U.S. Civil Forfeiture Law Challenged Under Investment Treaty—Part 1

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.

The U.S. is a party to many bilateral investment treaties—BITs—and many bilateral and multilateral Free Trade Agreements—FTAs. These generally grant 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 one country from indirect or direct expropriations by the host country, except for a public purpose, upon payment of adequate compensation, and in accordance with due process of law. The BITs usually provide, however, that they do not preclude the application of host country measures necessary for the maintenance of public order or the protection of the host country’s own security interests.

A breach by the host country of its obligations under a BIT entitles the investor to money damages from the government of the offending host country. Such private investor claims for money damages against the host country government are adjudicated by arbitration panels. These panels are generally administered by the World Bank Group’s International Centre for Settlement of Investment Disputes, 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 U.S. finds itself the respondent in a BIT arbitration proceeding. This Optima BIT arbitration involves in part a challenge to a civil forfeiture action instituted in 2020 by the U.S. Department of Justice—DOJ—against a Dallas, Texas, office complex, the proceeds of its pending sale, and certain other assets. The District Court in the forfeiture proceeding has required that these sales proceeds be held by the U.S., pending the resolution of the forfeiture proceeding. 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 U.S. District Court for the Southern District of Florida. The DOJ has based its action in part upon its contention that the office complex was purchased from the proceeds of the specified unlawful activity of money laundering. This DOJ allegation relates to the alleged diversion of assets of PrivatBank, Ukraine’s largest bank, by the two Ukrainian nationals who each indirectly, through other entities, own one-third of the Delaware LLCs.

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

Notice of Arbitration

It is unusual for the U.S. to be named as a respondent in an investor-state arbitration. The U.S. has been a respondent in only 20 of the 1,104 investor-state arbitration cases that were filed between 1987 and 2020. Moreover, of these 20 arbitrations, none were decided in favor of the claimant, although three cases are still pending and three were settled.

The Optima arbitration claims are based upon the U.S.-Ukraine BIT—the BIT—which entered into force in 1996. The arbitration was initiated in March 2021 by the single member U.S. LLC that purchased the Dallas office complex and the U.S. LLC that is its sole member, as claimants. The Notice of Arbitration notes that the definition of “investment” in the BIT includes “tangible . . . property,” and also includes “interests in a company” which are “controlled directly or indirectly by nationals or companies of [Ukraine].”

Further, the BIT stipulates that “any company legally constituted under the applicable laws and regulations of [the U.S.] or a political subdivision thereof [and is] an investment of [Ukraine] nationals . . . shall be treated as a national or company of [Ukraine].” The Notice recites that the two Ukrainian investors have at least two-thirds indirect profits and voting interest in the higher-tier LLC, thereby causing the single-member LLC’s Dallas office complex, and the single-member LLC itself, to be viewed as an investment as described in the BIT.

The LLCs’ claims are largely based upon the alleged applicability of Articles II(3)(a) and III(1) of the U.S.-Ukraine BIT and the alleged inapplicability of Article IX of the BIT. The U.S.-Ukraine BIT is similar to other BITs and FTAs entered into by the United States. Article II(3)(a) provides that investments are to be accorded fair and equitable treatment, and treatment no less favorable than that required by international law. Article III(1) prohibits direct or indirect expropriation of an investment, except for a public purpose, upon payment of adequate compensation, and in accordance with due process of law. Article IX of the BIT, however, provides that the BIT does not preclude the application of host country measures necessary for the maintenance of public order or the protection of the host country’s own security interests.

The LLCs allege that the U.S. civil forfeiture procedure falls below the fair and equitable treatment and international law standards referred to in Article II(3)(a) because it applies extraterritorial U.S. jurisdiction to target the alleged conduct at PrivatBank. The Notice stresses that the alleged conduct was not committed by or against U.S. nationals and did not create monetary losses in the U.S.

The LLCs also argue that international law standards of due process have been violated because no criminal conduct in Ukraine has yet been found, and neither of the two Ukrainian investors has been charged or convicted in Ukraine or in the U.S. The Notice also contends that the U.S. civil forfeiture law lacks due process, citing even some U.S. critics of that civil forfeiture law.

The LLCs argue that the U.S. civil forfeiture proceeding is tantamount to an expropriation as described in Article III(1) because it deprives the LLC of the benefits of the investment. The Notice further argues that there is no U.S. public purpose for the civil forfeiture proceeding, and even if there were, compensation is still required for expropriations undertaken for public purposes. The LLCs further contend that Article IX of the BIT does not excuse the expropriation because forfeiture is unnecessary to maintain the public order in the U.S. or the U.S.’s own security interests.

The LLCs also point out that the evidence concerning whether there was money laundering or other predicate offenses in Ukraine that would implicate the U.S. civil forfeiture statute is located in Ukraine. Moreover, the Notice states that civil litigation is now underway in Ukraine concerning such legality of the transactions leading to the U.S. investment and that Ukrainian litigation to date has favored the claimants.

Status of U.S. Optima cases

As of October 2021, two of the three arbitrators in the BIT case have been appointed. In May 2021, the Southern District of Florida granted the joint request of the U.S. and the LLCs that the trial of the civil forfeiture case be stayed. In August 2021, the Delaware Chancery Court (C.A. No. 2019-0377-JRS) ruled on a pending civil claim by PrivatBank against the same LLCs that are the claimants in the pending BIT proceedings. The Chancery Court did, as requested by the respondent LLCs, stay the action concerning the liability of those LLCs while the related Ukrainian proceedings continued, based on forum non conveniens factors. However, the Chancery Court did not dismiss the case on grounds of forum non conveniens, as requested by those LLCs.

Part 2 of this article will look at arguments that may be raised by the U.S. in defending this case—that money laundering, if established, deprives the arbitration panel of jurisdiction or requires the case to be dismissed. Part 2 will also discuss the burden of proof in BIT proceedings, and the relationship of BIT proceedings to other proceedings.

This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners. 

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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