Following the Money: Could RICO Help the Foreign Victims of Embezzlement Bring the Infamous White-Collar Criminal to Justice?

Photo by Christine Roy on Unsplash

Alisher Kassym, Associate Member, University of Cincinnati Law Review 

I. Introduction

In certain foreign countries that have experienced a significant influx of cash without the proper legal environment to control where the cash is coming from, white-collar crimes are frequent, damaging, and problematic.[1] Former Soviet Union countries, where racketeering was an issue even before the states gained independence,[2] are prominent victims of various financially motivated offenses. Perhaps the most infamous scandal abroad came from Central Asia involving Mukhtar Ablyazov—a fugitive embezzler whose past fraudulent actions in Kazakhstan gave rise to litigation throughout the world,[3] including the New-York’s federal district court in City of Almaty v. Ablyazov.[4] In City of Almaty, a plaintiff brought a civil claim against Ablyazov and his co-conspirators under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), but ultimately failed.[5] This article will examine, by the example of City of Almaty v. Ablyazov, under which circumstances foreign governments and corporate entities can invoke RICO to seek a remedy against white-collar criminals that reside or have assets under the jurisdiction of the United States. Ultimately, this article ponders RICO’s effectiveness as applied to criminal conduct taking place outside of the U.S.

II. Background

The RICO federal statute defines racketeering activity quite expansively and, among many other things, deems money laundering, engaging in money transactions obtained by unlawful means, and fraud in the sale of securities unlawful  under the act.[6] U.S.C. Section 1962 makes it unlawful to, directly or indirectly, engage with income derived from racketeering activity and thereafter use the illegal income to invest or acquire an interest in an enterprise.[7] The Section further prohibits anyone associated with an enterprise to manage the enterprise’s affairs by resorting to racketeering and conspiracies to violate any offenses stated under the Section.[8] Lastly, pursuant to U.S.C. Section 1964, any “person injured in his business or property” due to racketeering activity has a civil cause of action and can bring a claim in the U.S. federal district courts.[9] Notably, RICO does not expressly require the injury or the plaintiff to originate in the United States.[10]

A. RJR Nabisco[11] and the Presumption Against Extraterritoriality in RICO Litigation

The Supreme Court’s decision in RJR Nabisco v. European Cmty. clarified the application of RICO claims derived from foreign racketeering activity.[12] In this case, the European Community, alongside 26 of its member states, brought a RICO claim against RJR Nabisco and the associated entities for participating in the multinational money-laundering scheme that involved organized crime groups.[13] Specifically, the European Community alleged that RJR Nabisco played a key role in the criminal scheme by accepting funds from drug traffickers in return for large shipments of tobacco products to Europe.[14] RJR’s actions allegedly harmed the European Community in multiple manners: loss of tax revenue, unfair competition with local tobacco businesses, negative effects on financial institutions and local currency.[15] The district court granted RJR Nabisco’s motion to dismiss, stating that RICO did not apply to violations that took place outside the U.S.[16] The Second Circuit disagreed and reinstated the claims.[17] The appellate court found that Congress intended RICO to apply extraterritorially to the extent that some of the definitions under Section 1961 apply extraterritorially, which in RJR’s case were money laundering and support of terrorism.[18] The panel then supplemented that RICO did not require an injury to occur domestically.[19]

The Court split their analysis into two parts: (1) whether the RICO violations defined in Section 1962 apply to conduct taking place in foreign countries and (2) whether the private cause of action under Section 1964 is available to foreign plaintiffs.[20]

