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The Courts Speak: Bank Liability for Alleged AML Failures Impacting Third Parties, and Hauling into U.S. Court Foreign Defendants Who Launder the Alleged Fruits of Foreign Crime

We discuss two recent federal court opinions addressing two issues of increasing frequency and importance: (i) the potential civil liability of financial institutions to non-customers and other third-parties for alleged failures to implement an effective Anti-Money Laundering (“AML”) program; and (ii) the ability of private plaintiffs to sue foreign defendants who allegedly committed offenses against the plaintiffs abroad, and then laundered the proceeds of those offenses in the U.S. This second issue, of course, is relevant to U.S. government actions against foreign persons.

As we shall see, banks are not necessarily liable to anyone impacted by a bank’s alleged AML-related failures. Conversely, foreign defendants may be surprised by the ability of plaintiffs to haul them into U.S. court to redress alleged criminal offenses committed entirely abroad — if those foreign defendants sent the fruits of those offenses to the U.S.  The case relevant to the latter point involves allegations of billions of dollars of theft and corruption committed in Kazakhstan as part of a complicated scheme to purchase high-end real estate in New York (a recurring theme in recent money laundering enforcement efforts, and in this blog) via European shell companies, using in part accounts held at the troubled foreign bank FBME.

The BSA Does Not Create a Private Right of Action, and Banks Generally Have No Duty to Non-Customers Impacted by Alleged AML Failures in the Absence of a Special Relationship

Financial institutions have increasingly been subject to lawsuits alleging that private parties were harmed as a result of the institution’s alleged AML failure – typically, a failure to file Suspicious Activity Reports, or SARs. A recent case exemplifying this increased exposure to liability, Towne Auto Sales v. Tobsal Corp., was litigated in the Northern District of Ohio. The plaintiff, a company which bought and sold used vehicles, negotiated with a defendant trucking business to purchase a car and consequently wired $27,050 to an account plaintiff believed was held by the trucking business. In fact, however, the account was held by another entity, defendant Tobsal Corporation.  Plaintiff’s President called the bank receiving the wire and stated that he thought that a fraud was occurring, and that the wire should not be processed.  The recipient bank processed the wire anyway.  The plaintiff also alleged that the recipient bank had negligently allowed Tobsal to open up an account, in violation of the Bank Secrecy Act (“BSA”).  The complaint in part alleged an Ohio state-law claim of negligence per se based on the recipient bank’s violation of the BSA.  This count was dismissed.

The district court succinctly summed up the issue and its holding, so we simply repeat it here:

The Patriot Act and the Bank Secrecy Act impose a duty on banks and financial institutions to report suspicious activity indicative of criminal activities to the government of the United States. Spitzer Management, Inc. v. Interactive Brokers, LLC, 2013 WL 6827945 (N.D. Ohio 2013). “Neither of these statutes creates a private cause of action. . . .” Id. at *2; see also In re Agape Litig., 681 F. Supp. 2d 352, 360 (E.D.N.Y. 2010) (“[B]ecause the Bank Secrecy Act does not create a private right of action, the Court can perceive no sound reason to recognize a duty of care that is predicated upon the statute’s monitoring requirements.”); Armstrong v. American Pallet Leasing Inc., 678 F. Supp. 2d 827 (N.D. Iowa 2009) (stating that neither the Bank Secrecy Act nor the Patriot Act impose a duty of care to plaintiffs because neither creates a private right of action). Since neither Act establishes a private cause of action, Defendant’s Motion to Dismiss Count V is granted.

Importantly, the Towne Auto Sales decision also addressed the issue of civil liability by banks to non-customers.  Observing that “Ohio follows the prevailing rule that a bank owes no duty to a person who is neither a customer nor an account-holder[,]” the court held that the complaint failed to set forth sufficient facts to establish the bank’s duty to plaintiff as needed to sustain its claim of general negligence. Given this lack of duty, the bank also could not be held liable under a theory of respondeat superior for the alleged conduct of the bank employee who allowed Tobsal to create an account.  The general negligence claim further failed on this alternative ground: (i) no contractual relationship existed between the bank and the plaintiff; and (ii) generally, in the absence of such a special relationship between the parties, “there is no duty to exercise reasonable care to avoid intangible economic loss or losses to others that do not arise from tangible physical harm to persons and tangible things.”

Foreign Crime Committed Against Foreign Defendants Can Spell U.S. Civil Liability

In City of Almaty v. Ablyazov, the Southern District of New York addressed “an alleged conspiracy by which prominent citizens of Kazakhstan purportedly looted billions of dollars from the City of Almaty, Kazakhstan . . . and BTA Bank JSC . . . , a formerly state-owned banking institution based in Kazakhstan, and then laundered the stolen funds around the world, including ultimately by investing in New York City real estate projects.” The case is complicated, involves convoluted facts and procedure, and addresses numerous legal issues.  We therefore will summarize it only here, and focus on some of the opinion’s big-picture outcomes.

