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May 2, 2022

Stroock Client Alert

By: Tom Firestone

On April 28, the White House released a new “comprehensive proposal to hold Russian oligarchs and elites accountable.”[1] The proposal, which is explained in parallel White House and Justice Department “FACT SHEET”s[2] attempts to address the difficulties of seizing criminal proceeds generated in Russia and allowing the seized assets to be used to “remediate harms of Russian aggression toward Ukraine.”[3] This article summarizes the proposal’s key provisions and explains how they might help U.S. prosecutors.

The Problem

Designating an oligarch (or anyone else) as a Specially Designated Nation (“SDN”) “blocks” their property and prohibits any U.S. person from transacting in that property. However, seizing the property requires a judicial proceeding and proof by a preponderance of the evidence that the property constitutes the proceeds or instrumentalities of a crime. Seizing the proceeds of Russian corruption can be extremely difficult for U.S. prosecutors, especially if, as is often the case, the crime was committed in Russia many years ago, the subject’s ownership interest is buried behind a daisy chain of offshore shell companies, the subject has an ostensibly legitimate source of income and the subject is sufficiently wealthy and politically connected to sabotage attempts by prosecutors to obtain evidence from Russia. The new proposal is clearly designed to address many of these problems. 

What is Proposed?

Streamlined Administrative Forfeiture

First, and perhaps most significantly, the proposal would create a “new, streamlined administrative process … for the forfeiture of property in the United States that is owned by sanctioned Russian oligarchs and that has a connection to specified unlawful conduct.”[4] As noted above, in most cases, asset forfeiture requires a judicial procedure and proof that the property constitutes criminal proceeds or instrumentalities. By contrast, administrative forfeiture does not require a prior judicial proceeding. However, it is available only for a few categories of property, including contraband, conveyances (i.e., boats, cars, airplanes) used to import, transport, or store a controlled substance, and certain other forms of property worth less than $500,000.[5]  It is not available for real property or property worth more than $500,000. 

The White House proposal would allow the government to seize mansions, bank accounts, yachts, jets and other expensive property belonging to oligarchs without first proving in court that the property had been acquired with criminal proceeds – a significant change from current practice. While it would require proof of a “connection” to “specified unlawful activity” (a term which covers a number of predicate crimes, typically referred to as “SUAs, listed in 18 USC 1956 (c) (7)), proving a mere “connection” would presumably be easier than proving that the property constitutes proceeds or instrumentalities of an SUA which, as explained above, can be extremely difficult when the SUA was committed in Russia many years ago. 

According to the proposal, a forfeiture decision “would be reviewable in federal court on an expedited basis.”  The proposal does not specify exactly what expedited judicial review would entail, but the standard of review would presumably be the arbitrary and capricious standard provided for in 5 USC Section 706 (2)(A). The proposal also does not define “oligarch” and there is no definition of the term in U.S. law. Given the term’s original ancient Greek meaning (rule by a wealthy few), it would presumably apply in this context only to someone who (a) has both wealth and political power and (b) has acquired at least one or them corruptly. A wealthy and honest businessman would presumably not be covered.

Forfeiture of Property Used to Facilitate Sanctions Evasion

The proposal would also “allow for the forfeiture of property that Russian oligarchs use to facilitate the evasion of sanctions.” [6]  As noted in the White House Fact Sheet, “[u]nder current law, the United States can forfeit the proceeds of sanctions violations, but it cannot forfeit property used to facilitate sanctions violations. This proposal closes that gap.”[7] 

The DOJ Fact Sheet provides some more detail, explaining that the proposal would amend the penalty provisions of the International Emergency Economic Powers Act (IEEPA) “to extend the existing forfeiture authorities to facilitating property, not just to proceeds of the offenses.”[8] 

While not specified in the DOJ Fact Sheet, the proposal would presumably amend 31 CFR Section 510.701(d), which allows for the forfeiture of property “concerned” in a sanctions violation to clarify that that penalty provision would also apply to property used to facilitate a sanctions violation. In other words, if an SDN uses a yacht to plan a scheme to evade sanctions, the yacht could be forfeited even if the SDN acquired it prior to being sanctioned.

