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Bank of New York's $22.5 billion headache

The Russian government is suing the Bank of New York for smuggling cash out of the country. 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

(Fortune Magazine) -- Inside a rundown government building on Novaya Basmannaya Street in Moscow, a bizarre lawsuit is playing out involving $7.5 billion in illicit money transfers and America's ninth-largest bank.

The Russian government is suing the Bank of New York Mellon (BK, Fortune 500) under the U.S. civil RICO statute - the Racketeer Influenced and Corrupt Organizations Act - seeking $22.5 billion.

And what a cast of characters. Russia is represented by a Miami plaintiffs lawyer who specializes in airplane crash cases, whose experts include Harvard law professor Alan Dershowitz. The bank's defense is being led by Jonathan Schiller, a founding partner of super-lawyer David Boies's law firm, Boies Schiller & Flexner, and he has assembled his own phalanx of experts, led by former U.S. Attorney General Richard Thornburgh.

In the suit the Russian Federal Customs Service seeks to recover taxes it says it should have collected on the $7.5 billion that one of the Bank of New York's employees helped smuggle out of the country about a decade ago. The bank maintains that the case has no merit.

What makes the dispute unique is that Russia has filed the suit not in "any appropriate United States district court," as the RICO statute contemplates, but in a Russian court. Moscow's commercial court is widely regarded as not only a place susceptible to corruption but one in which judges simply lack the judicial independence required to rule against important state interests.

While a judgment in Moscow might well not be enforceable in the U.S., the Bank of New York does business in more than 100 countries, and the judgment would almost certainly be enforceable in some of them. Moreover, as a multinational operation, the Bank of New York does not relish the prospect of defying any country's judiciary. After an 80-year presence in Russia, it also dreads the prospect of having to pull out now, when Russia is the world's sixth-largest economy, its second-largest producer of oil, and a global superpower once again.

The case raises a larger issue: Can any Western company get a fair shake in the Russian court system when the adversary is the Russian government?

In recent years Russia has often used the selective enforcement of its laws to advance policy objectives - most notably the nationalization of natural resources. From 2003 to 2006 it cited tax claims as the basis for seizing the assets of Yukos, then its largest oil company; in 2006 it alleged environmental violations in forcing Shell (RDSA), Mitsui (MITSY), and Mitsubishi (MSBHY) to cough up half their stake in their Sakhalin Island oil franchise; and in recent months it has invoked transgressions of labor, migration, and tax laws to wring concessions from the Western half of the TNK-BP (BP) oil joint venture, including the ouster of its American CEO, Richard Dudley.

Yet the Bank of New York suit might also reflect a quirkier, narrower agenda. Russia's President, Dmitry Medvedev, has acknowledged that his nation's courts sometimes become the tool of powerful individuals. As the Financial Times reported in June - citing Moscow sources - "the Bank of New York case could not have got this far without support from a high-level 'sponsor' in government, the security services, or business - or one well connected in all three areas."

How high up in the Russian government hierarchy does one need to go to get approval to sue an American bank for $22.5 billion? Louise Shelley, an expert on the Russian legal system at the George Mason School of Public Policy in Arlington, Va., says, "The head of the customs service wouldn't have approval to do something like this on his own." Approval probably came, she says, from "somewhere in the Kremlin."

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