United States of America v. Prevezon Holdings Ltd. et al
OPINION & ORDER: For the foregoing reasons, and in this Courts informed discretion, Prevezon's motion for summary judgment is denied, and the Governments Motion in Limine No. 2 is granted. The Clerk of Court is directed to terminate the motion s pending at ECF Nos. 573 and 596, and as further set forth in this order. Motions terminated: 596 MOTION in Limine Number 2, To Exclude Evidence and Arguments Misinforming the Jury On Asset Tracing Law, filed by United States of America, 573 MOTION for Summary Judgment , filed by Prevezon Alexander, L.L.C., Ferencoi Investments, Ltd., Prevezon 2009 USA, L.L.C., Prevezon 1711 USA, L.L.C., Prevezon Soho USA, L.L.C., Kolevins, Ltd., Prevezon Holdings Ltd., Prevezon 1810, L.L.C., Prevezon 2011 USA, L.L.C., Prevezon Pine USA, L.L.C., Prevezon Seven USA, L.L.C. (Signed by Judge William H. Pauley, III on 5/10/2017) (ap)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
UNITED STATES OF AMERICA,
PREVEZON HOLDINGS, LTD., et al.,
No. 13-cv-6326 (WHP)
OPINION & ORDER
WILLIAM H. PAULEY III, United States District Judge:
Prevezon Holdings Ltd. and affiliated entities (“Prevezon”) move for summary
judgment.1 For the following reasons, Prevezon’s motion is denied.
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, OOO Parfenion, and
OOO Makhaon (the “Portfolio Companies”). In the aftermath of the raid, the Russian
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.
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 Government lacks any evidence giving rise to a genuine issue of material fact.
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., 258 F.3d 62, 69 (2d Cir. 2001). A
dispute regarding a material fact is genuine “if the evidence is such that a reasonable jury could
return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
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, 2004 WL
958010, at *2 (E.D.N.Y. Apr. 14, 2004). The nonmoving party must “do more than simply show
that there is some metaphysical doubt as to the material facts,” Matsushita Elec. Indus. Co. v.
Zenith Radio Corp., 475 U.S. 574, 586 (1986), and “may not rely on conclusory allegations or
unsubstantiated speculation.” Scotto v. Alemenas, 143 F.3d 105, 114 (2d Cir. 1998). If there is
any evidence in the record “from any source from which a reasonable inference could be drawn
in favor of the nonmoving party, summary judgment is improper.” Chambers v. TRM Copy
Ctrs. Corp., 43 F.3d 29, 37 (2d Cir. 1994).
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, 57 F. Supp. 3d 311, 322 (S.D.N.Y. 2014)
(alterations omitted). The Government offers evidence of four specified unlawful activities
(“SUAs”): (1) fraud against a foreign bank; (2) transportation of stolen property; (3) bribery of a
public official; and (4) successive money laundering transactions.2
A. Fraud Against a Foreign Bank3
Prevezon principally contends that the fraud alleged by the Government is not a
fraud against HSBC, but rather a fraud against the Russian Treasury. (Mot. at 7.) “The well
established elements of the crime of bank fraud are that the defendant (1) engaged in a course of
conduct designed to deceive a federally chartered or insured financial institution into releasing
property; and (2) possessed an intent to victimize the institution by exposing it to actual or
potential loss.” United States v. Barrett, 178 F.3d 643, 647–48 (2d Cir. 1999). A scheme to
defraud, while “not capable of precise definition” is commonly known as “wronging one in his
property rights by dishonest methods or schemes, and usually signif[ies] the deprivation of
something of value by trick, deceit, chicanery or overreaching.” United States v. Stavroulakis,
952 F.2d 686, 694 (2d Cir. 1992).
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
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 (“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
subsidiary 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—HSBC Private Bank (Guernsey)
Limited (as trustee); HSBC Management (Guernsey) Ltd. (as manager); and HSBC Private Bank (Suisse) S.A. (as
investor)—are subsidiaries or affiliates controlled by the HSBC Group, which is engaged in the business of banking.
