A U.S. judge held Bank of China Ltd. in contempt last week for refusing to turn over account information of Chinese entities accused of selling counterfeit luxury goods, and now is imposing a $50,000 daily fine until the bank turns over the required information. U.S. District Judge Richard Sullivan in Manhattan, firing off the latest salvo in the battle between China and the United States over financial transparency and national sovereignty, held that the bank must pay a fine for withholding its records that involve Chinese entities that were sued in 2010 by subsidiaries of luxury goods conglomerate Kering SA, including Gucci Group, Bottega Veneta and Yves Saint Laurent.
The companies subpoenaed the Bank of China, which is not a party to the lawsuit, seeking records of the alleged counterfeit sellers' accounts, but the state-owned bank argued that it could not turn over the records without violating Chinese privacy law. The bank also said the New York court had no jurisdiction over it.
Bank of China's attorney, Laura Hall, said at Tuesday's hearing that the bank had no choice but to refuse to turn over the records and be held in contempt so that it would have a right to appeal to the 2nd U.S. Circuit Court of Appeals. "We're bound by conflicting systems of law," she said. Sullivan, however, said the bank seemed to be prioritizing Chinese law. "What desire is there to comply with U.S. law?" he asked. "It doesn't seem terribly deep."
The plaintiffs asked Sullivan either to order the bank to pay $12 million they said they lost due to the counterfeiters, or to order it to pay a daily fine until it turns over the records. Sullivan said he would consider both options, but was leaning toward the latter.
The dispute is part of a larger conflict between China's opaque, state-dominated economic system and the disclosure-based U.S. regulatory regime. Clashes have grown more frequent as Chinese companies have sought to expand overseas or tap international capital by listing in the United States.
Earlier this year, the U.S. Securities and Exchange Commission settled a long-running dispute with the China units of the Big Four audit firms over their failure to turn over documents about U.S.-listed Chinese clients. The audit firms had argued that compliance with the SEC would violate Chinese state secrecy laws.
The U.S. Public Accounting Oversight Board has similarly sought to inspect Chinese audit firms for years, but China has blocked its requests on national sovereignty grounds.
In the Bank of China case, Sullivan had ordered the Bank of China to turn over the records in August 2011. An appeals court ordered him to reconsider last year, but he once again ordered the bank to turn over the records in September and October.
"We are disappointed by Judge Sullivan's decision, but it will clear the way for a review of the issues by the United States Court of Appeals for the Second Circuit," Bank of China's law firm, Allen & Overy, said in a statement. The firm said the dispute should be settled through international agreements.
William Overholt, a senior fellow at the Harvard University Asia Center and former head of strategy with Nomura in Hong Kong, said such cases could help push China more toward international norms of financial transparency. "Opening that up is a crucial step forward in having a normal capital market in China," he said.
But James Feinerman, a Georgetown University law professor who has served as an expert witness for Bank of China in the past, said Chinese banks' privacy concerns were not that different from other international banks, and such cases could have implications for New York's future as a global financial hub.
"The thing that banks are worried about - both U.S. and foreign - is that they don't want to be subjected to a worldwide jurisdiction just because they have an outpost in New York," said Feinerman.
(Reporting by Brendan Pierson in New York, additional reporting by Elizabeth Dilts; Editing by Tom Brown)