United States v. Prevezon Holdings, Ltd

Money laundering, tracing, extraterritorial jurisdiction & concealment

Stefan Cassella of Asset Forfeiture Law, LLC analyses a recent judgement which found that the transfer of fraud proceeds from one foreign country to another, through a US correspondent bank account, may serve as the specified unlawful activity (SUA) for international money laundering.

Money may be regarded as the proceeds of bank fraud, even if the bank was not the victim of the offense, if deceiving the bank was an integral part of the scheme. Circumstantial evidence, such as the use of coded language and shell companies, is sufficient to establish the concealment element of a money laundering offense. Additionally, circumstantial evidence—such as the timing and pattern of financial transactions—may be used to establish that the funds involved in an alleged money laundering offense are traceable to a criminal offense.

If clean money is used to facilitate the laundering of dirty money in a commingled account, the clean money becomes subject to forfeiture, and property traceable to the formerly clean money is forfeitable as well.

[United States v. Prevezon Holdings, Ltd., ___ F. Supp.3d ___, 2017 WL 1951142 (S.D.N.Y. May 10, 2017).]

Russian criminals perpetrated an elaborate scheme to defraud the Russian treasury of $230 million by stealing the identities of Russian businesses and using them to make false claims for tax refunds. The perpetrators then laundered the money “through a Byzantine web of conduit accounts,” and ultimately used $1.9 million of the laundered funds to purchase apartments in Manhattan.

The Government filed a civil forfeiture action pursuant to 18 U.S.C. § 981(a)(1)(A) against the apartments, alleging that they were involved in the money laundering offense. Claimant, the corporate owner of the real property, filed a claim and moved for summary judgment on the ground that the Government could not satisfy the elements of the money laundering statute and could not satisfy the tracing requirements of the civil forfeiture statute.

First, Claimant argued that the Government could not establish any of the alleged predicates for the money laundering offense. Among other things, it argued that 18 U.S.C. § 2314 (interstate transportation of stolen property) could not serve as an SUA (“specified unlawful activity”) because the transactions in question occurred between foreign companies using foreign bank accounts. But the court held that because the alleged transactions occurred in US dollars and passed through correspondent bank accounts in the US, they would constitute violations of Section 2314 and thus could serve as money laundering predicates.

The use of US-based correspondent accounts, the court said, was not trivial: the foreign transactions “could not have been completed without the services of these US correspondent banks;” accordingly, “the use of the correspondent banks – as indispensable conduits – suffices to invoke [Section 2314’s] application,” whether the parties conducting the transaction knew they were using US banks to do so or not.

Claimant also objected that the Government could not show that any of the allegedly laundered funds were the proceeds of foreign bank fraud. See 18 U.S.C. § 1956(c)(7)(B)(iii) (making foreign bank fraud an SUA). The victim of the scheme, Claimant said, was the Russian treasury, not a bank. The court held, however, that part of the scheme to steal the identities of the Russian businesses involved making misrepresentations to a foreign bank. Thus, while the principal victim of the scheme may have been the Russian treasury, and while the bank itself may not have suffered a loss, deceiving the bank was part of the scheme, which meant that the proceeds of the scheme could properly be characterized as the proceeds of bank fraud.

Claimant also objected that the Government could not establish the concealment element of the money laundering offense, but the court held that the Government could rely on circumstantial evidence to do so.

Among other things, the Government alleged that the money launderers used coded language and shell corporations to funnel the proceeds of the fraud scheme “to other fictitious business accounts and then eventually to [the defendant property].”

Such evidence, the court said, “is perhaps the only way to prove money laundering” in particularly complex financial cases. Indeed, “hamstringing a party’s use of circumstantial evidence to prove the design to conceal or disguise the nature, location, source, ownership, or control of a multi-layered money laundering scheme would immunize money launderers sophisticated enough to use shell companies that regularly flush their accounts.”

Finally, Claimant argued that the Government could not satisfy the tracing requirements to establish that the money being laundered was traceable to the Russian fraud, or that the defendant property in New York was traceable to the money laundering. But the court had several responses.

First, the Government may rely on circumstantial evidence to show that the money moving through a complex series of transactions was in fact traceable to the initial fraud. Such evidence could include the “suspicious timing of the transactions” and the “strikingly similar patterns of activity” occurring more or less at the same time in multiple bank accounts.

Moreover, the Government is entitled to rely on accounting principles – such as “first in, first out” — to trace money through a series of bank accounts.

Claimant argued, however, that the ultimate transaction resulting in the purchase of the defendant property could only have been made with clean funds that had been commingled with the fraud proceeds along with way, because all of tainted funds had been used for other purposes by that time. The court held, however, that even if that were true, such commingled funds had become “tainted” when they were used to facilitate the earlier steps in the money laundering scheme, and thus constituted forfeitable funds when they were used to purchase the defendant property.

For all of these reasons, Claimant’s motion for summary judgment was denied.

Comment: There are many important parts to this case. In particular, the holding that the transfer of the proceeds of a foreign fraud between the foreign bank accounts of foreign companies may constitute a violation of 18 U.S.C. § 2314 as long as the money passes through a correspondent bank account in the United States – and thus may serve as the predicate for a money laundering offense – extends the jurisdiction of the federal courts to a wide range of international illegal activity.

I was most interested, however, in the tracing issues.

To constitute a money laundering offense, the property involved in a financial transaction must be traceable, at least in part, to specified unlawful activity. As money moves through what this court called “a Byzantine web of conduit accounts,” however, it can be difficult to establish that the money involved in one of the latter transactions is traceable to the proceeds of the original crime. Making such tracing difficult is, of course, the primary purpose of the money laundering scheme.

The court says, however, that the Government may rely on circumstantial evidence to satisfy the tracing requirements. For example, if two transactions occur at approximately the same time and fit a pattern of transactions that have been shown to involve criminal proceeds, there is a fair inference that the transactions both involved criminal proceeds.

Moreover, the court endorses the use of the accounting techniques described by the Second Circuit in the seminal Banco Cafetero case to meet the Government’s tracing requirements. This is significant because Banco Cafetero authorized the use of accounting rules such as “first in/first out” and “lowest intermediate balance” only in the context of a probable cause determination. In this case, the court endorsed the use of those rules to establish the occurrence of a money laundering offense by a preponderance of the evidence.

Finally, the claimant attempted to escape liability for the forfeiture of its NY property by arguing that even if money laundering offenses occurred along the way, the ultimate purchase of the property must have been made with “clean” money that was commingled with the tainted funds. The reasons why the claimant thought this was so do not matter. What’s important is this: once the tainted funds were laundered by commingling them with clean funds, all of the funds in the commingled bank account were forfeitable as property involved in money laundering. And if all of the funds were forfeitable, any property purchased with those funds would be forfeitable as well as property traceable to the money laundering offense, without regard to whether the purchase was made with the clean funds or the dirty funds.

On May 15, 2017, the acting U.S. Attorney for the Southern District of New York announced the settlement of this case, with the claimant agreeing to pay a civil penalty under 18 U.S.C. § 1956(b) of $5.8 million, which is three times the value of the property in NY that was involved in the money laundering offense.

Stefan Cassella, Asset Forfeiture Law, LLC 

www.assetforfeiturelaw.us