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Can a U.S. bank get a fair trial in Moscow?

By Roger Parloff, senior editor
Last Updated: September 24, 2008: 7:22 AM ET

The dispute stems from notorious events that exposed, at the very least, shocking regulatory failings at the Bank of New York, which is America's oldest financial institution, having been founded by Alexander Hamilton in 1784. In the early 1990s, after the Soviet Union fell, the Bank of New York launched a new Eastern European division made up largely of Russian émigrés. Among them was Lucy Edwards, one of about 1,700 vice presidents at the bank at that time.

In 1996, Edwards's husband, Peter Berlin, opened two accounts at a Bank of New York branch in Manhattan, ostensibly for an import-export business he claimed to be running. In reality, he and Edwards placed the accounts largely under the control of a Russian bank, which used them to perform illicit money transfers for its depositors, paying Edwards and Berlin about $1.8 million in commissions (which were not shared with the Bank of New York).

Edwards bribed a subordinate and falsified records to conceal what she was doing from supervisors. She also supplied her husband with Bank of New York software he wasn't supposed to have, which enabled the wire transfers to receive less scrutiny from bank auditors than usual. The Edwards-Berlin accounts were soon generating more wire-transfer fees for the bank than any other account in their branch.

Acting on a tip, Manhattan federal investigators raided the couple's apartment in August 1999. They pleaded guilty in February 2000 to having opened an unlicensed branch of a foreign bank and conspiracy. Though neither of those crimes can serve as a basis for a RICO case, the government alleged that the conspiracy had nine objectives, and that one of those was "laundering money" to promote a "wire-fraud scheme," which can serve as a basis for a RICO case. (Though the RICO law was originally aimed at organized crime, it has civil provisions as well as criminal provisions. It's not uncommon for plaintiffs suing major companies to include civil RICO allegations, because victors in such cases are entitled to recover three times their actual damages.)

In 1999, U.S. prosecutors asked Russian authorities to help them discover the motive behind the wire transmissions. One likely goal was evasion of Russian tax and customs duties, and another possibility was money laundering, which in this context refers to illicit transfers of funds that are themselves the proceeds of a crime.

But contemporary press accounts suggest that the prosecutors' attempts to enlist Russian assistance were largely rebuffed at the time. (Mary Jo White, the U.S. attorney at the time, declined to be interviewed for this article.) Many powerful Russians were evading taxes during that period, and in 1998 President Boris Yeltsin had just vetoed a Russian parliamentary bill designed to crack down on illicit money transfers. In October 1999, the Washington Post reported that Russia's tax minister had announced that "an audit by his agency had determined that most money transfers made through the Bank of New York accounts by Russian commercial banks were legal."

Federal prosecutors ultimately concluded that tax evasion and money laundering had not been the crux of the operation after all. At Edwards's and Berlin's sentencing in July 2006 the prosecutor told the judge that the money transmitted "was used really for all sorts of purposes, many of them entirely innocuous." The couple, who had cooperated with the prosecutors, were sentenced to six months' house arrest and probation.

As for Edwards's supervisors and the bank itself, prosecutors leveled no charges. Instead, on Nov. 8, 2005, it dropped its inquiry on condition that the bank sign a nonprosecution agreement. In it, the Bank of New York acknowledged Keystone Kops-style incompetence, but no knowing, intentional misconduct. It admitted, for instance, that the personnel who'd developed their wire-transfer software "failed to appreciate ... the increased money-laundering risks associated with the ... product"; that the Bank of New York branch personnel "incorrectly believed ... that Berlin was in the 'import/export' business"; and so on. The bank has always maintained that none of those acknowledgments amounted to an admission of criminal conduct.

However, the Department of Justice press release that announced the agreement left a different impression. It stated near the top that the Bank of New York "has admitted its criminal conduct."

The press release and the nonprosecution agreement soon came to the attention of Florida attorney Steven C. Marks of Miami's Podhurst Orseck, who had represented the Russian Federal Customs Service in unsuccessful litigation in U.S. courts against the major tobacco companies for allegedly smuggling cigarettes into Russia to circumvent taxes. As a plaintiffs lawyer for air-disaster victims, Marks was at home with cases that straddled the globe; he'd handled, for instance, successful litigation stemming from the crash of Silk Air Flight 185, which mysteriously went down between Jakarta and Singapore in 1997.

Marks read the Justice Department announcement to mean that the bank had now admitted criminal conduct in the Edwards-Berlin prosecution. That created an opportunity for Russia to sue over the case, he reasoned, because such an admission of criminal behavior after years of denial could reset the statute-of-limitations clock.

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