OPINION & ORDER
Prevezon Holdings Ltd. and affiliated entities (“Prevezon”) move for summary judgment.
BACKGROUND
This civil forfeiture action arises from the laundering of proceeds derived from a $230 million fraud in Russia, a portion of which was used to purchase real estate in Manhattan. Beginning in 2007, a Russian criminal organization (the-“Organization”) orchestrated an elaborate hoax designed to defraud the Russian Treasury into issuing tax refunds totaling ■ $230 million (the “Russian Treasury Fraud”), The opening act of the Russian Treasury Fraud involved a raid on the Moscow offices of Hermitage Capital Management. (“Hermitage”) and its law firm, Firestone Duncan. The purpose of that illegal' raid was to obtain corporate documents and seals belonging to Hermitage’s portfolio companies—OOO Rilend, 000 Parfenion, and 000, Makhaon (the “Portfolio Companies”). In the aftermath of the raid, the Russian Federation’s Interior Ministry rebuffed Hermitage and its trustee HSBC Guernsey’s attempt to recover the corporate documents.
In the meantime, the Organization used the corporate documents to transfer ownership of the Portfolio Companies from HSBC Guernsey’s shareholding vehicles— held in trust for Hermitage—to a Russian company owned by a member of the Organization. The Organization then orchestrated a series of sham lawsuits against the Portfolio Companies, claiming that those companies had breached contracts that were forged and backdated. Those litigations resulted in default judgments against .the Portfolio Companies totaling $973 million.
Then, the Organization used those default judgments to apply for tax refunds claiming that such judgments were equal to the profits the Portfolio Companies had realized in the tax year. Members of the Organization who worked at the Russian Federation tax offices approved the Organization’s applications and granted refunds totaling $230 million. In its closing act, the Organization laundered the proceeds through a Byzantine web of conduit accounts. Eventually, approximately $1.9 million made its way into Prevezon’s account, and was used to purchase apartments in. Manhattan.
This action has a rather convoluted history that includes a year-long trip to the Second Circuit, re-assignment to another district judge, and the disqualification of Prevezon’s prior counsel on the eve of trial. With the trial date looming, Prevezon re-asserts its earlier claims that the Gov
DISCUSSION
1. Standard
Summary judgment should be granted only “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). A fact is material “if it might affect the outcome of the suit under the governing law.” Holtz v. Rockefeller & Co.,
The moving party bears “the initial burden of establishing the absence of any genuine issue of material fact, after which the burden shifts to the nonmoving party to establish the existence of a factual question that must be resolved at trial.” United States v. U.S. Currency in Amount of Two Hundred Forty Eight Thousand Four Hundred Thirty Dollars,
II. Specified Unlawful Activities
To prove its money laundering claim, the Government must demonstrate “(1) that the defendant conducted a financial transaction; (2) that the transaction in fact involved the proceeds of specified unlawful activity as defined in § 1956(c)(7); and (3) that the defendant knew that the property involved in the financial transaction represented the proceeds of some form of unlawful activity.” Tymoshenko v. Firtash,
A. Fraud Against a Foreign Bank
Prevezon principally contends that the fraud alleged by the Government
According to Prevezon, if HSBC was the victim of any crime arising from the raid, it was not fraud, but theft of its Portfolio Companies. Prevezon maintains that there is no evidence to prove any of the elements of bank fraud—no deceptive conduct was directed at HSBC; HSBC was not induced to rely on any misrepresentations; and none of the perpetrators knew that HSBC would be harmed as a result of their actions.
The scheme “to obtain funds from a bank depositor’s account normally is also a scheme fraudulently to obtain property from a financial institution, at least where ... the defendant knew that the bank held the [property], the [property] came from the [customer’s account], and the defendant misled the bank in order to obtain” such property. Shaw v. United States, — U.S. -,
Here, understanding HSBC’s distinct role as trustee (among others) of Hermitage and its companies is critical to determining whether it was the victim of bank fraud. HSBC Guernsey served as the trustee to Hermitage. (Statement of Undisputed Material Facts (“SUF”), ECF No. 574, at ¶¶ 3-4, 6).) As trustee, HSBC Guernsey owned the Portfolio Companies through two shareholding vehicles, whose ownership interests were fraudulently re-registered to members of the Organization following the raid. (Counter Statement of Undisputed Material Facts (“Counter SUF”), ECF No. 613, at ¶7.) Therefore, while Hermitage certainly had an interest in protecting the Portfolio Companies from the Organization, HSBC Guernsey, in its fiduciary capacity as trustee to Hermitage, and as the legal owner of the Portfolio Companies, had a vested interest in combating the Organization’s fraudulent scheme.
