Proposed Settlement Comes After Court Issues Rulings on Extraterritorial Application of U.S. Criminal Law, Evidence of Intent to Conceal and Tracing of Money Laundering Proceeds

On the eve of trial this past Friday, the government announced an agreement to settle, subject to court approval, a major civil forfeiture action in the Southern District of New York.  In the case, United States v. Prevezon Holdings, Ltd. et al., the government alleged an elaborate scheme involving money laundering and other offenses committed in Russia, Cyprus, and Manhattan. The case gained some notoriety in the press due to lurid allegations of the suspicious death while in pretrial detention in Moscow of a Russian lawyer who had uncovered the tax refund fraud scheme, and the alleged defenestration earlier this year of a lawyer working for the decedent’s family. Although the civil forfeiture complaint filed in 2013 sought to forfeit at least $230 million worth of assets, the parties settled for approximately $5.9 million. In the wake of this settlement, both the defense and the government now appear to be claiming victory.

The buildings located on the Red Square: Kremlin wall (at left) and Saint Basil's Cathedral (at right), Moscow, Russia. UNESCO World Heritage Site

This post will analyze an opinion issued by the court in this case last week, prior to the settlement, denying summary judgment to the defense.  The legal rulings contained therein are perhaps not as suitable for a Hollywood-style thriller as some of the content of the government’s press releases and pleadings, but nonetheless represent important issues in the field of money laundering and forfeiture.  Primarily, we analyze an increasingly common and key question: when can U.S. law apply to conduct occurring primarily overseas?  This question has broad implications for federal criminal law enforcement in general, including for RICO and tax fraud prosecutions, as well as for potential civil lawsuits brought by shareholders or other plaintiffs.

The Allegations

The civil forfeiture complaint targeted in part the assets of nine corporations controlling real estate in Manhattan, including four luxury residential units and two high-end commercial spaces, and two related companies. The complaint also sought a monetary judgment.  According to the government’s press release accompanying the settlement, the case involved in part the following allegations:

[T]he defendant corporations laundered some proceeds of a $230 million Russian tax refund fraud scheme involving corrupt Russian officials that was uncovered by Sergei Magnitsky, a Russian lawyer who died in pretrial detention in Moscow under suspicious circumstances and was posthumously prosecuted by Russia.

. . . .

In 2007, a Russian criminal organization engaged in an elaborate tax refund fraud scheme resulting in a fraudulently obtained tax refund of approximately $230 million from the Russian treasury. As part of the fraud scheme, members of the organization stole the corporate identities of portfolio companies of the Hermitage Fund, a foreign investment fund operating in Russia. The organization’s members then used these stolen identities to make fraudulent claims for tax refunds.

. . . .

Members of the criminal organization, and associates of those members, have also engaged in a broad pattern of money laundering in order to conceal the proceeds of the fraud scheme. In a complex series of transfers through shell corporations, the $230 million from the Russian treasury was laundered into numerous accounts in Russia and other countries. A portion of the funds stolen from the Russian treasury passed through several shell companies into Prevezon Holdings, Ltd., a Cyprus-based real estate corporation that is a defendant in the forfeiture action. Prevezon Holdings laundered these fraud proceeds into its real estate holdings, including investment in multiple units of high-end commercial space and luxury apartments in Manhattan, and created multiple other corporations, also subject to the forfeiture action, to hold these properties.

On May 10, 2017, the district court ruled on the defendants’ motion for summary judgment. We will focus here on the court’s analysis of three of the defendants’ claims, with particular attention paid to the issue of extraterritoriality.

Extraterritorial Reach of the U.S. Criminal Law

The civil complaint alleged a money laundering offense based on the underlying Specified Unlawful Activity, or SUA, of the transportation of property stolen or taken by fraud, in violation of 18 U.S.C. § 2314. The underlying SUA involved four transfers of funds allegedly processed in part through correspondent bank accounts in the U.S.  The defense sought summary judgment as to the money laundering count because the alleged conduct lacked a sufficient nexus to the United States.  Specifically, the defense argued that the conduct involved transfers between foreign companies using foreign bank accounts, and that the “incidental” involvement of the U.S. correspondent accounts failed to qualify these transfers as covered by Section 2314.

The court agreed with the defense that Section 2314 was presumed not to apply extraterritorially. Nonetheless, it denied summary judgment because the involvement of the correspondent accounts constituted conduct that sufficiently touched and concerned the U.S. and therefore was able to displace the presumption against the extraterritorial application of the statute.

The court began by citing Morrison v. National Australia Bank, Ltd., a 2010 Supreme Court case, for the presumption that a statute does not have extraterritorial reach, unless congressional intent to make the statute extraterritorial is clear. [This general presumption against extraterritoriality was reaffirmed and applied by the Supreme Court most recently in June 2016 in RJR Nabisco, Inc. v. European Community, in which the Court held in a civil case that a claim under the RICO statute, 18 U.S.C. § 1962, may rest on a pattern of racketeering that includes predicate offenses committed abroad, so long as those predicate offenses violate a statute that is itself extraterritorial.] After finding that Congress had not clearly intended for Section 2314 to apply to foreign conduct, the Prevezon Holdings court turned to the alleged factual domestic nexus.