Making Sanctions and Export Controls Violations RICO Predicates

The DOJ Fact Sheet explains that the proposal would add criminal violations of IEEPA and the Export Control Reform Act (ECRA) to the definition of “racketeering activity” in the Racketeer Influenced and Corrupt Organizations Act (RICO). RICO is a valuable tool in prosecuting organized crime because it allows prosecutors to join multiple defendants and crimes (that might otherwise have to be tried separately) in a single case. This allows the judge and jury to see the full range of criminal activity of the organization and its members, making it easier for prosecutors to obtain convictions, longer sentences, and forfeiture of assets. Thus, the proposal would allow prosecutors to join IEEPA and ECRA violations with other charges such as wire fraud, mail fraud, bribery, and money laundering and charge all those who had a sufficient degree of participation in the underlying “pattern of racketeering activity” as part of a single “racketeering enterprise.”    

This could be a very powerful tool in combatting sanctions evasion. By way of illustration, DOJ recently charged Russian oligarch Konstantin Malofeyev, whom it described as “closely tied to Russian aggression in Ukraine,” with sanctions evasion.[9]  Separately, OFAC sanctioned Malofeyev and 40 individuals and entities for their participation in Malofeyev’s “global sanctions evasion network.”[10]  Despite OFAC’s allegations that Malofeyev runs a “vast global network” that uses “cut-outs and proxies” to “evade sanctions and conduct malign influence activities,” neither he, nor any members of the global network were charged with RICO,[11] as sanctions evasion is not a RICO predicate. If the proposed amendment is adopted, similar future cases will likely rely on RICO, thus allowing for racketeering charges to be brought against other Malofeyevs and their entire networks in a single indictment, with corresponding opportunities for asset forfeiture and longer sentences.

Expanded Statute of Limitations

The proposal would also extend the statute of limitations for bringing money laundering charges, and related forfeiture actions, from 5 to 10 years. As already noted, prosecuting foreign money laundering cases, especially those involving Russia, can be extremely difficult and time consuming. Criminal proceeds are often hidden under layers of shell companies spread out across multiple secrecy jurisdictions. Connecting the dots often requires sending multiple mutual legal assistance requests to multiple foreign countries — a complicated and time consuming process. Obtaining evidence from Russia can also be challenging, especially if the subject is a powerful oligarch with the means to corrupt the judicial process. While current law allows for the temporary suspension of the statute of limitations to permit prosecutors to obtain evidence from overseas, it also requires prosecutors to first obtain a court order based on a preponderance of the evidence and limits the total of all periods of suspension to three years.[12]  By automatically extending the statute of limitations from 5 to 10 years, the proposal would eliminate these restrictions and facilitate the prosecution of international money laundering cases.

New Crime – Possessing Proceeds of Russian Government Corruption

The proposal would also “[c]reate a new criminal offense, making it unlawful for any person to knowingly and or intentionally possess proceeds directly obtained from corrupt dealings with the Russian government.”[13]  In contrast to many other elements in the proposal, it is not immediately clear how this would facilitate the seizure of kleptocrat assets. Proceeds “obtained from corrupt dealings with the Russian government” are, in most cases, already “criminal proceeds” given that 18 USC 1956(c)(7)(B) includes “bribery of a public official, or the misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official” (even when committed in a foreign country) as an SUA. Engaging in a transaction with such proceeds, even without attempting to conceal their nature, source or origin, or to promote criminal activity, can be a crime.[14]  Moreover, under the proposal, the prosecution would still have to prove that the property is the proceeds of Russian government corruption, a serious challenge for the reasons discussed above. The prosecution would also have to prove that the defendant knew that the proceeds were the result of Russian government corruption, which could also be very difficult, especially with respect to third parties who were not involved in the underlying corruption that generated the proceeds. 

In short, without more details, it appears that the proposed new offense would do little to change the existing offense of money laundering or to alleviate the legal obstacles inherent in the prosecution of such cases. Notably, it is not mentioned in the DOJ Fact Sheet.

Transferring the Proceeds to Ukraine

The proposal would also permit the Departments of Justice, Treasury and State “to work together to return funds forfeited to the U.S. government to remediate harms of Russian aggression toward Ukraine.”[15] As explained in the DOJ Fact Sheet, forfeited funds are generally used to compensate victims of the crimes underlying the forfeitures and for law enforcement purposes. Therefore, allowing the government to transfer seized funds to Ukraine will “require amendments to multiple statutes governing the use of forfeited funds.”[16] However, the proposal does not spell out exactly what these amendments would be.

What Does It Mean?

