Moscow Court Rules Against the Bank of New York

MOSCOW, Feb. 29 /PRNewswire/ -- In what could only be described as a major defeat for the Bank of New York , the Court denied all requests for dismissal of Russia's $22.5 billion claim against the bank for money laundering (Case No. 40-24987/07-10-149).

In a surprising move, Ivan Marisin, senior partner in the Moscow office of Clifford Chance, made a motion for dismissal of the Chief Judge for the Banking Division of the Moscow Arbitration Court who is presiding over the case along with two other judges on a three-judge panel. The court denied the motion to recuse the Chief Judge.

The bank then sought to have the case thrown out by claiming that a Power of Attorney for the plaintiff's U.S. lawyer Steven C. Marks of Podhurst Orseck, P.A. was falsified. The court, however, ruled that the Power of Attorney is in fact authentic and therefore denied the bank's motion to dismiss the case. As a result, BoNY's lead attorney, Ivan Marisin of Clifford Chance, now faces a potential 2-year jail sentence if found guilty of criminal slander. As required by law, an investigation into the matter will be opened by the Prosecutor General's office. The next hearing will be held on April 7, 2008. The judge made it clear that the case will move forward without further delay and be tried on the merits.

Unfortunately for the BoNY, despite its public statements that repeatedly characterize the lawsuit as "totally without merit, if not frivolous," a closer examination of Russia's legal claim against the Bank of New York reveals a formidable case. A quick review of the facts shows that BoNY already admitted and accepted responsibility for the crime of money laundering. In November of 2005, BoNY entered into a Non-Prosecution Agreement with the U.S. Attorney's Offices for the Eastern and Southern Districts of New York in which it acknowledged responsibility for its conduct and agreed to pay $38 million in penalties and victim compensation.

As explained in a press release issued by the United States Attorneys prosecuting the case, "BoNY has accepted responsibility for its criminal conduct, and its chairman of the board of directors has signed a statement admitting the criminal conduct in detail."

BoNY has since tried to redefine the scope and extent of its admission by claiming that the bank itself never admitted to criminal conduct, but merely to "the criminal conduct of its employees." This parsing of words simply does not work. The actions (criminal or otherwise) of a corporate entity are nothing more than the culmination of the actions of its employees. Under well- established U.S. law, BoNY is responsible and legally liable for the admitted criminal conduct of its officers acting within the scope of their employment and/or independently for its failure to properly supervise and prevent the laundering of billions of dollars out of the Russian Federation. In fact, any attempt to publicly make such an erroneous distinction may put BoNY in direct violation of its Non-Prosecution Agreement with United States Attorney's Office and may subject the bank to the reopening of criminal charges in accordance with sub-section 18 of that agreement.

Furthermore, BoNY was not a passive participant or third party to these crimes. BoNY collected a fee on each wire transfer, plus other miscellaneous charges such as research fees, balance reporting fees and other service charges, which accrued daily. This activity generated a significant amount of income for BoNY and created an incentive not to inquire into or report the conspicuous criminal conduct. In fact, the Benex and BECS accounts were the highest-producing fee accounts in this branch, yet somehow BoNY failed to monitor these two colossal accounts.

As Richard Bove, an independent analyst from Punk Ziegel & Co. pointed out in his May 24, 2007 research report, "A reading of [BoNY's 8K filed on November 8, 2005] will clearly indicate that criminal money laundering did occur; that the bank promoted the officer at the bank responsible for the admitted criminal activities after a recommendation was made that she be fired; that more than one request to review the activity in the suspicious accounts was denied by higher level bank officers; that the bank, in effect, had no systems to detect money laundering or if they had them, they did not use them; and that bank specifically separated out officers associated with the illegal accounts for praise for building this business."

The case against the bank is so strong based on prevailing U.S. law that Russia would have preferred to file its claim in a U.S. court, because it believes it would have had little or no difficulty winning on the merits. The suit, however, was ultimately filed in Russia due to BoNY's legal maneuvering in a related case.

