Global Policy Forum

Russia Presses US Bank Over Money Laundering


By Andrew E. Kramer

New York Times
July 4, 2008

The Russian government sought Thursday to make Bank of New York Mellon liable under United States racketeering laws for $22.5 billion in damages arising from a money laundering scandal that helped undermine the Russian economy in the late 1990s. The appearance of a team of pastel-clad trial lawyers from Miami, representing Russia, capped a long effort to enforce civil liabilities here against the bank, which reached a settlement with the United States government in the case in 2005.

As Russia's economy collapsed in the late 1990s, capital flight was one of the contributing causes. And at that time, about $7.5 billion was improperly transferred out of the country through Bank of New York accounts to a shell company owned by the husband of a bank employee, Lucy Edwards. Both Ms. Edwards and her husband were later sentenced to five years of probation, and the bank, which admitted lax oversight, agreed to pay $14 million to the United States.

In a novel legal theory on choice of law, the lawyers - working on a contingency fee for the Russian Customs Committee - are seeking to apply the Racketeer Influenced and Corrupt Organizations act, known as RICO, against the bank in a Russian court. The bank argues that the statute of limitations for new legal suits against it has expired. One of the lawyers for Russia, Steven C. Marks of the Podhurst Orseck law firm, argued that a new lawsuit was valid because the bank's 2005 settlement qualified as a criminal admission of guilt, making it liable for civil damages.

The case, being heard at Basmany Court in Moscow, has attracted the attention of prominent legal experts. Alan M. Dershowitz, the Harvard law professor, prepared an affidavit in support of the Russian plaintiffs, and a former United States attorney general, Dick Thornburgh, prepared one on behalf of the bank.

On Thursday, the court heard testimony from experts on whether it had jurisdiction to decide American criminal law, and whether the RICO statute could be applied outside of the United States. "I believe very strongly that in a time of globalization of banking and globalization of money laundering, it would be a terrible tragedy if RICO laws were confined to the United States border," Mr. Dershowitz said in a telephone interview. But Mr. Thornburgh said no foreign court should hear cases under the RICO statute, a 1970s law aimed at fighting organized crime that allows civil penalties for certain criminal acts. "Only U.S. courts can adjudicate RICO," he said in an interview in Moscow.

Bank of New York Mellon also contends that the improper wire transfers did not amount to a precursor crime under RICO, and that Russia's claim to damages was not supported by evidence. The bank says the Basmany Court's decision will never be upheld outside of Russia. The same court heard the politically tinged bankruptcy case against the Yukos oil company, which ended in dismantlement of the company and was criticized for what some saw as judicial irregularities.

Still, Mr. Dershowitz, arguing for the Russian customs agency, said the Bank of New York should observe the court's ruling. "A great bank founded by Alexander Hamilton will not want to be perceived as running away from judgment," he said. The plaintiffs are arguing that the widespread harm caused to Russian people by the collapse of the Russian ruble should be considered in the damage calculation.

In many other legal cases, officials in Russia and other countries have objected to applying American law to disputes outside of the United States. The practice has drawn objections in several widely publicized cases, including Exxon Mobil's dispute with Venezuela and Cuban exile suits against the island's Communist government. In the Venezuela case, Exxon sued in United States, British and Dutch courts.

Courts around the world, however, routinely apply other countries' laws in contract disputes. Bruce Marks, a Philadelphia lawyer who filed RICO claims against an aluminum conglomerate controlled by the Russian billionaire Oleg V. Deripaska, testified in court Thursday for the customs agency. Mr. Marks said that the American racketeering law could be applied in a foreign court, though no foreign court had yet passed judgment on such a case.

At one point, with the spires of Moscow's skyline outside the courthouse window, Mr. Marks was drawn into a discussion of United States Supreme Court precedent on the question of whether civil damages could be sought under the RICO law even if the defendant had not been convicted of a criminal offense. He said it could, telling Judge Lyudmila Pulova that Sedima v. Imrex clarified that point. In that case, decided by the United States Supreme Court in 1989, the court ruled that a fraudulent scheme, even one that is part of a legitimate company's "regular way of doing business," can establish proof of a racketeering violation.

Steven Marks, the lead plaintiff's lawyer, who is not related to Bruce Marks, specializes in airline crash cases that fall under international law. He had also represented the governments of several South American countries seeking damages from American tobacco companies. In Russia, Steven Marks was authorized to seek damages on the cigarette claims with a 29 percent contingency fee. That agreement, with the Russian customs committee, was later extended to the Bank of New York case.

Mr. Marks says his payment terms are not material to the case. He said the lawyers would seek to use the Russian court's judgment to garnish Bank of New York reserves at central banks in some of the 90 or so countries where the bank does business.

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