Titans of the US legal system will argue before a Moscow judge on Monday over a multi-billion-dollar lawsuit being brought under American law that is highly unusual – even by the standards of Russian justice.
At issue is a $22.5bn damages claim against Bank of New York Mellon by the Russian Federal Customs Service with potentially far-reaching implications. It relates to a decade-old money laundering case that had been thought resolved.
Bank of New York reached a $14m settlement with US federal prosecutors in 2005 after two Russian émigrés, one a bank vice-president, admitted helping to launder $7bn of Russian money in the late 1990s. Now Russia is demanding billions in unpaid taxes on the money.
Russian customs has brought in Alan Dershowitz, the Harvard law professor who advised on the defence of OJ Simpson, as an expert witness. They are also fielding Robert Blakey, an author of the US racketeer-influenced and corrupt organisations (Rico) statute – which they are trying to use in the Moscow Arbitration Court. Bank of New York’s lawyers are fielding Dick Thornburgh, a former attorney-general and Pennsylvania governor.
The case is an important test of whether Rico can be applied outside the US. It will put a spotlight on President Dmitry Medvedev’s pledges to strengthen the Russian judiciary’s independence.
Background
Alan Dershowitz is the Felix Frankfurter Professor of Law at the Harvard Law School. As well as his legal work, he is known for his commentary on the Arab-Israeli conflict.
As a criminal appellate lawyer, Mr Dershowitz successfully argued to overturn the conviction of Claus von Bulow for the attempted murder of his wife. He also served as the appellate adviser in the trial of O.J. Simpson, the former American football player and actor.
Mr Dershowitz was made a full professor of law in 1967, aged 28, becoming, at that time, Harvard’s youngest full law professor.
As Mr Medvedev has admitted, Russian courts frequently become tools of state authorities or wealthy businessmen. Some Moscow observers suggest the BNY case could not have got this far without support from a high-level “sponsor” in government, the security services, or business – or one well-connected in all three areas.
Podhurst Orseck, the Miami-based lawyers representing Russian customs in association with a Moscow firm, are demanding $22.5bn damages, based on claimed direct and indirect losses to the Russian budget of $7.5bn. Rico allows damages to be trebled on a punitive basis.
BNY and its lawyers, Boies, Schiller & Flexner, insist the case is frivolous. They argue Rico claims cannot be brought outside the US, and a public, criminal law cannot be adjudicated on by a private commercial court.
“To be in the Moscow [Arbitration] Court trying to bring a US public law case such as Rico is barred by Russian and US law,” says Jonathan Schiller, co-founder of Boies, Schiller & Flexner and lead counsel on the BNY case. Mr Thornburgh backs that argument.
Mr Schiller also says the case lacks the two “predicate” crimes required for a Rico case. Bank of New York was never charged with or admitted to money-laundering, he says; it admitted only to monitoring failures. Lucy Edwards, the employee involved, and her husband Peter Berlin also admitted only to conspiracy to launder and violating reporting laws, not money-laundering itself.
But Mr Dershowitz and Mr Blakey argue Rico can be applied outside the US. That question, not the case’s merits, is the focus of Monday's’s hearing, with BNY attempting to dismiss the case. “There is nothing in the Rico statute or legislative history that precludes the Russian court from applying Rico,” says Mr Dershowitz, who adds it is “very important” for Rico laws to be applied extra-territorially.
He points out Rico is both a criminal and a civil law, and the Russians are seeking to apply only the civil part. “We have to prove that money laundering occurred, but that will not be hard to do. The burden of proof is much lighter in a civil case than in a criminal case.”
This is raising questions about whether BNY should establish a reserve against a possible loss. Ken Thomas, an independent expert retained by the Russian side’s lawyers, wrote this month to Ben Bernanke, Federal Reserve chairman, warning an adverse ruling could not just damage the 12-largest US bank but pose potential systemic risks.
Mr Schiller says the bank has few assets that could be pursued in Russia, and a damages ruling could not be enforced in the US or many other countries where the bank has significant assets thanks to the “revenue rule” barring authorities from collecting foreign tax claims.
“The US will not permit, and has not for 200 years, the application of a foreign government’s tax laws in the United States,” he says. “Just as Russia would not expect the US to collect its taxes over there.”
BNY says US accounting rules require a reserve only if losses are “probable and reasonably estimable”.
