In addition, the dispute raised some interesting issues of U.S. law. And, besides all that, the case is a lot of fun. So we decided to republish this article, originally appearing in the U.S. American Bar Association’s Russia/Eurasia Committee newsletter in 2008.
The paper was originally published when the case was still in progress; its outcome is in the postscript.
The author (and the copyright holder), Sergey Budylin, is currently an advisor at the Bartolius Law Office.
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The Claim
The Arbitrazh Court of Moscow is considering a claim of the Russian Federation Federal Customs Service (FTS) against the Bank of New York Mellon (BNY) amounting to $22.5 billion Apart from the amount, the peculiarity of the claim is that it is based on U.S. law, namely, the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-68.[i]
BNY has been accused of being instrumental in a massive laundering of Russian funds during the 1990s. In 2005, BNY settled a case stemming from those accusations with U.S. prosecutors, paying $38 million in fines and compensations to the U.S. Case closed? According to FTS, it was just the beginning.
In May 2007, FTS filed a claim in a Russian arbitrazh (economic) court based on RICO. According to FTS’ allegations, BNY’s illegal operations inflicted harm to the Russian state budget in the amount of $7.5 billion. In accordance with RICO provisions, the alleged damages were trebled, to result in a $22.5 billion claim. Apparently, this is the largest claim ever in the history of Russian courts.
BNY argues that RICO is a criminal act and, as such, cannot be applied in non-U.S. courts. According to FTS, RICO also contains civil-law provisions that can be applied by Russian courts under appropriate conflict-of-law rules.
The lead judge in the case is Lyudmila Pulova, the chairman of the Moscow Arbitrazh Court banking panel.
FTS is represented by a Miami law firm, Podhurst Orseck, P.A., together with a Moscow law firm. Among their expert witnesses are Alan Dershowitz, a prominent Harvard Law School professor, G. Robert Blakey, a RICO drafter, and Yevgeniy Vasiliev, a Moscow State Institute of International Relations (MGIMO) professor.
BNY is represented by Boies, Schiller & Flexner LLP. Among their expert witnesses are Dick Thornburgh, a former U.S. Attorney General, and Mikhail Yukov, a former Russian Federation Supreme Arbitrazh Court Deputy Chairman.[ii]
On the FTS side, Professor Dershowitz is confident that there is no legal ban on a foreign government bringing a civil RICO action in a foreign court.[iii] Mr. Thornburgh, for BNY , argues that, here, a civil RICO action cannot be maintained because there is no injury and no damages to the plaintiffs, and that U.S. proceedings which resulted in the execution of the non-prosecution agreement, did not, by themselves, establish that the Russian Federation suffered actual damages.[iv]
There can hardly be any doubt as to who authored the idea of the suit. Most likely, Russian officials in FTS had never heard of RICO before. On the other hand, Podhurst Orseck is a firm specializing in, inter alia, RICO litigation. In particular, they are known for their unsuccessful attempts “to use similar legal theories to bring similar claims [in U.S. courts] for customs duties against U.S. tobacco companies on behalf of Belize, Ecuador, and Honduras,”[v] to quote a BNY press release.[vi]
An intriguing aspect of the case is the legal fees on the plaintiff’s side. Podhurst Orseck (FTS’ attorneys) reportedly charge a 29% contingency fee.[vii] Interestingly, Russian arbitrazh courts treat contingency-fee legal services provision agreements as unenforceable against clients. Although theoretically questionable, this judicial attitude was recently held constitutional by the RF Constitutional Court.[viii] Therefore, even if winning the case, the attorneys could end up without their money (to wit, $6.5 billion).
Non-Prosecution Agreement
Apparently, plaintiff’s evidentiary base is essentially limited to the facts disclosed in BNY’s 2005 non-prosecution agreement and in related public statements of BNY officials.[ix]
According to the non-prosecution agreement and public statements, the U.S. Attorney Office (USAO) conducted a criminal instigation into allegations that BNY was engaged in money laundering.
Specifically, the admitted facts were as follows. Lucy Edwards, a Russian émigré, was a BNY Vice President until August, 1999. Her husband, Peter Berlin, is also a Russian émigré. In 1996, Berlin, with the assistance of Edwards, opened two corporate accounts with BNY. From February 1996 through July 1999, the accounts received about $7 billion in deposits. The funds were then transferred, normally within days, to numerous third parties around the world. However, the companies transmitting the funds, whose accounts Berlin had opened, did not conduct any genuine commerce. Their activity was a part of an underground money transmitting business conducted by a Russian bank, Depozitarno Kliringovy Bank (DKB).
