US Civil Forfeiture Law Challenged Under Investment Treaty—Part 2 - Bloomberg Tax
A U.S. company indirectly majority-owned by investors from a foreign country, and whose U.S. assets are the subject of a U.S. civil forfeiture proceeding relating to alleged money laundering, has filed an arbitration proceeding against the U.S. The arbitration, based on that foreign country’s Bilateral Investment Treaty with the U.S., seeks damages from the U.S. federal government. More information about the case can be found at Part 1.
The U.S. will presumably argue that there have been no substantive violations of the U.S.-Ukraine BIT, as alleged in the Optima Notice of Arbitration. That is, the U.S. will likely argue that, as a substantive matter, Articles II(3)(a) and III(1) of the U.S.-Ukraine BIT, concerning fair and equitable treatment and treatment required by international law, have not been violated by the U.S.; and that Article IX of that BIT, permitting host country measures for the maintenance of public order or protection of essential security interests, allows the U.S. civil forfeiture proceedings.
Effect of Money Laundering on Jurisdiction and Admissibility
Another issue discussed in several arbitration awards and in much international law academic commentary, but not directly addressed in the Optima Notice, is the significance, in deciding a BIT arbitration, if an arbitration panel concludes that there was illegality in connection with a claimant’s investment, such as when an investment was obtained as a result of money laundering or bribery. One question is whether such illegality of the investment, if present, should deprive the arbitration panel of jurisdiction, or cause the arbitration panel to dismiss the claims. When the U.S. State Department, which will represent the United States in the Optima arbitration, responds to the BIT Notice, this issue may assume a prominent role.
A leading decision concerning this issue is the 2013 arbitral award in Metal-Tech Ltd. v. Republic of Uzbekistan, ICSID Case No. ARB/10/3. The Metal-Tech panel was guided by the development of ICSID precedent on the issue of the effect of investor misconduct on panel jurisdiction and claim admissibility. Metal-Tech involved the host country government’s defense that the investor used bribery to obtain approval for the investment. Bribery, as alleged in Metal-Tech, may be a weaker defense to host governments against arbitral jurisdiction and claim admissibility than is money laundering, as alleged in Optima. That is because allowing bribery of a host state official as a defense to a BIT claim, unlike allowing money laundering as a defense to a BIT claim, in effect allows the host country to escape liability for expropriation by reason of its own official’s malfeasance.
The Metal-Tech panel noted that Article 25(1) of the ICSID Convention limits the jurisdiction of arbitration panels to “investments.” However, the Metal-Tech panel rejected the view of some earlier precedents that had held that compliance with host state laws is a prerequisite to being an “investment” for purposes of Article 25(1). Rather, the Metal-Tech panel concluded that any limitation on “investment” to legal investments must be found in the text of the applicable BIT itself.
The Metal-Tech panel then turned to the text of the applicable BIT, which was the Israel-Uzbekistan BIT. That BIT explicitly required that for an “investment” to be protected under that BIT, it must be “implemented in accordance with the laws and regulations of the home state.” The Metal-Tech panel, having found the investment was obtained by bribery of Uzbek officials, in violation of Uzbek anti-bribery laws, concluded that the Uzbek project was not an “investment” for which Uzbekistan consented to grant arbitration under the BIT. The Metal-Tech panel therefore dismissed the investor’s BIT claim for lack of jurisdiction of the ICSID panel.
By contrast, the U.S.-Ukraine BIT involved in the Optima case does not have a corresponding legality requirement in its definition of “investment.” It does, however, have a requirement that, to be a “‘company’ of a Party,” an LLC, corporation, or other entity must “be legally constituted under the laws and regulations of a Party.” It is uncertain what, if any, effect this clause could have on a future U.S. Optima arbitration defense based on Metal-Tech.
Suppose that the Optima ICSID panel follows the Metal-Tech decision, and finds that the Dallas office complex is an “investment” described in Article 25(1) of the ICSID Convention, even if the U.S. does establish money laundering; and suppose that the ICSID panel in Optima finds no textual basis in the U.S.-Ukraine BIT to deny the Dallas office complex status as an “investment” described in the BIT, even if the U.S. does establish money laundering; and suppose the Optima panel therefore accepts jurisdiction of the LLCs’ claims. Nevertheless, if the U.S. does establish money laundering, the LLCs in Optima still may find their claims being dismissed by the arbitration panel, on the grounds that investments which violate international public policy must be dismissed, and that claims which are tainted by bribery or money laundering are of the type which violate international public policy.
The host country posited this alternative “violates international public policy” argument for dismissal of the claims in Metal-Tech. Several commentators have argued that since anti-money-laundering measures have become generalized, as evidenced by the widespread adoption of the Financial Accounting Task Force Recommended International Standards on Combating Money Laundering, anti-money-laundering measures have achieved the status of transnational or international public policy that should lead to claim disallowances. However, since the arbitration panel in Metal-Tech determined that it lacked jurisdiction under a textual analysis, because money laundering eliminated the “investment” status under the text of the applicable BIT, the Metal-Tech panel declined to rule on the alternative “violates international public policy” argument.
