US - A multi-billion dollar damages claim issued against the Bank of New York Mellon could pose a systemic risk issue for US and even worldwide financial markets, a banking expert has warned.
BNY Mellon said an adverse ruling would be unenforceable and have no material impact on the company. The bank has dismissed the case as "totally without merit" and said publicly that, while it would not be surprised by an adverse judgment, it "intends to pursue every available route of appeal through every level of the Russian legal system and beyond". An application by BNY Mellon to dismiss the case is currently being considered by a Russian court.
But in a letter to US Federal Reserve chairman Ben Bernanke, Thomas warned of "the potential systemic risk to domestic and even worldwide financial markets" if BNY Mellon, the largest custodian bank in the world and a major US clearing bank, was unable to offer its settlement services for a sustained period as a result of the case.
Thomas wrote: "It is not clear if the regulators have ensured that adequate financial safeguards are in place at the company to address such an adverse judgment."
He said: "The timing of any pending adverse judgment, which could be within a few weeks, could not be worse in the wake of the Bear Stearns crisis and increasing concern over the fragile condition of other firms."
BNY Mellon maintains that contingency reserves are unnecessary because an adverse judgment is both unlikely and unenforceable in the jurisdictions where it operates. A spokesperson re-iterated that the bank is confident that there will be no material financial impact on the bank or its shareholders.
Thomas disclosed that he has been retained as a consultant by the law firm Podhurst Orseck acting for the Russian authorities.
The claim launched by the Russian Federal Customs Service springs from a money laundering scandal that was first exposed in 1998, when the FBI and US tax authorities launched a probe into accounts opened by BNY vice president Lucy Edwards and her husband, Peter Berlin.
Edwards and Berlin pleaded guilty to illegally transferring money through Bank of New York accounts in 1999. They were fined and sentenced to six months house arrest.
In November 2005, the bank reached a $14m settlement with the US authorities after admitting it failed to report $7.5bn in unlawful Russian transactions.
In the current claim the Russian authorities are seeking to hold BNY Mellon liable for $22.5bn in damages related to unpaid taxes on the money laundered by Edwards and Berlin under the US Racketeer Influenced and Corrupt Organisations Act (RICO).
BNY Mellon is mounting a multi-pronged defense. The bank has said that it was never charged with any crime or violation of any statute, nor was anyone charged with actual money laundering by the US authorities. BNY Mellon said the Russian Government reportedly conducted its own investigation and concluded that taxes were not illegally avoided in connection with the transfers.
The bank's legal experts have also argued that the Russian courts do not have jurisdiction to consider claims under the RICO Act. At a preliminary hearing at the Basmany Court in Moscow last week the bank presented written opinions from 22 legal experts, including former US Attorney General Dick Thornburgh and RICO expert Gregory Joseph, in support of its motion to dismiss the case.
Matthew Biben, executive vice president and legal counsel for Bank of New York Mellon, said: "It would be contrary to the operation of the rule of law for this Russian court to allow this case to continue or to award a judgment to the FCS on the basis of these meritless claims concocted by American contingency-fee lawyers."
The plaintiffs presented evidence from Harvard Law professor Alan Dershowitz and RICO statute author Robert Blakey in support of their argument that the case should be heard in the Russian court.
The result of the hearings is pending.
This story first appeared in Global Pensions' sister title ICFA (www.icfamagazine.com).
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