The White House proposal is a serious attempt to address the difficulties of seizing the proceeds of Russian corruption and has clearly been drafted with input from prosecutors who have first-hand experience with these difficulties. It will now be up to its proponents to flesh out the details and work with Congress to get the necessary amendments passed. 

******************

In an upcoming episode of our podcast, The New Cold War: Risk, Sanctions, Compliance Episode 9, Tom Firestone will discuss the new White House proposal in more detail and its potential implications.

******************

[1] https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-president-bidens-comprehensive-proposal-to-hold-russian-oligarchs-accountable/

[2] https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-president-bidens-comprehensive-proposal-to-hold-russian-oligarchs-accountable/; https://www.justice.gov/opa/pr/fact-sheet-administration-legislative-proposals-support-kleptocracy-asset-recovery

[3] https://www.justice.gov/opa/pr/fact-sheet-administration-legislative-proposals-support-kleptocracy-asset-recovery

[4] https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-president-bidens-comprehensive-proposal-to-hold-russian-oligarchs-accountable

[5] https://home.treasury.gov/policy-issues/terrorism-and-illicit-finance/asset-forfeiture/forfeiture-overview

[6] https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-president-bidens-comprehensive-proposal-to-hold-russian-oligarchs-accountable/

[7] https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-president-bidens-comprehensive-proposal-to-hold-russian-oligarchs-accountable/

[8] https://www.justice.gov/opa/pr/fact-sheet-administration-legislative-proposals-support-kleptocracy-asset-recovery

[9] Russian Oligarch Charged with Violating U.S. Sanctions | OPA | Department of Justice

[10] U.S. Treasury Designates Facilitators of Russian Sanctions Evasion | U.S. Department of the Treasury

[11] download (justice.gov)

[12] See 18 USC Section 3292.

[13] https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-president-bidens-comprehensive-proposal-to-hold-russian-oligarchs-accountable/

[14] See 18 USC Section 1957 (“Whoever…knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than $10,000 and is derived from specified unlawful activity….”).

[15] https://www.justice.gov/opa/pr/fact-sheet-administration-legislative-proposals-support-kleptocracy-asset-recovery

[16] https://www.justice.gov/opa/pr/fact-sheet-administration-legislative-proposals-support-kleptocracy-asset-recovery

 

May 2, 2022

Stroock Client Alert

By: Tom Firestone

On April 28, the White House released a new “comprehensive proposal to hold Russian oligarchs and elites accountable.”[1] The proposal, which is explained in parallel White House and Justice Department “FACT SHEET”s[2] attempts to address the difficulties of seizing criminal proceeds generated in Russia and allowing the seized assets to be used to “remediate harms of Russian aggression toward Ukraine.”[3] This article summarizes the proposal’s key provisions and explains how they might help U.S. prosecutors.

The Problem

Designating an oligarch (or anyone else) as a Specially Designated Nation (“SDN”) “blocks” their property and prohibits any U.S. person from transacting in that property. However, seizing the property requires a judicial proceeding and proof by a preponderance of the evidence that the property constitutes the proceeds or instrumentalities of a crime. Seizing the proceeds of Russian corruption can be extremely difficult for U.S. prosecutors, especially if, as is often the case, the crime was committed in Russia many years ago, the subject’s ownership interest is buried behind a daisy chain of offshore shell companies, the subject has an ostensibly legitimate source of income and the subject is sufficiently wealthy and politically connected to sabotage attempts by prosecutors to obtain evidence from Russia. The new proposal is clearly designed to address many of these problems. 

What is Proposed?

Streamlined Administrative Forfeiture

First, and perhaps most significantly, the proposal would create a “new, streamlined administrative process … for the forfeiture of property in the United States that is owned by sanctioned Russian oligarchs and that has a connection to specified unlawful conduct.”[4] As noted above, in most cases, asset forfeiture requires a judicial procedure and proof that the property constitutes criminal proceeds or instrumentalities. By contrast, administrative forfeiture does not require a prior judicial proceeding. However, it is available only for a few categories of property, including contraband, conveyances (i.e., boats, cars, airplanes) used to import, transport, or store a controlled substance, and certain other forms of property worth less than $500,000.[5]  It is not available for real property or property worth more than $500,000. 

The White House proposal would allow the government to seize mansions, bank accounts, yachts, jets and other expensive property belonging to oligarchs without first proving in court that the property had been acquired with criminal proceeds – a significant change from current practice. While it would require proof of a “connection” to “specified unlawful activity” (a term which covers a number of predicate crimes, typically referred to as “SUAs, listed in 18 USC 1956 (c) (7)), proving a mere “connection” would presumably be easier than proving that the property constitutes proceeds or instrumentalities of an SUA which, as explained above, can be extremely difficult when the SUA was committed in Russia many years ago. 

