PRELIMINARY OBJECTIONS OF THE UNITED STATES OF AMERICA
February 14, 2023
TABLE OF CONTENTS
II. Background Facts Pertinent to 41(5) Objections
A. U.S. Law Provides for the Civil Forfeiture of Assets and the Proceeds of Crime, Including the Crime of Money Laundering
B. Civil Forfeiture Is Recognized as a Critical Tool in Global Efforts to Combat Money Laundering
C. The "Optima Scheme": Kolomoisky and Boholiubov's Scheme to Launder Money Embezzled from PrivatBank in the United States Through the Purchase of Assets by the "Optima" Companies
2. The U.S. Forfeiture Cases
III. ICSID Arbitration Rule 41(5): Legal Standard
IV. Claimants' Claims Are Manifestly Without Legal Merit and Should Be Rejected
A. Jurisdictional Objection 1: The Claims Must Be Rejected Because Claimants Failed to Comply with the U.S.-Ukraine BIT's Preconditions to Arbitration
B. Jurisdictional Objection 2: Article VIII Imposes No Affirmative Obligations on the Host State and Cannot Form the Basis of an "Investment Dispute" Under the U.S.-Ukraine BIT
C. Merits Objection 1: Claimants' Claims Lack the Requisite Finality to Form the Basis of a Legally Viable Claim
1. Claimants' Claims Are Manifestly Without Legal Merit Because They Are Based on Non-Final Judicial Acts
2. The Challenged Non-Final Judicial Acts Cannot Constitute an Expropriation as a Matter of Law Because They Have Not Resulted in a Permanent Deprivation of Claimants' Investments
D. Merits Objection 2: Claimants' Allegations Concerning Prescriptive Jurisdiction Cannot Form the Predicate of a "Fair and Equitable Treatment" Claim Under the U.S.-Ukraine BIT
1. The United States respectfully submits these Preliminary Objections pursuant to Rule 41(5) of the 2006 ICSID Arbitration Rules, requesting that the Tribunal dismiss in their entirety Claimants' claims as manifestly lacking in legal merit.
2. This arbitration implicates significant law enforcement interests of the United States to deter serious transnational crimes through forfeiture of the proceeds of such crimes. Specifically, the claims in this arbitration arise out of two civil forfeiture complaints filed by the U.S.
Department of Justice in the Southern District of Florida in connection with the alleged violation of U.S. money laundering laws. These civil forfeiture complaints allege that commercial real estate in Dallas, Texas and Cleveland, Ohio was acquired with funds embezzled from PrivatBank, one of the largest banks in Ukraine, as part of a multibillion-dollar money laundering scheme.
3. As alleged in the forfeiture complaints, Ihor Kolomoisky and Gennaidy Boholiubov, oligarchs who previously owned PrivatBank, embezzled and defrauded the bank of billions of dollars. After nearly a decade of obtaining fraudulent loans and lines of credit, the scheme was uncovered and the bank then had to be nationalized by the National Bank of Ukraine. At that time, a staggering 95 percent of corporate lending at PrivatBank was to parties related to shareholders and their affiliates. Kolomoisky and Boholiubov laundered a significant portion of the criminal proceeds by using an array of shell companies' bank accounts, primarily at PrivatBank's Cyprus branch, and transferring those funds to the United States.
4. Associates of Kolomoisky and Boholiubov, Mordechai Korf and Uriel Laber, operating out of offices in Miami, Florida, are alleged to have created a web of entities, typically under a variation of the name "Optima," to launder the misappropriated funds through the purchase of properties in the United States. Korf and Laber purchased hundreds of millions of dollars in real estate and businesses across the country, including the properties subject to the two forfeiture complaints underlying this arbitration: a Dallas office park formerly known as the CompuCom Headquarters, and an office tower known as 55 Public Square in Cleveland. In the wake of the fraud's uncovering, PrivatBank also filed civil cases against Kolomoisky and Boholiubov in the United States, the United Kingdom, Cyprus, and Israel. These cases, several of which have resulted in worldwide freezing orders, are ongoing.
5. The United States has a compelling interest in enforcing its federal laws against money laundering. A crucial tool in this law enforcement effort, civil forfeiture deprives individuals engaged in criminal activity of the proceeds and benefits of their crimes. Seizing such properties, even if the underlying criminal conduct occurred abroad, also serves to deter would-be perpetrators of criminal offenses within the United States. In particular, money laundering can pose a threat to financial sectors, but it can also have serious, real-life adverse impacts on law and order, the environment, and human health and safety.
6. Notably, civil forfeiture complaints, including those at issue here, are merely allegations that the properties are subject to forfeiture - the government has the burden of establishing by a preponderance of the evidence at trial that the assets may be forfeited. If the government is unable to do so, the property is returned, and the government is required to reimburse the legal fees and expenses of any claimant that successfully challenged the forfeiture.
7. Rather than challenge the pre-trial orders or forfeiture cases at the U.S. district or appellate courts, as Claimants are entitled to do and would be the normal course, Claimants filed this arbitration, alleging that the civil forfeiture cases, in particular pre-trial district court orders entered to prevent the dissipation of the assets, violate the Treaty between the United States of America and Ukraine Concerning the Encouragement and Reciprocal Protection of Investment (the "U.S.-Ukraine BIT," "BIT," or "Treaty"). Specifically, Claimants allege breaches of Article II(3)(a) ("fair and equitable treatment"), Article III(1) ("expropriation"), and Article VIII ("preservation of rights") of the BIT. In so doing, Claimants are seeking, effectively, to appeal those pre-trial orders to this Tribunal in the guise of treaty claims, before any domestic trial has taken place, and before any judgment of forfeiture has been entered.
