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. Last Updated: 07/27/2016

Customs Asks Court To Apply U.S. Law

The Federal Customs Service will ask a Moscow court to apply U.S. law that allows triple damages for money-laundering in its lawsuit against the Bank of New York, lawyers for the service said Friday.

The customs service accuses the bank of laundering $7.5 billion from 1996 to 1999 and is claiming $22.5 billion in damages, said Steven Marks, a U.S. lawyer representing the customs service.

A U.S. investigation into the bank ended in 2005 after the bank admitted breaching the law and reached a $38 million settlement with prosecutors. But this settlement did not compensate the Russian government for lost taxes, lawyers for the service said.

The lawsuit comes at a time when Russian-U.S. relations are strained over a range of issues, from U.S. missile defense to the Kremlin's flexing its energy muscles and Western concerns over democracy in Russia. It also revisits a 1990s scandal that was widely viewed in Russia as humiliating for the country, coming after a decade of U.S.-promoted liberal reforms and economic hardship.

The Bank of New York on Friday reaffirmed its belief that the lawsuit was without merit and frivolous and reiterated a promise of vigorous defense. The bank has a representative office in Moscow but does not have retail or on-the-ground banking capabilities in the country.

Russian law allows courts to apply the law of the country where the plaintiffs believe their rights were violated, said customs service lawyer Maxim Smal, and experts confirmed that this was common practice.

The damages included $5 billion in lost tax revenues on goods imports and the penalties that have accumulated since that time, Marks said.

Should the customs service win, it would be able to collect the damages in the United States or "anywhere in the world," said Marks, who works for Podhurst Orseck, a Miami-based law firm.

But Bernard Black, a law professor at the University of Texas who specializes in Russian corporate law, disagreed. "They don't have a way to get at U.S. assets. If they win, they'll be able to collect whatever assets the Bank of New York has, directly or through subsidiaries, in Russia. Otherwise, they might say [to the bank] that it can't do business in Russia until it pays. That might be the most effective way of forcing a settlement, because Russia is an important market."

Officials at the Moscow Arbitration Court, where the lawsuit was filed, could not immediately be reached for comment.

In February 2000, two Russian emigres, former BoNY vice president Lucy Edwards and her husband, Peter Berlin, admitted to U.S. investigators that several accounts at the bank controlled by Berlin were part of an illegal laundering scheme that was used to defraud Russia of taxes. Russian-born Edwards and her boss, BoNY senior vice president Natasha Gurfinkel Kagalovsky, the wife of then-Yukos vice president Konstantin Kagalovsky, resigned from the bank after the investigation was made public in August 1999.

Edwards has been cooperating with the customs service's legal team, Marks said.

Getting $22.5 billion out of the bank in this case is an unrealistic goal, Black said. He speculated that the settlement would be closer to $100 million.

"The real goal here is absolutely to send a message: 'We want people, especially foreign people, to behave well when they do business here," Black said of the Russian position by telephone from Austin, Texas on Sunday.

Marks said it was not until late 2005 when the bank finally acknowledged responsibility and Russia first became "reasonably" aware of these claims.

The statute of limitations is four years in the United States and three years in Russia.

Marks said the customs service's lawyers had approached the bank early last year for an out-of-court settlement but had been rebuffed.

"For them to try to reanimate a 10-year-old matter is quite strange from a legal perspective," said Vladimir Bondarenko, a lawyer at law firm Salans.

The fact that Edwards admitted money-laundering seven years ago makes the argument especially strange, Black said.

Bondarenko said the lawsuit could be a symptom of the recent chill in Russian-U.S. relations. "The publicity surrounding all this raises questions about how far beyond PR they will proceed with this case," he said.