In 2000, Berlin and Edwards pled guilty to conspiracy to: (1) conduct unauthorized and unregulated banking activities, (2) establish an unlicensed branch of a foreign bank in the U.S., (3) operate an illegal money transmitting business, and (4) launder money to promote wire fraud. BNY accepted responsibility for the conduct of its employee, Lucy Edwards, and other employees (responsible for client check etc.). BNY agreed to cooperate with the prosecution, and to pay a $14 million fine (plus a $12 million fine related to certain other allegations and $12 million to a victim compensation fund). USAO, in turn, agreed not to prosecute BNY.
Mr. Thomas Renyi, the then BNY Chairman and CEO, testified in September, 1999: “No charges have been filed against The Bank of New York. No relevant authorities have asserted that The Bank of New York has engaged in money laundering or violated any other law.” On the other hand, he admitted: “What we have been able to determine is that the central accounts in question here that were controlled seemingly by Mr. Berlin moved $7.5 billion over the past three years [1996-1999] . . . .”[x] Apparently, the latter figure, borrowed from Renyi’s testimony, has served as a base for the damages calculation in the FTS claim.
RICO
RICO is a U.S. federal criminal statute adopted in 1970.[xi] Its apparent original purpose was fighting Mafia-like organized criminal structures.[xii] However, its language is broad enough to cover many non-Mafia contexts. Besides criminal provisions, the statute also includes civil-liability provisions.
RICO violations are described in its 18 U.S.C. § 1962(a)-(d).The most common ground for civil claims is set forth in 18 U.S.C. § 1962(c):
It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.
“Pattern of racketeering activity,” “enterprise,” “unlawful debt,” and even “person” are terms of art defined in 18 U.S.C. § 1961.
The criminal RICO penalties are up to 20 years of imprisonment and/or certain fine per count, 18 U.S.C. § 1963. In addition, civil remedies are available under 18 U.S.C. § 1964. In particular, 18 U.S.C. § 1964(c) reads as follows:
Any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefore in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee.
The statutory RICO provisions have been subject to extensive and often non-obvious judicial interpretation by U.S. courts. In particular, it has been held that the “enterprise” used for criminal purposes can itself be either an illegal or perfectly legitimate enterprise; that the factors of “relatedness” and “continuity” of crimes, rather than mere occurrence within a ten-year period mentioned by the statute, determine the presence of the “pattern of racketeering activity”; that the statute of limitation for civil RICO claims, albeit not established by RICO itself, is four years; that, despite the statutory language, referring to “the district court of the United States,” state courts have concurrent jurisdiction over civil RICO claims (then why not foreign courts, one might ask); and that a foreign state is a “person” for the purposes of being able to bring a civil RICO claim in a U.S. court.[xiii]
Apparently, RICO was originally expected to be used mostly for criminal jurisprudence purposes. However, the treble damages/attorney fee provision made the statute an attractive litigation tool for many plaintiffs and their attorneys. In the 1980s, civil RICO litigation exploded, and now the number of criminal RICO claims is only a small fraction of civil RICO claims. Importantly, with the exception of security fraud violations, the defendant need not be criminally convicted before a civil plaintiff can sue for treble damages under RICO.
In sum, while RICO is a criminal statute, it also contains civil-liability provisions, and, in fact, in the U.S., “civil RICO” is the most commonly used hypostasis of the statute.
Applicable Russian Law: Conflict-of-Law and Jurisdictional Provisions
At the first glance, the whole idea of applying RICO, a U.S. public law, in a Russian court might seem completely outlandish. Obviously, this is not what the U.S. legislature had in mind when adopting the statute. Apparently, non-U.S. courts, let alone Russian courts, have never applied RICO before. And, of course, Russian courts are not authorized to enforce foreign criminal law.
On the other hand, RICO civil-liability provisions belong to U.S. civil law. Foreign civil law provisions are routinely applied by courts of virtually all countries, including Russia. More specifically, under Russian conflict-of-law rules, in case of “obligations resulting from the infliction of harm,” the applicable law is normally the law of the country where the harm-inflicting activity took place.[xiv] This might well be U.S. law, including, arguably, RICO.