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. United States v.
Shaw, 137 S. Ct. 462, 466 (2016). The bank itself need not be harmed as a result of the
fraudulent scheme. Shaw, 137 S. Ct. at 467. Nor is the Government required to prove that the
defendant engaged in the fraud with actual knowledge that the bank has an interest in the
fraudulently obtained property, Shaw, 137 S. Ct. at 467 (“[t]o require more, i.e., to require actual
knowledge of those bank-related property-law niceties, would free (or convict) equally culpable
defendants”), or that the purpose of the fraud was to harm the bank. Shaw, 137 S. Ct. at 464–65
(“no relevant authority supporting the view that the bank fraud statute criminalizing the
‘knowing execution of a scheme to defraud’ requires something more than knowledge”)
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 falsely represented to Hermitage and Firestone
Duncan that the Russian Federation authorized them to raid Hermitage’s offices and seize
evidence pertaining to an entity unrelated to the Portfolio Companies. That misrepresentation,
according to the Government, formed the basis under which Hermitage and Firestone Duncan
consented to the raid. And such misrepresentations were also directed at HSBC by virtue of its
agency relationship with Hermitage and Firestone Duncan. (Gov’t Memo. of Law in Opposition
to Summary Judgment (“Opp.”), ECF No. 612, at 4.) Second, following the raid, the
Government contends that the Organization deceived HSBC by misrepresenting its ownership
interest in the Portfolio Companies, obstructing HSBC’s efforts to object to the sham lawsuits,
and assuring HSBC that the Portfolio Companies’ corporate documents had not been provided to
other parties. (Opp. at 5–6.)
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 following 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, 950 F. Supp. 2d 547, 556 (S.D.N.Y. 2013); see also In re Rosenfeld, 543 B.R.
60, 72 (Bankr. S.D.N.Y. 2015) (“concept of false pretenses has been broadly construed by the
courts. It typically is found to be the product of multiple events, acts, or representations
undertaken pursuant to a scheme of trickery, deceit, chicanery, or overreaching.”). Sham
lawsuits, and deflecting Hermitage and HSBC’s efforts to stop them, were critical features of the
Russian Treasury Fraud. Here, the post-raid deceptive conduct is more direct—the Organization
falsely assured HSBC that the Portfolio Companies’ documents had not been manipulated or
shared with other parties when, in fact, they were used to hijack HSBC’s ownership interest.
(Counter SUF ¶ 17–18 (citing Declaration of Cristine I. Phillips (“Phillips Decl.”), ECF No. 614,
Exs. 3, 5; Declaration of Todd Hyman (“Hyman Decl.”), ECF No. 615, Exs. 2, 7–8).) These
misrepresentations or omissions of fact were directed at HSBC and its representatives as part of a
continuing, fraudulent scheme culminating in the diaspora of the $230 million refund in the
alleged money laundering network.
Those facts, taken together, suffice to establish that the “scheme [was one] to
deceive the bank and deprive it of something of value.” Shaw, 137 S. Ct. at 469. While the
scheme may have deceived and injured other parties—including, e.g., Hermitage, the Portfolio
Companies, the Russian Treasury—HSBC also was deceived. Municipality of Bremanger v.