In Pavlov vs. The Bank of New York, BoNY obtained a dismissal in part because it argued that the case should be litigated in Russia. The Pavlov case was brought by depositors of an insolvent Russian bank against BoNY and other defendants for their alleged involvement in the laundering and looting of assets of several Russian banks, and also sought damages under RICO. In Pavlov, BoNY argued that Russia was an adequate alternative forum and the Bank further agreed to consent to jurisdiction in Moscow. In BoNY's own Memorandum in Support of its Motion to Dismiss Plaintiff's Amended Complaint, the Bank clearly stated, "[t]he Russian courts are clearly an adequate, available and much more convenient forum for the resolution of this dispute."

By filing its claim against BoNY in Russia, the Russian Federation did exactly what BoNY had previously requested of a U.S. court in a related case. Based on the Pavlov decision, had the Federation initially filed suit in the United States, it probably would have fought jurisdiction for years only to have likely faced dismissal with the need to re-file the same suit in Russia.

This is an ironic twist of fate for BoNY. As a result of the Pavlov ruling, Russia now has the unique advantage of maintaining Russian jurisdiction over the proceedings, while trying the case under the more favorable U.S. RICO Statute. There is no reason to believe that a Russian judge would come to any different conclusion regarding BoNY's criminal activities than did the U.S. Department of Justice.

Despite common misconceptions and BoNY's public assertions, Russian judgments are fully enforceable in most jurisdictions around the world where BoNY has assets, including the United States. The Uniform Foreign Country Money Judgments Recognition Act, which has been adopted in the majority of states including New York, provides for the enforcement of foreign judgments in the United States. In accordance with this statute, a New York court is prohibited from recognizing a foreign money judgment only if it concludes that the judgment "was rendered under a system which does not provide impartial tribunals or procedures compatible with the requirements of due process of law" or the "foreign court did not have personal jurisdiction over the defendant."

Russian judgments have consistently been found to be enforceable in the U.S. and established appellate precedence confirms U.S. court enforcement of Russian judgments. A recent example is the case of Technostroyexport v. International Development and Trade Services where an appellate court affirmed the United States District Court's previous confirmation of a major Russian money judgment. To date, BoNY has not pointed to a single U.S. decision which supports a contention that the Russian legal system is inadequate or where a Russian judgment was denied enforcement.

Further complicating matters for BoNY is that in the related Pavlov case, the Bank successfully argued in a U.S. court that Russia was indeed an adequate alternative forum. Under current U.S. law, when a party claims there is an adequate alternative forum and seeks to transfer a case to that forum, that party must also agree that any judgment issued by that forum would be enforceable in the U.S. Therefore, based on the Bank's arguments in this previous case, a U.S. court would most certainly not allow BoNY to now claim that Russia suddenly does not offer an adequate forum or that a judgment issued by a Russian court would not be enforceable.

Based on recent statements in the press, BoNY appears to be positioning itself to contest the enforceability of a Russian court judgment in the U.S. by arguing that, in effect, it is a judgment for the collection of taxes. Such an argument would be based on a legal principle recognized by some courts in the United States that prevents U.S. courts from enforcing tax claims of another sovereign. This so-called revenue rule generally bars U.S. courts from enforcing foreign tax laws or judgments for the collection of foreign taxes.

The Bank is absolutely correct in asserting that it does not owe Russia any taxes or customs duties. Furthermore, the Russian government is not suing for the collection of back taxes or duties. Rather, Russia is seeking a statutory remedy for money laundering under the RICO statute. Moreover, the Federation maintains that this revenue rule doctrine is not applicable since Russia is not seeking to enforce a tax claim, but is instead suing BoNY for the criminal money laundering act itself.

In addition to collection in the U.S., Russia will also be able to enforce a judgment in many other countries where BoNY has billions in assets and where the revenue rule does not exist. There is a well-established practice of enforcement of Russian judgments in many countries throughout the world, including in the EU.

BoNY has consistently maintained that the Russian lawsuit is "totally without merit, if not frivolous." The Federation, of course, disagrees and intends to continue to pursue its claims to verdict and, if successful, collection. The simple fact is that only two conditions need to be met for this lawsuit to have serious financial consequences. The first is that a Russian verdict is handed down ordering the bank to pay billions in damages. The second is the successful enforcement and collection of any Russian judgment. In light of BoNY's admitted responsibility, the Federation understandably remains confident as to both issues.