According to the proposal, a forfeiture decision “would be reviewable in federal court on an expedited basis.”  The proposal does not specify exactly what expedited judicial review would entail, but the standard of review would presumably be the arbitrary and capricious standard provided for in 5 USC Section 706 (2)(A). The proposal also does not define “oligarch” and there is no definition of the term in U.S. law. Given the term’s original ancient Greek meaning (rule by a wealthy few), it would presumably apply in this context only to someone who (a) has both wealth and political power and (b) has acquired at least one or them corruptly. A wealthy and honest businessman would presumably not be covered.

Forfeiture of Property Used to Facilitate Sanctions Evasion

The proposal would also “allow for the forfeiture of property that Russian oligarchs use to facilitate the evasion of sanctions.” [6]  As noted in the White House Fact Sheet, “[u]nder current law, the United States can forfeit the proceeds of sanctions violations, but it cannot forfeit property used to facilitate sanctions violations. This proposal closes that gap.”[7] 

The DOJ Fact Sheet provides some more detail, explaining that the proposal would amend the penalty provisions of the International Emergency Economic Powers Act (IEEPA) “to extend the existing forfeiture authorities to facilitating property, not just to proceeds of the offenses.”[8] 

While not specified in the DOJ Fact Sheet, the proposal would presumably amend 31 CFR Section 510.701(d), which allows for the forfeiture of property “concerned” in a sanctions violation to clarify that that penalty provision would also apply to property used to facilitate a sanctions violation. In other words, if an SDN uses a yacht to plan a scheme to evade sanctions, the yacht could be forfeited even if the SDN acquired it prior to being sanctioned.

Making Sanctions and Export Controls Violations RICO Predicates

The DOJ Fact Sheet explains that the proposal would add criminal violations of IEEPA and the Export Control Reform Act (ECRA) to the definition of “racketeering activity” in the Racketeer Influenced and Corrupt Organizations Act (RICO). RICO is a valuable tool in prosecuting organized crime because it allows prosecutors to join multiple defendants and crimes (that might otherwise have to be tried separately) in a single case. This allows the judge and jury to see the full range of criminal activity of the organization and its members, making it easier for prosecutors to obtain convictions, longer sentences, and forfeiture of assets. Thus, the proposal would allow prosecutors to join IEEPA and ECRA violations with other charges such as wire fraud, mail fraud, bribery, and money laundering and charge all those who had a sufficient degree of participation in the underlying “pattern of racketeering activity” as part of a single “racketeering enterprise.”    

This could be a very powerful tool in combatting sanctions evasion. By way of illustration, DOJ recently charged Russian oligarch Konstantin Malofeyev, whom it described as “closely tied to Russian aggression in Ukraine,” with sanctions evasion.[9]  Separately, OFAC sanctioned Malofeyev and 40 individuals and entities for their participation in Malofeyev’s “global sanctions evasion network.”[10]  Despite OFAC’s allegations that Malofeyev runs a “vast global network” that uses “cut-outs and proxies” to “evade sanctions and conduct malign influence activities,” neither he, nor any members of the global network were charged with RICO,[11] as sanctions evasion is not a RICO predicate. If the proposed amendment is adopted, similar future cases will likely rely on RICO, thus allowing for racketeering charges to be brought against other Malofeyevs and their entire networks in a single indictment, with corresponding opportunities for asset forfeiture and longer sentences.

Expanded Statute of Limitations

The proposal would also extend the statute of limitations for bringing money laundering charges, and related forfeiture actions, from 5 to 10 years. As already noted, prosecuting foreign money laundering cases, especially those involving Russia, can be extremely difficult and time consuming. Criminal proceeds are often hidden under layers of shell companies spread out across multiple secrecy jurisdictions. Connecting the dots often requires sending multiple mutual legal assistance requests to multiple foreign countries — a complicated and time consuming process. Obtaining evidence from Russia can also be challenging, especially if the subject is a powerful oligarch with the means to corrupt the judicial process. While current law allows for the temporary suspension of the statute of limitations to permit prosecutors to obtain evidence from overseas, it also requires prosecutors to first obtain a court order based on a preponderance of the evidence and limits the total of all periods of suspension to three years.[12]  By automatically extending the statute of limitations from 5 to 10 years, the proposal would eliminate these restrictions and facilitate the prosecution of international money laundering cases.