The Government claims that misrepresentations were directed at HSBC in two ways. First, members of the Organization
Had the Organization’s fraud ended with the illegal raid, the Government’s contention that HSBC was the victim of a fraud—based solely on HSBC’s agency relationship with Hermitage and Firestone-Duncan—would be substantially weakened. But the raid was merely the opening act of the fraud. The concatenation of events fol-' lowing the raid precipitated the fraudulent $230 million tax refund. “[A]cts of perpetration” and subsequent “acts of concealment” in-wide ranging, complex frauds are often “one and the same.” Sec. Exchange Comm’n v. Wyly,
Those facts, taken together, suffice to establish that the-“scheme [was one] to deceive the bank and deprive it of something of .value.” Shaw,
Prevezon’s other arguments fare no better. The Government offers evidence that the Organization attempted to induce HSBC and its agents into relying on misrepresentations about the raid. (Phillips Decl. Exs. 3 at 65:3-69:11, Ex. 4, Ex. 5 at 89:7-90:13.) Other evidence also indicates that the Organization sought to induce reliance "on post-raid misrepresentations regarding the use of the Portfolio Companies’ documents. (Hymán Decl. Exs. 7-8.) All that Shaw requires for purposes of establishing bank fraud is that the Organization “correctly believe[d] that [its] false statements would lead [HSBC] to release from [its possession property] that ultimately and wrongfully ended up in” the Organization’s pockets. Shaw,
Finally, while Prevezon claims that the perpetrators did not “kn[o]w or ha[ve] any reason to know that the HSBC Entities would be harmed,” the post-raid events raise a question of material fact regarding their knowledge. While members of the Organization may not have been aware of HSBC’s involvement at the time of the raid, they likely were alerted to HSBC’s ownership interest when HSBC sought to intervene in the sham proceedings, • That the Organization made a series of misrepresentations' to hinder HSBC’s- ability to reclaim ownership, or to deceive HSBC into believing that its interests were not in jeopardy, presents an issue of material fact central to whether the Organization knew that HSBC would be harmed. (Counter SUF ¶ 17 (citing Phillips Decl. Exs. 3-5; Hyman Decl. Exs. 2, 7-8).) This is a quintessential jury question.
B. Transportation of Stolen Property
The Government alleges that 18 U.S.C. § 2314—a statute criminalizing the transportation of property stolen or taken by fraud—constitutes an SUA in support of its money laundering claim. Four transfers of funds allegedly processed, in part, by U.S. bank accounts comprise the core of this SUÁ (the “Four Transfers”).
Prevezon disputes the domestic nature of the Four Transfers, ■ highlighting the fact that they occurred exclusively among foreign companies using foreign bank accounts. (Mot. at 12.) Although the transfers were processed, in part, by correspondent bank accounts in the United States, Prevezon argues that the incidental use of such accounts does not create the domestic nexus necessary to qualify as transfers under § 2314. (Mot. at 13.) The Government counters that the Four Transfers moved through the United States (Hyman Decl. Exs. 15-18). between their origination and destination accounts, and therefore are domestic conduct sufficient to invoke § 2314’s application.
Although the text of § 2314 references transportation of property in interstate or' “foreign commerce,” that language alone is insufficient to rebut the
To “displace[ ] the presumption” against extraterritoriality, the relevant conduct must have “sufficiently touch[ed] and concerned] the territory of the United States.” Licci by Licci v. Lebanese Canadian Bank, SAL,
The use of correspondent banks in foreign transactions between foreign parties constitutes domestic conduct within § 2314’s reach, especially where bank accounts are the principal means through which the relevant conduct arises. Other courts have construed the use of correspondent banks in the United States as “touching] and concern[ing] the United States so as to displace the presumption” against extraterritoriality. Mastafa,
The relevant conduct in this action is the “provision of wire transfers between [foreign entities and their foreign accounts] through [their] correspondent bank[s] in New York.” Licci,
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 completed without the services of these U.S. correspondent banks. Indeed, international wire transfers do not merely “ricochet” off of U.S. correspondent banks. (See Mot. at 15.) 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.” Bank Julius,
Moreover, that no wrongdoer purposefully availed himself of the services of a U.S. bank—or knew that such banks were being used—is irrelevant. Adopting such an interpretation would frustrate the purpose of § 2314 and render the “use of U.S. financial institutions as clearinghouses for criminals.” Bank Julius,
C. Bribery of a Foreign Official
The Government’s third SUA— the “bribery of a public official, or the misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official” (18 U.S.C. § 1956(c)(7)(B)(iv))—is tied largely to significant kickback payments to Vladden Stepanova, the. ex-husband of the Russian tax official, Olga Stepanova, who allegedly approved the $230 million refund. Prevezon maintains that the funds in the accounts of Mr. Stepanova’s two companies—Arivust Holdings and Aikate Properties—cannot- be -traced to Russian Treasury Fraud . because. ■ the Government’s expert “admitted that the suppps-edly tainted funds” had “actually been previously disbursed to other entities” before the kickback payments • were made. (Mot. at 16.) Put another way, because none of the tainted funds can be attributed to either Arivust or -Aikate’s accounts, Prevezon contends that the Government cannot prove misappropriation of public funds for the benefit of a public official. Further, Prevezon claims that Ms. Stepanova could not have benefited from the payment because she has been divorced from Mr. Stepanova for more than twenty years.