Plaintiff City of Almaty alleged that its former mayor Viktor Khrapunov, along with his associates and family members, embezzled $300 million from the City by stealing various public assets for personal use. Plaintiff BTA Bank alleges that its former chairperson, Mukhtar Ablyazov, siphoned more than $6 billion from the bank, primarily through a series of fraudulent loans to shell companies owned or controlled by Ablyazov.  Together,  plaintiffs alleged that the individual defendants, who were related by marriage, conspired to move the stolen funds out of Kazakhstan and launder them through a series of shell companies and sham transactions. Plaintiff created some of these entities under the laws of Switzerland and Luxembourg, and allegedly used them to invest stolen funds in high-profile U.S. real estate projects with the alleged assistance of a prominent New York real estate developer.  Some of the illicit funds were wired with the alleged assistance of lawyers through accounts held at FBME.

The plaintiffs brought a variety of New York state-law claims, including actual fraudulent conveyance, constructive fraudulent conveyance, unjust enrichment, common law conversion, constructive trust, and for recognition and enforcement of foreign judgments already obtained. The plaintiffs also had alleged claims under the federal Racketeer Influenced and Corrupt Organizations Act (“civil RICO”), but the district court previously had dismissed those claims, finding that they were impermissibly extraterritorial under the Supreme Court’s 2016 decision in RJR Nabsico, Inc. v. European Cmty.

Anyone interested in federal procedure and the ability to sue foreign defendants in U.S. court for foreign (mis)conduct should read the entire opinion, which provides a comprehensive discussion of many complex issues. For our more general purposes here, we note the court’s following conclusions:

  • Even though it previously had dismissed the sole federal claim, the court still had original subject-matter jurisdiction under 28 U.S.C. §§ 1330, 1441(d) because plaintiff City of Almaty was a “foreign state.”
  • Dismissal under the doctrine of forum non conveniens was not appropriate, even though the defendants preferred to litigate in Switzerland, in part because of the centrality of the plaintiffs’ allegations regarding money laundering using New York City real estate. Also, alternative arrangements to live testimony, such as videotaped depositions, were available and still would allow the jury an adequate opportunity to assess the credibility of witnesses absent at trial.
  • Plaintiffs alleged sufficient facts supporting their fraudulent conveyance claims to survive a motion to dismiss because a theory of piercing the corporate veil supported the plaintiffs’ allegations that the individual defendants in fact controlled and directed the entity that made the U.S. real estate investments and allegedly served as a front to conceal the true involvement and use of assets by the individual defendants.
  • Similarly, the unjust enrichment and conversion claims were plead adequately because the allegations indicated that the individual defendants used the illicit funds obtained from the scheme to buy assets to conceal those funds and thereby retain their benefits.
  • Finally, Viktor Khrapunov and his son, Ilyas, contested personal jurisdiction over themselves – an issue implicating both New York law and federal due process. The court essentially assumed that such jurisdiction was proper over Ilyas, who was alleged to have personally transacted business in New York. As to Viktor, the court found that the complaint sufficiently pled Viktor’s involvement in a conspiracy to launder the proceeds of the alleged crimes. However, the court explained that the complaint failed to allege sufficient jurisdictional facts that Viktor conspired to launder funds through New York:

Plaintiffs simply do not sufficiently allege Viktor Khrapunov’s “awareness of the effects of the activity in New York,” nor that the coconspirators in New York “acted at the behest of or on behalf of, or under the control of” Viktor Khrapunov. [Citation omitted] The mere fact that Ilyas is Viktor’s son, and that Ilyas is alleged to have personally directed the New York activities, is insufficient to give rise to an inference that Viktor was involved in any New York activity, nor that Viktor directed, knew about, or had control over the activities in New York.

Nonetheless, the court granted plaintiffs the ability to conduct discovery related to jurisdiction—namely, to see if they could discover facts supporting their allegations as to Viktor’s knowledge of, and control over, the activities of the alleged money laundering conspiracy in New York.

One obvious lesson: in order to avoid being subject to U.S. jurisdiction for alleged misconduct committed abroad, avoid turning to the U.S. real estate market (or the U.S. financial system in general) to invest the proceeds of that conduct.  The potential use of high-end real estate transactions in the U.S. to launder illicit funds earned abroad is the focus of intense government scrutiny, and the frequent basis for U.S. jurisdiction for suits by both the U.S. government and private plaintiffs.

Copyright © by Ballard Spahr LLP

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About this Author

 Peter D. Hardy, Ballard Spahr, Philadelphia lawyer, White Collar Defense lawyer, Internal Investigations, Consumer Financial Services, Privacy and Data Security, Tax
Partner

Peter Hardy advises corporations and individuals in a range of industries against allegations of misconduct—including tax fraud, money laundering, Bank Secrecy Act, mortgage fraud and lending law violations, securities fraud, health care fraud, public corruption, Foreign Corrupt Practices Act violations, and identity theft and data breach.

Mr. Hardy has extensive trial and appellate court experience. He oversees internal investigations, advises in potential disclosures to the Internal Revenue Service, and has litigated complex criminal matters at the trial and appellate levels. He...

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Juliana Carter, Litigator, Civil, Criminal Disputes, Philadelphia, Ballard Spahr Law Firm
Associate

Juliana B. Carter is an associate in the Litigation Department. Ms. Carter has trial experience with a range of civil and criminal disputes. She has also defended clients in tort litigation and arbitration proceedings.

Ms. Carter completed internships in the offices of the Philadelphia District Attorney, the Education Law Center of Pennsylvania, and the Southeastern Pennsylvania Transportation Authority (SEPTA). Ms. Carter was also appointed a mediator within the Philadelphia Municipal Court, helping to facilitate the settlement of small-claims and landlord-tenant disputes between pro se parties.

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