New Crime – Possessing Proceeds of Russian Government Corruption

The proposal would also “[c]reate a new criminal offense, making it unlawful for any person to knowingly and or intentionally possess proceeds directly obtained from corrupt dealings with the Russian government.”[13]  In contrast to many other elements in the proposal, it is not immediately clear how this would facilitate the seizure of kleptocrat assets. Proceeds “obtained from corrupt dealings with the Russian government” are, in most cases, already “criminal proceeds” given that 18 USC 1956(c)(7)(B) includes “bribery of a public official, or the misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official” (even when committed in a foreign country) as an SUA. Engaging in a transaction with such proceeds, even without attempting to conceal their nature, source or origin, or to promote criminal activity, can be a crime.[14]  Moreover, under the proposal, the prosecution would still have to prove that the property is the proceeds of Russian government corruption, a serious challenge for the reasons discussed above. The prosecution would also have to prove that the defendant knew that the proceeds were the result of Russian government corruption, which could also be very difficult, especially with respect to third parties who were not involved in the underlying corruption that generated the proceeds. 

In short, without more details, it appears that the proposed new offense would do little to change the existing offense of money laundering or to alleviate the legal obstacles inherent in the prosecution of such cases. Notably, it is not mentioned in the DOJ Fact Sheet.

Transferring the Proceeds to Ukraine

The proposal would also permit the Departments of Justice, Treasury and State “to work together to return funds forfeited to the U.S. government to remediate harms of Russian aggression toward Ukraine.”[15] As explained in the DOJ Fact Sheet, forfeited funds are generally used to compensate victims of the crimes underlying the forfeitures and for law enforcement purposes. Therefore, allowing the government to transfer seized funds to Ukraine will “require amendments to multiple statutes governing the use of forfeited funds.”[16] However, the proposal does not spell out exactly what these amendments would be.

What Does It Mean?

The White House proposal is a serious attempt to address the difficulties of seizing the proceeds of Russian corruption and has clearly been drafted with input from prosecutors who have first-hand experience with these difficulties. It will now be up to its proponents to flesh out the details and work with Congress to get the necessary amendments passed. 

******************

In an upcoming episode of our podcast, The New Cold War: Risk, Sanctions, Compliance Episode 9, Tom Firestone will discuss the new White House proposal in more detail and its potential implications.

******************

[1] https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-president-bidens-comprehensive-proposal-to-hold-russian-oligarchs-accountable/

[2] https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-president-bidens-comprehensive-proposal-to-hold-russian-oligarchs-accountable/; https://www.justice.gov/opa/pr/fact-sheet-administration-legislative-proposals-support-kleptocracy-asset-recovery

[3] https://www.justice.gov/opa/pr/fact-sheet-administration-legislative-proposals-support-kleptocracy-asset-recovery

[4] https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-president-bidens-comprehensive-proposal-to-hold-russian-oligarchs-accountable

[5] https://home.treasury.gov/policy-issues/terrorism-and-illicit-finance/asset-forfeiture/forfeiture-overview

[6] https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-president-bidens-comprehensive-proposal-to-hold-russian-oligarchs-accountable/

[7] https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-president-bidens-comprehensive-proposal-to-hold-russian-oligarchs-accountable/

[8] https://www.justice.gov/opa/pr/fact-sheet-administration-legislative-proposals-support-kleptocracy-asset-recovery

[9] Russian Oligarch Charged with Violating U.S. Sanctions | OPA | Department of Justice

[10] U.S. Treasury Designates Facilitators of Russian Sanctions Evasion | U.S. Department of the Treasury

[11] download (justice.gov)

[12] See 18 USC Section 3292.

[13] https://www.whitehouse.gov/briefing-room/statements-releases/2022/04/28/fact-sheet-president-bidens-comprehensive-proposal-to-hold-russian-oligarchs-accountable/

[14] See 18 USC Section 1957 (“Whoever…knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than $10,000 and is derived from specified unlawful activity….”).

[15] https://www.justice.gov/opa/pr/fact-sheet-administration-legislative-proposals-support-kleptocracy-asset-recovery

[16] https://www.justice.gov/opa/pr/fact-sheet-administration-legislative-proposals-support-kleptocracy-asset-recovery

 

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