At bottom, a genuine dispute of material fact exists regarding the origins of the supposed kickback payments.and the nature of the Stepanovas’ relationship. In view of this Court’s decision to admit bank records (see ECF No. 703), the jury may reasonably infer that tainted funds were wired for .Mr. Stepanova’s benefit. The jury may consider the Government’s trac
Moreover, the Stepanovas’ relationship, even after the apparent dissolution of their marriage, raises a genuine issue of material fact. Whether the Stepanovas remain sufficiently close to benefit each other is a jury question. (See Counter SUF ¶85.)
D. Money-laundering predicate
The Government alleges each successive phase of the ' purported money laundering scheme qualifies as an SUA. The money laundering predicate cannot exist as an independent SUA, but may only be added if another SUA is proven. Because this Court denies summary judgment on the SUAs involving fraud against a foreign bank, transportation of stolen property, and bribery of a foreign official, the successive money laundering acts may be considered as an additional SUA. To the extent Prevezon argues that the successive money laundering acts are not an SUA because earlier transfers of illegal proceeds “occurred outside the United States,” - (Mot. at 6 n.3)- this Court holds that the use of U.S. correspondent banks to launder illegal proceeds qualifies as domestic conduct.
“Congress enacted the money laundering statute to criminalize the use of United States- financial institutions as ¡ clearinghouses for criminal money laundering and conversion into- United States currency.” Bank Julius,
III.- Tracing Analysis
A. Tracing Assumptions
’ Prevezon further contends that it is entitled to summary judgment because there is no .evidence that, the “accounts between the Russian Treasury and Preve-zon in the Government’s tracing map, or any of the unknown persons who controlled those accounts, were connected to the Russian Treasury Fraud or intended to launder its proceeds.” (Mot. at 20-21; Reply at 9; Tr. at 30:24-31:2 (“you can’t identify money laundering simply because it looks like money laundering without any evidence that somebody intended to launder money.”).) And because the Government’s tracing report rests on a flawed analysis identifying the intervening transactions based on nothing more than its. expert’s belief that they bore “indicia of money laundering,” Prevezon contends that the Government is foreclosed from applying the money laundering principles it needs to trace each transfer to Prevezon (Mot. at 22; Reply at 9 n.9.)
Under 18 U.S.C. § 1956, the Government is required to prove that transporting proceeds derived from the Russian Treasury Fraud was “designed, at least in part, to conceal or disguise their--true nature, location, source, ownership, or- control.” Cuellar v. United States,
The purpose and intent elements may be established by circumstantial proof. United States v. Huezo,
The Government offers circumstantial evidence that the money laundering scheme was designed to conceal the illegal nature and source 'of the $1.9 million at issue. First, the suspicious timing of transactions—that “transactions in [bank] account[s] occurred in temporal proximity to the charged money laundering conspiracy”—is one form of circumstantial evidence that can prove intent. United States v. Diaz,
Second, both Megacom Transit and Cas-tlefront—two intermediary accounts—had “strikingly similar pattern[s] of activity in their bank accounts.” (Opp. at 22.) The majority of their incoming transfers came from three senders, one of whom routed money from an account at a bank designated by the U.S. Treasury as money laundering concern. (Hyman Deck 40-43.); see also Diaz,
The three senders also wired money to three other-companies with accounts at the same.bank during roughly the same time period. (Phillips Deck Ex. 14.) Thus, a total of five accounts reflecting similar patterns of activity were repeatedly accessed from the same IP address. On “42 days in February and March 2008,” all “five [accounts] ... were accessed by the same IP address on the same day.” (Opp. at 23 (citing Hy-man Deck Exs. 44-48).) This circumstantial evidence gives rise to an issue of mate
Third, use of coded language bears on the purpose for which money is concealed. United States v. Gotti,
Moreover, if Castlefront and Megacom Transit served as corporate shells for money laundering, that evidence is probative of a design to conceal because it may lead a jury to conclude that the Organization “funneled profits [from the Russian Treasury Fraud] to” those entities and “other fictitious business accounts and then eventually to” Prevezon’s account. United States v. Thayer,
Thus, while some evidence, by itself, falls short of establishing an intent to conceal, the “existence of more than one transaction, coupled with either direct evidence of intent to conceal or sufficiently complex, transactions that such an intent could be inferred; funneling illegal funds through various fictitious business accounts and highly unusual transactions involving cashier’s checks, third party deposits, and trust accounts used to disguise the source of funds” can establish that the financial transactions at issue were part of the money laundering scheme. United States v. Bikundi,