The Court’s inquiry began with the former issue.[21] In the majority opinion, Justice Alito restated the foundational principle of statutory construction—the presumption against extraterritoriality.[22] The presumption against extraterritoriality constructs federal laws only to apply domestically, unless an affirmative instruction from Congress bids otherwise.[23] Manifested by the judicial caution, the presumption against extraterritoriality aims to prevent “international friction” and foreign policy implications that linger whenever an American court can issue a civil remedy based on conduct outside of the U.S.[24] The court continued, stating that although RICO lacked express language granting extraterritorial jurisdiction, it implied foreign application for some of the offenses, which meant that at least some of provisions covered foreign racketeering activity.[25] A clear, albeit unpleasant example of when extraterritorial jurisdiction is implied in the statute would be a pattern of racketeering involving homicides of American people abroad.[26] The Court implied that everything, short of an explicit provision in the statute, pointed to Congressional intent of allowing extraterritorial application of RICO under the aforementioned circumstance.[27] An adverse result would render the statute impotent in situations involving global crimes of racketeering.[28] Still, the Court warned that many predicates under the RICO do not apply to extraterritorial conduct even if other predicates do.[29]

Despite the ruling that Section 1962 at least partially applied to foreign conduct, the European Community’s claim was ultimately dismissed due to the lack of domestic injury.[30] Per Section 1964, a RICO claim requires proof of injury to a plaintiff business or property.[31] Since the structure of the section did not imply extraterritorial application in the same manner as Section 1962, the Court concluded that a civil RICO claim requires a domestic injury.[32] The opinion left the question of what constitutes a domestic injury open but noted that the determination of whether an injury is domestic “will not always be self-evident.”[33]

B. The Decision in City of Almaty v. Ablyazov

The saga of Mukhtar Ablyazov took a new turn when the city of Almaty and the BTA bank (the Kazakh entities) filed multiple crossclaims of civil RICO violations in the Southern District of New York.[34] The complaint alleged that Ablyazov and his co-conspirators have siphoned billions of dollars from the Kazakh Entities and then laundered the money through a series of sham transactions and operation of shell companies.[35] Most importantly, a portion of the laundered funds was invested in several real estate projects in New York.[36]

The district court’s opinion started with restating the ruling in RJR Nabisco that RICO applied extraterritorially, but had to involve a domestic injury in order for a plaintiff to successfully sue in federal court.[37] Just as Justice Alito predicted in RJR Nabisco, the parties here debated whether the Kazakh Entities’ injuries were domestic or foreign in nature.[38] Since RJR Nabisco provided no framework to tackle categorizing the origin of a racketeering injury, the district court separately scrutinized the underlying facts around the Ablyazov’s activity.[39]

The court determined that the location of the alleged racketeering activity bore no influence on where the actual injury occurred.[40] Consequently, an argument that Kazakh Entities’ injury was foreign simply because the racketeering activity happened in Kazakhstan was meritless.[41] Next, the court investigated the origins of the injury by using a common-sense, two-question inquiry: “who became poorer” and “where did they become poorer” due to the RICO violation.[42] The answers to both of the questions were fairly predictable—the Kazakh Entities became poorer, and they became poorer in Kazakhstan.[43]  In the court’s view, the Kazakh Entities had no “discrete financial base” that was injured in New York.[44] The court also reminded the parties that mere financial connections such as branch office, investments, and bank accounts were deemed insufficient to establish the domestic nature of an injury.[45] Consequently, the injuries suffered by the Kazakh Entities as a result of Ablyazov’s fraudulent activities were foreign, and thus barred by the presumption against extraterritoriality.[46]

III. Discussion

As demonstrated by the Supreme Court in RJR Nabisco, some of the RICO predicates cover foreign conduct of racketeering due to their expansive and particularly harmful nature of the offenses, which in turn hints at the Congressional intent to design RICO to apply extraterritorially. However, finding an applicable extraterritorial predicate is not the only barrier foreign RICO plaintiffs will face, since the requirement of a domestic injury also taints foreigners’ hopeful prospects of litigating their claims in the U.S. This requirement, as will be shown, greatly diminishes the probability of successful extraterritorial RICO claims, and renders the statute ineffective in most situations involving foreigners. Therefore, while RICO can, in theory, make the victims of foreign racketeering whole, the statute will only apply in specific instances where foreign plaintiffs have substantial ties to the U.S., such as tangible property or a considerable business presence.

