The U.S. Civil Forfeiture Law challenged under an investment treaty – Part 1

A U.S. company indirectly majority-owned by foreign investors, and whose U.S. assets are subject to U.S. civil forfeiture proceedings relating to allegations of money laundering, has filed arbitration proceedings against United States. Investment treaty with the United States, seeks damages from the United States federal government.

The United States is a party to numerous bilateral investment treaties (BITs) and numerous bilateral and multilateral free trade agreements (FTAs). These generally accord investments in the host country, which are controlled by investors in the other country, fair and equitable treatment and treatment equal to what is accorded by international law. They also grant protection to investors of a country against indirect or direct expropriation by the host country, except for reasons of public utility, upon payment of adequate compensation and in accordance with legal procedure. However, BITs generally provide that they do not exclude the application of host country measures necessary to maintain public order or protect the security interests of the host country.

A violation by the host country of its obligations under a BIT entitles the investor to damages from the government of the offending host country. Such claims by private investors for damages against the government of the host country are adjudicated by arbitration panels. These panels are generally administered by the International Center for Settlement of Investment Disputes of the World Bank Group, or ICSID.

Optima Arbitration

In the ICSID panel arbitration case Optima Ventures LLC and Optima 7171 LLC v. United States, ICSID Case No. ARB / 21/11, the United States finds itself the defendant in a BIT arbitration proceeding. This Optima The BIT arbitration in part involves a challenge to a civil forfeiture action brought in 2020 by the United States Department of Justice (DOJ) against an office complex in Dallas, Texas, the proceeds of its pending sale and certain others. active. The district court in the forfeiture proceedings demanded that the proceeds of those sales be held by the United States, pending resolution of the forfeiture proceedings. The Dallas office complex is owned by a Miami-based single-member Delaware LLC, which is directly owned by another Miami-based Delaware LLC, which in turn is indirectly majority-owned by Ukrainian nationals.

The civil forfeiture action was filed in the United States District Court for the Southern District of Florida. The DOJ based its action in part on its claim that the office complex was purchased from the proceeds of the specified illegal money laundering activity. This DOJ allegation concerns the alleged misappropriation of assets of PrivatBank, Ukraine’s largest bank, by the two Ukrainian nationals who each indirectly own, through other entities, one-third of Delaware’s LLCs.

The Optima This case is of interest to scholars of international law, in part because it sharply raises many academic topics currently being debated. These topics include whether a defense against money laundering can deprive an ICSID panel in investor-state arbitration of its jurisdiction or the ability to award damages for a claim; the burden of proof that an ICSID panel will apply in determining whether money laundering has occurred; and the effect that an ICSID panel proceeding may have on other proceedings.

Notice of Arbitration

It is unusual for the United States to be named as defendants in investor-state arbitration. The United States was only a respondent in 20 of the 1,104 investor-state arbitration cases that were filed between 1987 and 2020. In addition, of these 20 arbitrations, none were decided in favor of the claimant, although three cases are still pending and three installed.

The Optima Arbitration claims are based on the United States-Ukraine BIT – the BIT – which entered into force in 1996. The arbitration was initiated in March 2021 by the sole member US LLC which purchased the office complex from Dallas and the US LLC, which is its only member, as applicants. The notice of arbitration notes that the definition of “investment” in the BIT includes “tangible.” . . ownership ”, and also includes“ interests in a company ”which are“ directly or indirectly controlled by nationals or companies of [Ukraine]. “

In addition, the BIT states that “any company legally incorporated under the applicable laws and regulations of [the U.S.] or a political subdivision of it [and is] an investment of [Ukraine] nationals. . . will be treated as a national or a company of [Ukraine]. “The notice clarifies that the two Ukrainian investors have at least two-thirds of the indirect profits and voting rights in the upper-level LLC, so that the Dallas office complex of the single-member LLC, and the Single member LLC itself, is considered an investment as described in the BIT.

The LLC’s claims are largely based on the alleged applicability of Articles II (3) (a) and III (1) of the US-Ukrainian BIT and the alleged unenforceability of Article IX of the BIT. The US-Ukraine BIT is similar to other US BITs and FTAs. Article II (3) (a) provides that investments shall receive fair and equitable treatment, and treatment no less favorable than that required by international law. Article III, paragraph 1, prohibits the direct or indirect expropriation of an investment, except for reasons of public utility, against payment of adequate compensation and in accordance with due process. Article IX of the BIT, however, provides that the BIT does not exclude the application of host country measures necessary to maintain public order or protect the security interests of the host country.

The LLCs Alle the U.S. Civil Forfeiture Procedure to Be Below Fair and Equitable Treatment and International Law Standards Under Article II (3) (a) because it applies U.S. extraterritorial jurisdiction to target alleged conduct at PrivatBank. The notice points out that the alleged behavior was not committed by or against US nationals and did not result in monetary losses to the United States.

The LLCs also argue that due process standards of international law have been violated because no criminal behavior in Ukraine has yet been discovered, and neither of the two Ukrainian investors has been charged or convicted in Ukraine or the United States. the civil confiscation law lacks due process, even citing some American critics of this civil confiscation law.

The LLCs argue that the U.S. civil forfeiture proceeding amounts to an expropriation as described in Section III (1) because it deprives the LLC of the benefits of the investment. The opinion further contends that there is no public utility in the United States for the civil forfeiture proceeding, and even if there was, compensation is still required for expropriations undertaken for purposes. public. The LLCs further contend that Article IX of the BIT does not excuse expropriation because forfeiture is not necessary to maintain US public order or US security interests.

The LLCs also point out that the evidence as to whether there was money laundering or other predicate offenses in Ukraine that would involve the US Civil Forfeiture Law is in Ukraine. In addition, the Notice states that a civil dispute is currently ongoing in Ukraine regarding this legality of transactions leading to US investment and that the Ukrainian dispute to date has favored the claimants.

Status of the United States Optima case

In October 2021, two of the three arbitrators in the BIT case were appointed. In May 2021, the Southern District of Florida granted the joint US and LLC request to stay the trial of the civil forfeiture case. In August 2021, the Delaware Chancery Court (CA No. 2019-0377-JRS) ruled on a pending civil action by PrivatBank against the same LLCs that are the plaintiffs in the ongoing BIT proceeding. The Chancellery Court, as requested by the respondent limited liability companies, stayed the action regarding the liability of these limited liability companies while the related Ukrainian proceedings continued, on the basis of forum non conveniens The factors. However, the Court of Chancery did not close the case on the grounds of forum non conveniens, as requested by these LLCs.

The second part of this article will examine the arguments that the United States might raise in defense of this case, namely that money laundering, if established, deprives the arbitration panel of jurisdiction or necessitates the dismissal of the arbitration panel. the case. The second part will also deal with the burden of proof in BIT proceedings and the relationship between BIT proceedings and other proceedings.

This column does not necessarily reflect the opinion of the Bureau of National Affairs Inc. or its owners.

Author Info

Alan S. Lederman is a shareholder of Gunster, Yoakley & Stewart, PA in Fort Lauderdale, Florida. He is not involved as counsel in any of these matters.

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