Use of circumstantial evidence, particularly in complex financial cases such as this, is perhaps the only way to prove money laundering. It is unsurprising that there is no direct evidence demonstrating that any of the conduit companies knew about, or were associated with, the Russian Treasury Fraud, or that any individu
The Government’s expert, upon reviewing thousands of transactions, constructed a tracing chart outlining the various transactions through which a portion of the fraud proceeds were laundered into Preve-zon’s account. And while many of the transactions were identified as money laundering transactions based on their structure and characteristics—e.g., time at which they were opened, timing and similar patterns of transactions, fictitious business purposes, shell accountholders, etc.— the evidence also indicates that certain accounts were controlled by a single party using the same IP address. The tracing analysis does not purport to identify the individuals behind the transactions. Nor does it tether the transactions directly to the Russian Treasury Fraud. But there is enough evidence, viewed in a light most favorable to the Government, for the jury to make, those determinations. Jurors are “entitled,- and routinely encouraged, to rely on their common sense and experience in drawing inferences. Based on the complexity and scale of the money laundering scheme, common sense and experience [could] support an inference” that the Organization constructed a sprawling network for shell companies to hide the purpose of the transfers. Huezo,
B. Tracing Principles
■ Prevezon further contends that it is-entitled to summary judgment because the Government cannot prove that each account in the tracing map disbursed tainted funds from the Russian Treasury Fraud to the next account in the chain. (Mot. at 23.) 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. (Mot. at 24 (Government expert “failed to guard against the possibility that tainted funds had been entirely disbursed from a particular entity in the chain before that entity received new untainted funds that it sent to Prevezon.”.) For example, Prevezon notes that one intermediary account had a balance of approximately $800 before $900,000 in-tainted funds was wired into it and then commingled with $2.1 million in clean funds. (SUF ¶¶ 46-48.) Subsequently, that, account’s payments to unrelated third parties reduced the balance to
But the Government has the benefit of utilizing the tracing principles established by United States v. Banco Cafetero Panama,
The facilitation principle strengthens- application of the first-in, first-out rule. That principle covers both laundered funds and “any funds that ‘facilitated’ money laundering even if they were not part of the money-laundering transaction.” United States v. Approx. $629,349.85 Seized from Wachovia Bank Acct. Nos. Ending in *6176 and *6189 in the Name of Ecost. com, and All Proceeds Traceable Thereto,-
Therefore, if the jury concludes that there is enough evidence linking each account to the money laundering scheme— starting with the Russian Treasury and ending with Prevezon—the Government may apply the .Banco Cafetero and the facilitation principles to reclaim the tainted funds at issue in this civil forfeiture action.
C. Government’s Motion in Limine No. <M
This Opinion and Order addresses most of the issues raised in the Government’s Motion in Limine Nóv 2. The Government’s’motion, however, seeks additional relief in the form of an order precluding Prevezon and its tracing expert, Anthony Milazzo, from’ offering “any evidence or argument contravening the law of the Second Circuit on the tracing of crime pro
CONCLUSION
For' the foregoing reasons, and in this Court’s informed discretion, Prevezon’s motion for summary judgment is denied, and the Government’s Motion in Limine No. 2 is granted. The Clerk of Court is directed to terminate the motions pending at ECF Nos. 573 and 596.
SO ORDERED
Notes
. This Opinion and Order also addresses the arguments set forth in the Government's Motion In Limine No. 2 (ECF No. 596), which raises substantially similar issues.
. The Government acknowledges that without independently proving some other SUA, the original money laundering offense giving rise to subsequent money laundering transactions would not exist. (See Prevezon Memo, of Law in Support of Summary Judgment 0‘Mot.”), at ECF No. 575, at 6, n.6.)
. Prevezon claims that HSBC is not a “foreign bank” under the SUA because “the HSBC Entities, in their roles as trustee, manager and investor, were not engaged in the core functions of a banking system.” (Mot. at 11 n. 8 (internal quotation marks and citations omitted).) But under the relevant provision’s definition, HSBC qualifies as a "foreign bank (as defined in paragraph 7 of section 1(b) of the International Banking Act of 1978),” including “any subsidiaty or affiliate” of any foreign company "which engages in the business of banking." 18 U.S.C. § 1956(c)(7)(B)(iii) (citing 12 U.S.C. § 3107(7)). The HSBC entities at issue here—