Other than restating the underlying principle of avoiding “international friction,” the Court supplied no guidance on what constitutes a domestic injury. In the City of Almaty, the alleged complicated scheme involving sham transactions in multiple international venues— including real estate investments in New York—was deemed to cause an extraterritorial injury rather than domestic because no entity in the U.S. “became poorer” as the result of racketeering conduct. In Cevdet Aksut Ogullari Koll. Sti. v. Cavusogluo[47], a Turkish company alleged that it lost business interest in the U.S. due to dealing with another foreign RICO enterprise.[48] According to the court in Cavusogluo, the company did not suffer a domestic injury because the company’s business “was entirely located and operated out of Turkey.”[49] In Dandong Old N.-East Agric. v. Gary Ming Hu [50], a major Chinese soybean oil manufacturer’s civil RICO claim against domiciles of the United States failed because the plaintiff’s deprivation of money was felt nowhere except for China, thus making the injury extraterritorial.[51]

In contrast, the court in Tatung v. Shu Tse Hsu[52] found that a foreign corporation doing business in the United States was domestically injured as a result of racketeering activity.[53] Specifically, the court did not hesitate to define the injury as domestic for two reasons: the plaintiff corporation maintained a presence in California, and some parts of the alleged RICO scheme were directed against the corporation in California.[54] Notably, the opinion deviated from a more popular location-of-the-injury approach and instead argued that the approach unjustly favors the U.S. entities violating RICO at the expense of foreigners.[55]

In the absence of clear instruction from the Supreme Court, proving domestic injury in a civil RICO claim will likely require a strong, tangible connection between a foreign entity and the United States. In recent cases, the majority of federal courts tend to decide the nature of an injury based on where the economic impact of racketeering was felt. Even the court in Tatung, which criticized the said injury-focused approach, found the plaintiff’s physical presence in California to be a significant factor in determining that an injury was domestic. That leaves foreigners with a de-facto requirement for substantial, palatable ties to the U.S. via a business enterprise or property. One can imagine that outside of a few entities that have the incentive to maintain connections on the American soil, the requirement is often unlikely to be satisfied by foreign nationals, corporations, and especially governments. Thus, the majority of civil RICO claims brought by non-U.S. residents are doomed to fail.

Evidently, the Kazakh government and BTA bank did not have sufficient physical ties to the U.S. to prove domestic injury. Due to the circumstances, a civil RICO claim is essentially a closed venue to pursue. Does this mean the Kazakh entities have no way of redressing the injuries caused by Ablyazov and co-conspirators in the American courts? Possibly, but justice may come in a different form than court-awarded damages. The U.S. Department of Justice operates the Money Laundering and Asset Recovery Section (MLARS) that specializes in prosecuting and litigating money laundering cases.[56] Specifically, MLARS has an International Unit which assists foreign governments with recovering embezzled assets that made it into the U.S. financial system.[57] Moreover, other jurisdictions involved in Ablyazov’s sham transactions may be more sympathetic to the problems of the Kazakh Entities. Therefore, even if RICO is off-limits for some foreign plaintiffs like the Kazakh Entities, they still might find relief through MLARS’s International Unit, or the courts of other jurisdiction.

IV. Conclusion

While RICO can apply to extraterritorial claims of embezzlement and racketeering, the foreign plaintiffs seeking damages under the Act will often find themselves struggling to prove that the economic impact caused by racketeering was felt in the U.S. Presumably, not many foreign individuals, companies, and especially governments maintain enough presence in the U.S. to prove a domestic injury successfully. Therefore, although RICO theoretically can apply to foreign plaintiffs, it can be challenging to convince U.S. courts to exercise jurisdiction over their RICO claims. As for the Ablyazov saga, the Kazakh entities seem to be keen on persisting on their claims as evidenced by the recent attempt to amend the complaint.[58] Nevertheless, the prospects of successful litigation against the fugitive in the American courts look grim, and the Kazakh Entities may want to file their claims in a more favorable jurisdiction.