Procedure-wise, in accordance with the Arbitrazh Procedure Code, Russian arbitrazh courts have jurisdiction over economic and entrepreneurial-related cases with participation of foreign citizens or organizations, inter alia, if the relevant “claim originated form the infliction of harm to property by the activity or other circumstance having taken place in the territory of the Russian Federation, or where the harm was inflicted in the territory of the Russian Federation.”[xv]
In sum, Russian procedural law authorizes an arbitrazh court to hear an economic case based on the infliction of harm, if the harm occurred in Russia; Russian conflict-of-law rules authorize a court to apply foreign substantive law to determine the grounds and the amount of liability if the harm was inflicted by actions made in a foreign country.
Enforcement Perspectives
Even if FTS wins its case, it is quite unlikely that BNY will pay the award voluntarily. Obviously, BNY does not have sufficient funds in Russia to be seized under a possible Russian court decision. Realistically, any possible perspectives of the case bear upon whether a judgment can be enforced outside Russia.
Internationally, while foreign criminal judgments are normally not enforced, foreign court decisions in civil cases are enforced routinely. A foreign civil judgment may be enforced based either on an international treaty or on the comity principle (comitas gentium) in the absence of such a treaty. In the latter case the presence of reciprocity (i.e., “you enforce my decisions, I enforce yours”) may, or may not, be required for the enforcement. In particular, under Russian statutory procedural law, foreign court decisions are recognized and enforced by arbitrazh courts where this is authorized by a treaty or a Russian federal statute.
In the U.S., a foreign judicial money awards may be enforced based on the law of particular states. In New York, the relevant statute (Article 53 of the Civil Practice Law and Rules, being a clone of the Uniform Foreign Country Money-Judgment Recognition Act) generally authorizes the enforcement of foreign money judgments, save in certain situations.[xvi]
However, according to the New York statute, BNY would have many arguments in a New York court in case of a request for the enforcement of a possible future Russian judgment. In particular, BNY could argue that the judgment was “for taxes,” or that Russian courts are not “impartial,” or that the Russian court did not have jurisdiction, or that the judgment was “repugnant” to the New York public policy.
Besides the U.S., FTS could seek to enforce a possible future Russian judgment in any other country where BNY has a branch or assets, if the country either applies the comity principle or has an appropriate legal assistance treaty with Russia (Russia is a party to more than 30 legal assistance treaties).
In sum, generally Russian judgments in civil cases can be enforced in any country applying the comity principle or having a suitable treaty with Russia. Russia does not have such a treaty with the U.S. However, U.S. states, including New York, generally enforce foreign money judgments: no treaty is needed for that. On the other hand, the enforcement of a particular judgment may be precluded by provisions of local law (e.g., non-enforcement of foreign public law, or public policy considerations).
Conclusion
The first and foremost question now in litigation is whether the Russian court has jurisdiction over a RICO claim. Although from a U.S. perspective, legislative intent might seem important for answering this question, for a Russian court, provisions of relevant Russian law are decisive.
Apparently, here the alleged harm-inflicting activity took place in the U.S., and the alleged harm to the Russian state budget was inflicted “in the territory of the Russian Federation.” If so, as discussed above, a Russian arbitrazh court is authorized by Russian arbitrazh procedure law to consider a claim for harm compensation. Further, in accordance to Russian conflict-of-law rules, the court should apply foreign law to calculate the amount of the compensation, although “may” (apparently, in its discretion) apply Russian law, if the harm in Russia was foreseeable. Returning to RICO, if the Russian court decides to apply foreign law, it should determine whether “civil RICO” is a part of applicable foreign law, and, if so, apply it. That is, looking from the jurisdictional angle, the FTS claim does not seem frivolous at all, although it is no doubt extremely unusual.
If the Arbitrazh Court of Moscow accepts jurisdiction, the plaintiff will obviously have a lot of hurdles to take before obtaining a judgment. To name one, the amount of the alleged damages seems to be completely based on BNY admissions made in the U.S., rather than on any customs records, etc. The plaintiff apparently assumes that all funds that passed through BNY accounts were stolen from Russia. However, the Russian customs officials do not seem to explain how exactly the money transfers, albeit dubious from the regulatory point of view, harmed the Russian budget. More realistically, FTS could have a claim for the customs duties and the value-added tax (VAT) underpaid by the Russian importers who exploited the underground DKB money-transmitting facilities. However, none of such importers are even mentioned by name in the claim. It is not certain that such evidence will satisfy the court. The statute of limitation (four years, according to the U.S. Supreme Court) is another obvious issue. And, of course, there is going to be a battle over whether any RICO violation actually took place. BNY has never admitted to RICO violations and no U.S. court held that BNY committed a RICO violation. If so, the Russian court would have to decide the issue on its own. But arbitrazh courts are purely economic courts and, as such, are not authorized, accustomed or equipped to apply even Russian criminal law, let alone foreign criminal law. The outcome of this first-impression RICO case, if accepted by the Russian court, is completely unpredictable.