Citigroup Global Mkts. Inc., 2013 WL 1294615, at *19 (S.D.N.Y. Mar. 28, 2013), aff’d sub
nom. Mun. Corp. of Bremanger v. Citigroup Global Mkts. Inc., 555 Fed. Appx. 85 (2d Cir. 2014)
(“principal may recover for misrepresentations relied on by an agent” so long as reliance is
reasonable); Fed. Dep. Ins. Corp. v. Hodge, 50 F. Supp. 3d 327, 337–38 (E.D.N.Y. 2014)
(“Atlas, in the normal course of business, did make representations to the agents of banks, if not
the banks themselves.”); Jay Dees Inc v. Defense Tech. Sys., Inc., 2008 WL 4501652, at *5
(S.D.N.Y. Sept. 30, 2008) (“There is no reason why a misrepresentation to the plaintiff’s agent
does not suffice.”). While Prevezon characterizes the raid as a theft, the Government offers
evidence that HSBC and Firestone Duncan only consented to the raid because members of the
Organization misrepresented its purpose. (Counter SUF ¶¶ 17–18.) If true, such
misrepresentations could convert an ordinary theft into a fraud.
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. (Hyman 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, 137 S. Ct. at 467.
Here, HSBC’s agents may have been induced—under false pretenses—to allow the Organization
to take the Portfolio Companies’ documents. Subsequently, HSBC itself may have been induced
into acquiescing to the Organization’s retention of the documents, or at the very least, lulled into
believing that no further action was necessary. But whether HSBC or its agents were actually
induced is immaterial—indeed, all that was required is that the Organization made a false
representation, “[knew] it to be false, but intending that the other should believe and act upon it.”
Shaw, 137 S. Ct. at 467 (quoting Oliver Wendell Holmes, THE COMMON LAW 132 (1881)).
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
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 SUA (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 presumption against
extraterritoriality. See Morrison v. Nat’l Austl. Bank Ltd., 561 U.S. 247, 248 (2010). If a statute
does not, by its terms, apply to extraterritorial conduct, a court must determine which “territorial
events or relationships [are] the focus” of the statute. Mastafa v. Chevron Corp., 770 F.3d 170,
183 (2d Cir. 2014). Section 2314’s “focus . . . is the transportation or transfer of property.”
United States v. All Assets Held at Bank Julius, 2017 WL 1508608, at *12 (D.D.C. Apr. 27,
2017). In “enacting 18 U.S.C. § 2314, Congress was primarily concerned with the movement of
stolen property across state lines.” Bank Julius, 2017 WL 1508608, at *12 (citing Dowling v.
United States, 473 U.S. 207, 218–20 (1985)).
To “displace the presumption” against extraterritoriality, the relevant conduct
must have “sufficiently touch[ed] and concern[ed] the territory of the United States.” Licci by
Licci v. Lebanese Canadian Bank, SAL, 834 F.3d 201, 215 (2d Cir. 2016) (internal citations and
quotation marks omitted). Whether a “complaint passes jurisdictional muster  depends upon
alleged conduct by anyone—U.S. citizen or not—that took place in the United States,” and that
conduct must be assessed under the lens of the charging statute. Mastafa, 770 F.3d at 189 (“full
‘focus’ of the [Alien Tort Statute] was on conduct.”); RJR Nabisco, Inc. v. European Cmty., 136
S. Ct. 2090, 2101 (2016) (“If the conduct relevant to the statute’s focus occurred in the United
States, then the case involves a permissible domestic application even if other conduct occurred
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 “touch[ing] and concern[ing] the United States so
as to displace the presumption” against extraterritoriality. Mastafa, 770 F.3d at 186. In Licci,
for example, the Second Circuit held a “correspondent banking account in New York [used] to
facilitate dozens of international wire transfers,” which “totaled several million dollars” and
“substantially increased and facilitated [a terrorist organization’s] ability to” execute attacks
established a “sufficient connection with the United States” under the Alien Tort Statute. 834
F.3d at 206, 215. In United States v. Zarrab, 2016 WL 6820737, at *3 (S.D.N.Y. Oct. 17, 2016),
the court held that the use of “an international wire transfer from the U.A.E. to a Canadian
company . . . processed by a United States bank” was sufficiently domestic for purposes of
prosecuting the defendant for a conspiracy to defraud the United States. And in Mastafa, the
foreign bank’s role in conducting “numerous New York-based payments and financing
arrangements  exclusively through a New York bank account” was sufficiently specific and
domestic to establish jurisdiction. 770 F.3d at 191.