8. If Claimants are successful in this effort, the consequences for legitimate law-enforcement efforts would be far-reaching. Every civil forfeiture case involving property in the United States purportedly owned or controlled by Ukrainian (or other foreign) "investors" could effectively be nullified by commencing an investor-State arbitration, rather than decided in the first instance by domestic courts.
9. Here, Claimants ask that this Tribunal order the United States to compensate them for the value of the properties subject to forfeiture for money laundering, a brazen attempt to preempt the U.S. district court's final determination as to whether these properties were, in fact, purchased with the proceeds of crime. In other words, Claimants are requesting this Tribunal to order the United States to pay Claimants the equivalent of monies that a U.S. court may yet determine were the proceeds of crime laundered in violation of U.S. law. This Tribunal should not countenance Claimants' efforts. Rather, this Tribunal can and should summarily dismiss Claimants' claims as manifestly lacking in legal merit on several grounds. Indeed, Claimants' claims are precisely the kind of unmeritorious and frivolous claims that ICSID Arbitration Rule 41(5) was designed to address in a preliminary phase of the proceedings to avoid the unnecessary time and expense of litigating claims that cannot succeed as a legal matter.
10. The United States hereby raises four preliminary objections pursuant to ICSID Rule 41(5), two pertaining to jurisdiction and two pertaining to the merits. If successful, the first jurisdictional objection would dispose of Claimants' case in its entirety; the second jurisdictional objection would dispose of Claimants' Article VIII claim; and the two merits objections would collectively eliminate Claimants' alleged substantive claims.
11. Jurisdictional Objection 1: The United States' first jurisdictional objection concerns Claimants' failure to comply with the BIT's mandatory six-month cooling-off period. As a precondition to arbitration, noncompliance with Article VI(3) of the BIT fails to engage the United States' consent to arbitrate. In this case, Claimants filed their claims only four months after the earliest time the dispute can be said to have arisen with respect to the Texas case, and a mere days after the dispute arose with respect to the Ohio case (in both cases, without attempting to seek a resolution through consultation and negotiation). The Tribunal should dismiss Claimants' claims in their entirety on this ground alone.
12. Jurisdictional Objection 2: The United States' second jurisdictional objection concerns Claimants' "prescriptive" or "adjudicatory" comity argument styled as an Article VIII claim. The United States has not consented to arbitrate such a claim. Under Article VI of the BIT, U.S.
consent to jurisdiction is limited to alleged breaches of "any right conferred or created by this Treaty with respect to an investment." Article VIII does not confer or create any right (as opposed to, for example, Articles II-IV); it merely makes clear that the Treaty does not derogate from laws, practices, decisions, or obligations that arise outside the Treaty. As such, it cannot form the basis of an "investment dispute" under the BIT, and is therefore manifestly without legal merit. The Tribunal should dismiss the Article VIII claim as outside of its jurisdiction.
13. Merits Objection 1: The United States' first merits objection is that Claimants' claims, based on non-final judicial acts, cannot form the predicate of a breach of Articles II(3)(a) or III(1) of the U.S.-Ukraine BIT as a matter of law. It is well established with respect to claims based on judicial measures that judicial finality is a substantive element of the delict. Claimants' claims based on judicial measures in the underlying forfeiture proceedings lack the requisite judicial finality and are grossly premature and unripe. They are manifestly without legal merit and should be rejected.
14. Merits Objection 2: The United States' second merits objection concerns Claimants' allegations regarding "prescriptive jurisdiction." Claimants allege that the U.S. exercise of its statutory authority with respect to Claimants' property violated purported customary international law rules on prescriptive jurisdiction, and that this alleged violation, in turn, constitutes a violation of Article II(3)(a) of the BIT. Article II(3)(a) is not a conduit for enforcing every rule of international law. Rather, Article II(3)(a) addresses only breaches of the minimum standard of treatment for aliens under customary international law - a standard that does not include putative violations of the supposed customary international law on prescriptive jurisdiction. The Tribunal should dismiss this claim as manifestly lacking legal merit.
15. In sum, although the United States does not accept the facts as pled by Claimants, even assuming for purposes of these Rule 41(5) objections that those facts are true, Claimants' claims are without foundation and manifestly lack legal merit. ICSID Rule 41(5) provides a mechanism to dispose of frivolous claims at a preliminary stage of the proceedings to avoid the need to expend time and resources defending them. The Tribunal should issue an Award dismissing Claimants' claims in their entirety and award the United States the costs it has incurred in this arbitration.
88. For all of the foregoing reasons, the United States requests that the Tribunal: i) set a schedule for written submissions, as well as an oral hearing on the United States' Rule 41(5) Preliminary Objections, and, following the written and oral phase, ii) issue an Award dismissing Claimants' claims as manifestly lacking in legal merit and ordering Claimants to bear the full costs of these proceedings and to reimburse the United States for all arbitration-related fees and expenses.