As noted, the relevant conduct involved four transfers initiated, transmitted, and received by foreign banks but processed mid-stream by banks in New York City. This was enough:

The Four Transfers touch and concern the United States because the U.S. correspondent banks were necessary conduits to transport proceeds allegedly derived from the Russian Treasury Fraud. The use of such accounts is not trivial because the Four Transfers could not have been contemplated without the services of these U.S. correspondent banks.  Indeed, international wire transfers do not merely “ricochet” off of U.S. correspondent banks. . . . Rather, each transfer requires “two separate transactions that cross the U.S. border”—“once upon entering a U.S. account and once upon exiting a U.S. account.” [citation omitted].  And because the focus of § 2314 is on the transportation of stolen proceeds, the use of the correspondent banks—as indispensable conduits—suffices to invoke the statute’s application.

Moreover, the court stated that whether a defendant purposefully turned to the services of a U.S. bank, or even knew that such a bank was being used, was “irrelevant” and that a contrary finding would render the “the use of U.S. financial institutions as clearinghouses for criminals.” Given the pervasive involvement of U.S. correspondent bank accounts in financial transactions across the world, the likely practical effect of this ruling is that innumerable financial transactions will be able to give rise to U.S. criminal charges, even as to statutes which are presumed not to apply extraterritorially, and even when most of the conduct occurs abroad.

As we previously have blogged, the criminal money laundering statutes have been recognized as having extraterritorial application – based on explicit Congressional intent – and these statutes can so apply even when a defendant never enters the U.S. and the alleged conduct within the U.S. includes non-physical activity such as a wire transfer, e-mail, or other electronic activity. Similar to Section 2314, the money laundering statutes focus on activity subsequent to an underlying offense – i.e., financial transactions – rather than the underlying offense itself.  Likewise, and as we also have noted, the Supreme Court recently granted certiori in a case in which the Court may decide whether a corporation, as opposed to a natural person, ever can be found liable under the Alien Tort Statute (ATS) – and if so, how the ATS might apply when the fact pattern primarily involves conduct occurring abroad but related financial transactions occurred within the U.S.  As the economy has become both decidedly global and electronic, the case law increasingly reflects that federal prosecutors – as well as private U.S. plaintiffs – have many potential options to try to reach alleged foreign fraud, corruption, or terrorism schemes.

As the economy has become both decidedly global and electronic, the case law increasingly reflects that federal prosecutors – as well as private U.S. plaintiffs – have many potential options to try to reach alleged foreign fraud, corruption, or terrorism schemes.

Evidence of Concealment

In the complaint, the government alleged in part that certain financial transactions involving proceeds from the fraud on the Russian Treasury constituted money laundering transactions supporting forfeiture because those transfers were designed to conceal or disguise the true nature, location, source, ownership or control of the proceeds, in violation of 18 U.S.C. § 1956(a)(1)(B)(i) (the “concealment” prong of Section 1956, which sets forth alternative prongs involving different mental states). The government’s expert had reviewed thousands of transactions and constructed a chart which purported to trace the proceeds of the fraud through a series of convoluted transactions and their connection to the ultimate bank account deposits at issue – although the chart did not purport to identify the individuals behind the transactions, or tether the transactions directly to the fraud on the Russian Treasury.  However, the chart did suggest that a single party controlled certain accounts at issue through use of a single IP address.

Puzzle pieces 2The defendants claimed that the government failed to create an issue of fact regarding whether the transactions were designed to conceal the underlying fraud. The court disagreed, although it noted that under Cuellar v. United States, the government must introduce evidence of a subjective intent to conceal (the “why”), rather than just evidence that the particular method of the transactions at issue (the “how”) had the effect of concealment. The court found that the government’s evidence, although circumstantial, could allow a jury to draw a reasonable inference from the complexity and scale of the alleged scheme that a “sprawling network” of shell companies had been created in order to conceal the purpose of the transfers.  Specifically, the court found that the government could point to (1) the suspicious timing of certain transfers; (2) unusual patterns across multiple accounts and senders, including transfers from a bank designated by the U.S. treasury as an institution of primary money laundering concern; (3) the use of coded language to mischaracterize the true nature of certain transfers; and (4) the use of corporate shell entities. The government did not have to cite direct evidence that any of the conduit companies or any of the individuals controlling their accounts knew about the underlying fraud.

Tracing of Money Laundering Proceeds

Finally, the defendants argued that the government could not tie the alleged fraud proceeds to the end-user accounts subject to the forfeiture complaint:

[T]he Government cannot prove that each account in the [government expert’s] tracing map disbursed tainted funds from the Russian Treasury Fraud to the next account in the chain. . . In other words, Prevezon claims there is evidence that certain intermediary accounts were commingled with “clean” funds; that such accounts disbursed the entirety of the tainted funds to accounts unrelated to the money laundering scheme; that these accounts were then replenished with clean funds; and that remaining funds were subsequently disbursed to the next identified account in the chain.

The problem of directly tracing “dirty” funds commingled with “clean” funds is a common issue in money laundering cases – particularly with broad and complex schemes – and this issue has various potential permutations, depending upon the particular money laundering statute provision at issue. Generally, courts have resisted arguments that the government failed to prove that particular funds leaving an account containing commingled funds in fact involved funds earned from the SUA.  The Prevezon Holdings court was no exception.  It held that, under a “facilitation” theory, the government need not specifically trace funds involved in the charged transactions to the underlying unlawful conduct. Rather, the jury could find that the presence of the clean money in the commingled accounts facilitated the concealment of the dirty money and conclude that the accounts ultimately at issue involved tainted funds, and were properly subject to forfeiture.

The court’s rulings as to the issues involving concealment and tracing reflect that, in money laundering cases, complexity can be a sword for the government, not a shield for the defendant.