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, 834 F.3d at 215. In other words, while each of the Four Transfers was initiated,
transmitted, and received by a foreign bank, each was processed by New York banks. For
example, on February 6, 2008, approximately $410,000 was transferred from an account at a
Moldovan bank to Prevezon’s account at a Swiss bank (SUF ¶¶ 65, 69, 72, 73, 78, 79), but in
effecting that transfer, two U.S. banks processed the wires—Citibank in New York, New York
and UBS in Stamford, Connecticut—before routing the transfer to Prevezon’s Swiss account.
(See Hyman Decl. Exs. 15–18.)
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, 2017
WL 1508608, at **13, 18. And because the focus of § 2314 is on the transportation of stolen
proceeds, the use of the correspondent banks—as indispensable conduits—suffices to invoke the
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, 2017 WL 1508608; cf. Weiss v. Nat’l
Westminster Bank PLC, 176 F. Supp. 3d 264, 279 (E.D.N.Y. 2016) (“A foreign bank’s repeated
use of a correspondent account in New York on behalf of a client . . . shows purposeful
availment of New York’s dependable and transparent banking system.”) (internal citations and
quotation marks omitted). In fact, aside from physically carrying currency across the U.S.
border, it is hard to imagine what types of domestic conduct other than use of correspondent
banks could be alleged to displace the presumption against extraterritoriality in a statute
addressing the transportation of stolen property. Accordingly, Prevezon’s motion for summary
judgment on this SUA is denied.
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 supposedly 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
tracing analysis, which reveals, for example, that the intermediary account’s balance prior to the
Arivust transfer only dipped below zero because its funds were transferred to a linked short-term
fiduciary investment account. (Counter SUF ¶¶ 82–84.) With such evidence, the jury may
reasonably conclude that the intermediary account did not disburse the tainted funds before
making a transfer to Arivust and Mr. Stepanova.
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, 2017 WL 1508608, at *9. Transferring “millions of
dollars to and from accounts in the United States and between foreign bank accounts as
[electronic fund transfers] that pass through U.S. financial institutions” is precisely the type of
conduct that “Congress intended to prevent in enacting the money laundering statutes” and is
“conduct that fits well within the statute’s requirement of conduct that occurs in part in the
United States.” Bank Julius, 2017 WL 1508608, at *9.
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 Prevezon 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, 553
U.S. 550, 562 (2008) (internal quotation marks omitted). While the “secretive aspects of the
transportation [are] employed to facilitate the transportation,” that “secrecy [must be] the
purpose of the transportation.” Cuellar, 553 U.S. at 567. In other words, “how one moves the
money is distinct from why one moves the money. Evidence of the former, standing alone, is not
sufficient to prove the latter.” Cuellar, 553 U.S. at 566.
The purpose and intent elements may be established by circumstantial proof.
United States v. Huezo, 546 F.3d 174, 181 (2d Cir. 2008) (“circumstantial evidence  presented
was sufficient for a rational juror to infer that [defendant] had the requisite criminal knowledge
and intent to support his convictions for money laundering and conspiracy to commit money
laundering.”); Cuellar, 553 U.S. 567 n.8 (“In many cases, a criminal defendant’s knowledge or
purpose is not established by direct evidence but instead is shown circumstantially based on
inferences drawn from evidence of effect.”).
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, 2008 WL 4387209, at *1 (S.D.N.Y. Sept.
26, 2008). Here, some of the accounts of the conduit entities were opened a few months before
the transfers at issue, at the same bank on the same day. (Hyman Decl. Exs. 38–39).)