[1] See Douglas Green, White Collar Crimes in Central Asia: The Case of Kazakhstan, Stratfor Worldview (Feb. 6, 2017), https://worldview.stratfor.com/article/white-collar-crime-central-asia-case-kazakhstan.

[2] See id.

[3]Stephen Bland, The Ablyazov Affair: ‘Fraud on an Epic Scale’, The Diplomat (Feb. 23, 2018), https://thediplomat.com/2018/02/the-ablyazov-affair-fraud-on-an-epic-scale/.

[4] City of Almaty v. Ablyazov, 226 F. Supp. 3d 272 (S.D.N.Y. 2016).

[5] Id. at 274.

[6] 18 U.S.C.S. § 1961.

[7] 18 U.S.C.S. § 1962.

[8] 18 U.S.C.S. § 1962.

[9] 18 U.S.C.S. § 1964.

[10] See generally 18 U.S.C.S. § 1961, §1962, 1964.

[11] RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090 (2016).

[12] See Id.

[13] RJR Nabisco was formed in 1985 when Nabisco merged with RJ Reynolds tobacco in a record-breaking deal of its time. Linette Lopez, RJR Nabisco Goes Private And The Street Goes Wild, Business Insider, (Jan. 9, 2012),  https://www.businessinsider.com/rjr-nabisco-lbo-private-equity-deal-2012-1; RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090, 2093 (2016).

[14] Id. at 2093.

[15] Id. at 2098.

[16] Id. at 2093.

[17] Id.

[18] Id.

[19] Id. at 2099.

[20] Id.

[21] Id. at 2100.

[22] Id.

[23] Id.

[24] Id. at 2106-2107 (citing Kiobel v. Royal Dutch Petroleum, 133 S. Ct. 1659, 185 L. Ed. 2d 671, 681 (2013)).

[25] Id. at  2101-2102.

[26] Id. at 2102.

[27] See Id. at 2100-2102.

[28] Id. at 2104.

[29] Id. at 2102.

[30] Id. at 2105.

[31] Id. at 2106.

[32] Id. at 2108-2109.

[33] Id. at 2110.

[34] City of Almaty v. Ablyazov, 226 F. Supp. 3d 272 (S.D.N.Y. 2016)

[35] Id. at 275-276.

[36] Id. at 276.

[37] Id. at 278.

[38] Id. at 280.

[39] Id. at 281.

[40] Id. at 282.

[41] Id. at 282.

[42] Id. (citing  Bascuñan, 2016 U.S. Dist. LEXIS 133664, 2016 WL 5475998, at *4-6)

[43] Id. at 284.

[44] Id. at 285.

[45] Id.

[46] Id. at 287-287.

[47] 245 F. Supp. 3d 650 (D.N.J. 2017)

[48] Id. at 653.

[49] Id. at 659.

[50] Dandong Old N.-East Agric. & Animal Husbandry Co. v. Gary Ming Hu, 2017 U.S. Dist. LEXIS 122471, (S.D.N.Y. Aug. 3, 2017)

[51] Id. at 33-34.

[52] Tatung Co. v. Shu Tze Hsu, 217 F. Supp. 3d 1138, (C.D. Cal. 2016)

[53] Id. at 1157.

[54] See id. at 1156-1157.

[55] Id. at 1155.

[56] The United States Department of Justice, Money and Asset Recovery Section, https://www.justice.gov/criminal-mlars (last visited Feb. 13, 2020).

[57] Id.

[58] City of Almaty v. Ablyazov, No. 1:15-CV-05345 (AJN) (KHP), 2019 U.S. Dist. LEXIS 90556, at *4 (S.D.N.Y. May 29, 2019)