If the Russian court accepts the case and decides it in favor of FTS, the next step will be the enforcement of the judgment in a country where BNY has sufficient assets (preferably, in the U.S.). Whether a U.S. court would enforce a possible Russian judgment against BNY is a $22.5 billion question. On one hand, it would technically be a judgment in a civil case, and such foreign judgments are generally enforceable. Moreover, the Russian judgment would be based on U.S. law, which might be viewed favorably in a U.S. court. On the other hand, while the case is worded as a civil suit, essentially it is rooted in Russian public law because the alleged harm to the Russian budget consists of unpaid customs duties and taxes; U.S. courts do not enforce foreign tax/customs law. Perhaps most importantly, one would imagine that a U.S. court might be skeptical, to put it mildly, of the Russian court impartiality. I leave it to the reader to draw a conclusion about the possible attitude of a U.S. court to a would-be Russian judgment. Perhaps FTS may have better luck with the judgment enforcement in some other countries where BNY has branches, if such a country has a legal assistance treaty with Russia.
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P.S. For better or for worse, the case has never reached the trial stage. In October 2009 the parties settled. The bank agreed to pay to the Russian customs US$ 14 mln as legal expenses, which was obviously much less than the original claim amount of US$ 22.5 bln. This is the same amount the bank had argeed to pay to the U.S government under the earlier non-prosecution agreement.
According to then Russian finance minister Alexey Kudrin, the customs had been unable to gather sufficient evidence to support the case…
See: https://www.ft.com/content/b3a56732-beeb-11de-8034-00144feab49a.
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[i] For Russian-language media sources, see http://gzt.ru/business/2008/07/01/002401.html; http://bankir.ru/news/newsline/30.06.2008/137081; http://bankir.ru/news/newsline/08.04.2008/124491; http://www.lenta.ru/articles/2008/04/05/bank/; http://www.business-magazine.ru/trends/precedents/pub298978; http://www.rbcdaily.ru/2008/07/01/focus/357127. See also Julie Satow, Delay in Moscow May Be Bad Sign for Bank of New York, New York Sun, July 1, 2008, http://www.nysun.com/business/delay-of-moscow-hearings-may-be-bad-sign-for-bank/80977/.
[ii] Bank of New York Mellon, Press Release, http://www.bnymellon.com/pressreleases/2008/pdf/pr051908.pdf (BNY Press Release), at 1-2.
[iii] Arbitrazh Court of the City of Moscow, Legal Expert Witness Statement of Alan M. Dershowitz, available at http://www.nysun.com/files/dershowitzmoscow.pdf, at 9.
[iv] Id. at 16-17.
[v] See Republic of Honduras v. Philip Morris Cos., 341 F.3d 1253 (11th Cir. 2003), cert. denied, 540 U.S. 1109 (2004) (Honduras, Ecuador, and Belize, represented by Podhurst Orseck, sued five U.S. major tobacco companies for RICO violations seeking to remedy the tobacco companies’ schemes to avoid those republics’ taxes; the circuit court adopted the common-law “revenue rule” as the law of the circuit, and held that the revenue rule required the court to abstain from considering the republics’ claims).
[vi] BNY Press Release, supra n. 2, at 1.
[vii] http://www.business-magazine.ru/trends/precedents/pub298978 (Russ.).
[viii] RF Constitutional Court, Postanovlenie [Decision] of Jan. 23, 2007, No. 1-P, Vestnik Konst. Suda RF, 2007, No. 1 (Russ.), at Para. 3.1.
[ix] Non-Prosecution Agreement between the Bank of New York and the U.S. Attorney’s Offices for the Eastern and Southern Districts of New York (Nov. 4, 2005), http://judiciary.house.gov/Media/PDFs/BNY-USAO051104.pdf.
[x] Congressional Testimony of Thomas A. Renyi, Chairman of the Board of the Bank of New York, Sep. 22, 1999, http://www.russianlaw.org/renyi_congress.htm.
[xi] 18 U.S.C. §§ 1961-68 (1970).
[xii] Jeff Grell, RICO in a Nutshell, http://www.ricoact.com/ricoact/nutshell.asp.
[xiii] Id.
[xiv] RF Civil Code art. 1219(1).
[xv] RF Arbitrazh Procedure Code, art. 247(4).
[xvi] NY Civil Practice Law and Rules §§ 5304, 5301(b).