Second, both Megacom Transit and Castlefront—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 Decl. 40–43.);
see also Diaz, 2008 WL 4387209, at *1 (“money was deposited in the  account from a variety
of sources”). Further, the funds that Megacom Transit and Castlefront received from these three
senders were substantially identical in date and amount (see Hyman Decl. Exs. 42–43) raising an
inference that they were parceled into smaller transactions and allocated between Megacom
Transit and Castelfront. Dividing proceeds to avoid detection is a hallmark of money laundering.
See Huezo, 546 F.3d at 181 (“the techniques and individual steps involved in his money
laundering schemes” involved “arrangements he made . . . to launder $1 million that would be
delivered to New York City in two installments of $500,000” and “money being delivered was
packaged in bundled stacks” which was “typical for money laundering transactions”); United
States v. Peña, 2011 WL 902468, at *6 (5th Cir. 2011) (“testimony at trial established that the
proceeds [defendant] deposited were of the same type and amounts as deposited by his coconspirator,” thus sufficient “to infer [defendant’s] knowledge that the transactions involved
proceeds of illegal activity.”).
The three senders also wired money to three other companies with accounts at the
same bank during roughly the same time period. (Phillips Decl. 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 Hyman Decl. Exs. 44–48).) This
circumstantial evidence gives rise to an issue of material fact—whether the web of intermediary
accounts were used to conceal funds tainted by the Russian Treasury Fraud.
Third, use of coded language bears on the purpose for which money is concealed.
United States v. Gotti, 459 F.3d 296, 337 (2d Cir. 2006) (“the government adduced evidence that
the process by which the cash tributes were transmitted as highly complex and surreptitious. For
example, the defendants would communicate about the transactions in coded language.”). Here,
certain fund transfers were designated as payments to the intermediary companies for what
appear to be business-related expenses. For example, Castlefront received a significant payment
for “electronics equipment” (Hyman Decl. Ex. 42.) even though by all appearances, Castlefront
is a shell entity registered to a residential apartment block in London with no apparent business
purpose. (Hyman Decl. Ex. 49.) And Megacom Transit, a purported consumer goods company,
received a sizeable transfer from another company as payment for “securities.” (Hyman Decl.
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, 204 F.3d 1352, 1354 (11th Cir. 2000). Use of such companies and
accounts may be considered as “affirmative acts related to the commercial transaction—acts
designed to quell the suspicions of third parties regarding the nature, location, source, ownership
or control of the proceeds” of the Organization’s illegal conduct. United States v. Kinzler, 55
F.3d 70, 73 (2d Cir. 1995) (citing United States v. Lovett, 964 F.2d 1029, 1034 n.3 (10th Cir.
1992)). A “reasonable juror could conclude that those transactions involved unlawful proceeds
and that those transfers by the fronts were designed to conceal the money’s illicit origins.”
United States v. Baxter, 761 F.3d 17, 32 (D.C. Cir. 2014) (intent to conceal where checks
submitted to front company were then routed into personal account).
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, 2016 WL 912169, at *42 (D.D.C. Mar. 7, 2016)
(emphasis added and internal quotation marks omitted); Johnson, 440 F.3d at 1292 (evidence of
design to conceal includes “unusual secrecy surrounding the transaction; structuring the
transaction in a way to avoid attention . . . highly irregular features of the transaction; using third
parties to conceal the real owner; a series of unusual financial moves cumulating in the
transaction”) (citing United States v. Garcia-Emanuel, 14 F.3d 1469, 1474 (10th Cir. 1994)).
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 individuals controlling those accounts had a
demonstrable connection to the underlying wrongdoing. Multiple accounts held by multiple
entities far removed from the initial fraud appear to have been used to obscure the illegal origin
of the proceeds. Indeed, that is why “one of the factors to which [courts] look in determining
whether a defendant’s behavior constitutes ‘concealment’ is whether he engages in unnecessary
transactions to add extra ‘degrees of separation’ between himself and the source of the funds.”
United States v. Blankenship, 382 F.3d 1110, 1129 (11th Cir. 2004); see also United States v.
