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Court Rejects Defendant’s Motion to Quash Subpoena from Russian Government Under the Magnitsky Act.

Russian to English certified translation services are often required for international proceedings referencing the Magnitsky Act.  The Magnitsky Act is a relatively unknown law that has been mentioned in recent news reports surrounding allegations of Russian interference in the 2016 presidential election. In Deposit Insurance Agency v. Leontiev, a bankruptcy receiver for the Russian government issued a subpoena to the defendant. The defendant disputed the issuance of the subpoena, moving to quash it on the grounds that it violated the Sergei Magnitsky Rule of Law Accountability Act of 2012 (the “Magnitsky Act”). Following is an explanation of the Magnitsky Act and a U.S district court’s practical application of it to a Russian bankruptcy proceeding.

Background on Russian Defendant

The defendant, a Russian who now resides in New York, was the former president of a Russian bank “Probusinessbank” that was eventually taken over by the Russian government. The bank was founded in 1993 and remained in operation until 2015 when it was subjected to governmental control. During his tenure as owner of the bank, the defendant had ties to Russian dissidents and the United States government. The defendant claims that, due to his political affiliations, the Russian government began taking action against the bank in 2015. The defendant maintains that Probusinessbank was forced into bankruptcy as “punishment” as for the defendant’s controversial political views and that the Russian government intended to improperly expropriate the bank’s assets.

Russian Takeover of Probusinessbank

In August of 2015, the Central Bank of Russia appointed the Deposit Insurance Agency (the “DIA”) to act as the temporary administrator of Probusinessbank and subsequently withdrew Probusinessbank’s banking license. These actions effectively removed the bank from the defendant’s control and forced the bank’s assets into liquidation. The DIA also transferred $9.6 million into a DIA-affiliated bank around this time, which the defendant argues was an attempt to “loot” the bank. The Central Bank of Russia subsequently deemed Probusinessbank insolvent, resulting in bankruptcy proceedings against Probusinessbank. In October of 2018, the DIA filed an ex parte petition against the defendant requesting leave to seek discovery against him. The judge granted the petition, and the DIA issued a subpoena against the defendant containing 19 separate requests regarding the ownership, management, and transfer of funds from as many as 70 different companies. The subpoena also requested documents regarding loans and transfers and documents pertaining to two other court cases, among other things.

Background on the Magnitsky Act

The Magnitsky Act stemmed from the Magnitsky Affair, in which a Russian lawyer uncovered and investigated a massive and complicated Russian tax scheme. The scheme involved Russian officials raiding and taking over control of companies that were owned by the Hermitage Fund, an American-run investment firm. The Russian individuals set up sham companies and positioned themselves with the U.S. run companies. They fabricated contracts between the Hermitage companies and the fake companies they set up which stated that the Hermitage companies owed them significant sums of money. The scam companies then sought legal judgments from the Hermitage companies to recoup the fake debts and the Hermitage companies accounted for these “losses” in their balance sheets. The companies then sought tax refunds, which the fraudsters transferred to their own personal bank accounts upon receipt from the Russian government. Hermitage then hired Magnitsky, who discovered the fraud. The Russian government eventually had him arrested, jailed, and tortured for discovering the scam. He eventually died after being denied medical treatment.

After Magnitsky’s death, the United States Congress passed the Magnitsky Act, which prohibits the transfer of property to anyone involved in or connected with the tax fraud that led to Magnitsky’s death. The ban prevents anyone in the United States from transferring any goods, services, or funds to anyone on the list of sanctioned individuals. In 2017, the founder of the Russian Bank that represented the DIA, Andrei Pavlov was placed on the Magnitsky List as a result of his “essential role” in the $230 million tax fraud that was uncovered by Sergei Magnitsky.

Basis for Defendant’s Motion to Quash.

The Defendant argues that requiring the defendant to respond to the subpoena should be denied because it would violate American sanctions under the Magnitsky Act. Specifically, the Defendant claims that complying with the subpoena would be in violation of the Act because it would deliver “property” to an attorney with connections to the Magnitsky Affair. The Defendant argues that the information sought in the subpoena goes way beyond issues surrounding his bankruptcy proceedings, and that any information he submits will be turned over to Russian prosecutors to drum up criminal charges against him. The defendant further argues that the bankruptcy proceeding is simply a harassment technique because of his links to Russian dissidents and the U.S. government. The defendant also argued that he had a right to avoid self-incrimination in Russia (just like under American law) and attached an English translation of the Russian Constitution indicating same.

Court Denies Defendant’s Motion to Quash.

After considering the defendant’s arguments, the court denied the defendant’s motion to quash the subpoena for several reasons. The court found that the DIA’s relationship with Pavlov did not violate U.S. sanctions per the Magnitsky Act because the DIA was not a “United States person” as required by the Act. Thus, the Act was not implicated, even if Pavlov receives a direct pecuniary benefits as a result of the court enforcing the subpoena. The court explained that, according to 31 C.F.R. Section 584.201, only United States persons are prohibited from transacting with sanctioned individuals, and regulations define a United States person as “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States…or any person in the United States.” The court rejected the implication that Congress intended for the term “United States person” to include foreign governmental agencies. In addition, the court found that the defendant’s right to avoid self-incrimination was available to him at his deposition and at trial, but not in connection with quashing subpoenas.

However, the court did state that it was not “blind” to the defendant’s claims that the discovery sought was for a nefarious purpose by the Russian government. Accordingly, the court ordered the parties to meet and confer in order to modify the scope of the subpoena to only those topics relevant to the Probusinessbank bankruptcy proceedings. The parties were also ordered to discuss whether a protective order was necessary and are required to report back to the court on the status of these negotiations on September 28, 2018.

The case is Deposit Insurance Agency v. Sergey Leontiev, Case No. 17-MC-00414 decided on July 23, 2018 in the United States District Court for the Southern District of New York.

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