If the Optima panel hypothetically determines there has been money laundering, then besides the potentially adverse effect on claims admissibility or panel jurisdiction, there may also well be adverse substantive effects on the claims. For example, some commentators contend that with the worldwide expansion of anti-money-laundering legislation, the BIT standard of “fair and equitable treatment” should be construed to establish a relatively high threshold before the host country’s application of such laws should be viewed as violative of such standard.
Burden of Proof
The Metal-Tech panel noted that the BIT in that case, like the U.S.-Ukraine BIT in Optima, contains no rules concerning presumptions or burdens of proof. The Metal-Tech panel did note that the private claimant pointed to precedents requiring the host country to prove the claimant’s bribery based on “clear and convincing evidence.” The Metal-Tech panel seemed to apply a “reasonable degree of certainty” threshold in determining whether there had been bribery by the claimant, so as to preclude “investment” status under the text of the applicable BIT. If the Optima arbitration panel places on the U.S. a “reasonable degree of certainty standard,” this would be a higher threshold than the “preponderance of the evidence” threshold of 18 U.S.C. Section 983(c)(1), which will be applied by the Miami jury in the Optima civil forfeiture case to determine if the DOJ has met its burden.
Effect of BIT Arbitration on Other Proceedings
The effect of the Optima BIT arbitration on the other civil litigation, or any hypothetical related criminal litigation that may arise in the future, is at this point unclear. In the investor-state arbitration case of Nova Group Invs., B.V. v. Romania, ICSID Case No. ARB/16/19, the investment itself was subject to an order of sequestration by the host country, which the investor argued could eventually turn into a BIT-prohibited uncompensated expropriation. The foreign investor in Nova himself faced a criminal investigation of bribery by the host country.
The Nova panel determined that it had the power to issue an order recommending that the host country suspend its extradition proceedings in the country of residence of the foreign investor. It exercised such power, even before ruling on whether or not it had jurisdiction over the dispute. The Nova panel reasoned that such extradition would unduly interfere with the foreign investor’s pursuit of his BIT claim. Generally, compliance with ICSID recommendations is viewed as binding on the parties. Nevertheless, the investor’s attempts to use the Nova panel’s order as a defense to extradition have so far been rejected by the courts of his country of residence, which country is not a party to the arbitration. As of June 2021, however, he has not yet been extradited to the host country.
The Nova arbitration panel rejected, however, the investor’s request that the panel issue orders recommending that the host state terminate its criminal investigation of him. The Nova panel concluded that requesting termination of the criminal investigation was an undue interference in the host country’s criminal legal system, and that termination of the host country’s criminal investigation was unnecessary to promote the foreign investor’s freedom to pursue his BIT claim.
The Nova panel likewise declined to issue an order recommending that the host country terminate sequestration of the assets, because it concluded that any final expropriation, if eventually ruled contrary to the BIT, would be remedied as part of the BIT panel’s monetary damages award. Based upon Nova, it would seem the Optima BIT proceeding will not cause the Optima U.S. civil forfeiture proceeding to be discontinued.
Foreign Taxes
The DOJ civil forfeiture complaint in Optima does not mention taxes. However, the resolution of the arbitral challenges to the U.S. civil forfeiture procedures in Optima conceivably could have implications for the validity of certain U.S. civil forfeiture proceedings which, unlike in Optima, are centered on violations of foreign tax laws by nationals of a country with a BIT or FTA with the U.S.
Violations of foreign tax laws are not on the statutory list of predicate offenses that permit the DOJ to apply the U.S. anti-money-laundering and U.S. civil forfeiture statutes. However, U.S. federal courts have concluded that where a foreign tax scheme also involves listed predicate offenses, such as defrauding a foreign bank or bribery of a foreign official, even where such fraud or bribery occurs entirely outside the U.S., or a U.S.-centered wire fraud, then the DOJ can apply the civil forfeiture statutes against U.S. real estate or other U.S. assets traceable to the proceeds of those listed offenses. See United States. v. Prevezon Holdings Ltd. [122 F. Supp. 3d 57 (S.D.N.Y. 2015)].
Conclusion
U.S.-based multinationals often consider using BITs and FTAs to protect their investments in foreign countries from major foreign government actions they view as violating international law standards or as constituting expropriations. The Optima situation is the rare case when the U.S. finds itself as the respondent.
Author Information
Alan S. Lederman is a shareholder at Gunster, Yoakley & Stewart, P.A. in Fort Lauderdale, FL. He is not involved as counsel in any of these cases.
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To contact the reporter on this story: Kelly Phillips Erb in Washington at [email protected]
source: https://news.bloombergtax.com/daily-tax-report/us-civil-forfeiture-law-challenged-under-investment-treaty-part-2
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