Majors, 196 F.3d 1206, 1213 (11th Cir. 1999). In essence, 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.”
(Opp. at 24.)
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 Prevezon’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, 546 F.3d at 182; Diaz, 2008 WL 4387209, at *1 (the
“bank records presented at trial [may] permit a reasonable jury to infer that one of [the
Organization’s] purposes was to conceal or disguise the nature, location, source, ownership, or
control of [the fraud] proceeds.”).
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 approximately $100—an amount less
than its starting balance. Prevezon argues that the $900,000 in tainted funds were therefore
disbursed to innocent accounts, and that subsequent payments to the next intermediary account
contained only clean funds. (SUF ¶¶ 52–63.)
But the Government has the benefit of utilizing the tracing principles established
by United States v. Banco Cafetero Panama, 797 F.2d 1154 (2d Cir. 1986). Those principles
were designed to address the “particular problems in the case of tracing money or other fungible
property since identifying the particular funds traceable to the criminal violation is nearly
impossible.” United States v. Prevezon Holdings Ltd., 122 F. Supp. 3d 57, 68 (S.D.N.Y. 2015).
Banco Cafetero addresses one issue that Prevezon highlights in its brief—the “[first]-in, firstout” rule, whereby proceeds from the Russian Treasury Fraud are traced to “any one withdrawal,
or any asset purchased with such withdrawal, to the extent of the amount of the deposited tainted
funds.” United States v. Walsh, 712 F.3d 119, 124 (2d Cir. 2013) (citing Banco Cafetero, 797
F.2d at 1159)). Indeed, “[w]here the credit in a depositor’s account represents the net results of
transactions that include a deposit of [tainted] money, there is a plausible argument to be made
… that any withdrawal (in excess of the tainted deposit) contains the ‘traceable proceeds’ of such
a deposit.” Banco Cafetero, 797 F.2d at 1160.
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, 2015 WL 3604044, at *2 (E.D.N.Y. June 5,
2015). Indeed, the “Second Circuit appears to have embraced the ‘facilitation’ approach, and has
affirmed forfeiture of property as involved in money laundering transactions when it has served
as a conduit for the proceeds of the illegal transactions.” In re 650 Fifth Ave. and Related
Properties, 777 F. Supp. 2d 529, 563 (S.D.N.Y. 2011) (internal citations and quotation marks
omitted). Therefore, where the Government can demonstrate that a culpable account in the
money laundering chain was commingled with tainted and clean money, it “need not ‘trace’ the
funds used in the transaction to the charged unlawful conduct.” United States v. Weisberg, 2011
WL 4345100, at *2 (E.D.N.Y. Sept. 15, 2011) (“whether or not the money used in the particular
charged transaction itself is considered clean or dirty, where there is a commingled account, and
where the clean money facilitates the existence or concealment of the dirty money, the charged
transaction can be said to have involved dirty money.”).
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. 2
This Opinion and Order addresses most of the issues raised in the Government’s
Motion in Limine No. 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
proceeds and money laundering proceeds.” (Gov’t Motion in Limine No. 2, ECF No. 598, at 2.)
Of course, Mr. Milazzo may not offer legal opinions or conclusions regarding the tracing
principles discussed herein. (Prevezon Opposition to Motion in Limine No. 2, ECF No. 639, at 6
(“Defendants’ expert is not going offer legal opinions”).); see also United States v. Bilzerian,
926 F.2d 1285, 1294 (2d Cir. 1991) (“as a general rule an expert’s testimony on issues of law is
inadmissible.”). Accordingly, Mr. Milazzo must cabin is testimony to the specific transactions at
issue and the evidence offered in support of either the Government’s or Prevezon’s theory, in
accord with the applicable tracing principles discussed in this Opinion and Order. To the extent
any issues remain, they can be addressed later as the trial unfolds.
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
Dated: May 10, 2017
New York, New York
WILLIAM H. PAULEY III
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