Comity and Kleptocrats

An Experiment in Substacking

An Experiment

      I blog and tweet only rarely, so why should I substack? This post begins an experiment to find out if it makes sense to use this medium. Over the last few years, blog and podcast hosts have asked me to speak on law-adjacent issues of public interest. My most controversial and firmly held position, that people in the legal academy spend too much time pondering and agitating about the Supreme Court, narrows my natural audience considerably.

      Instead, my online work, like that found in dead-tree sources, focuses on matters of international relations, national security, technological innovation, and the law of foreign relations, both in the United States and elsewhere. I’ve had a lot to say lately about the design of sanctions against Russia as well as the role of big data (the essential predicate to artificial intelligence) in international relations. A substack might be a useful place to collect these publications in one place.

      I also occasionally work as an expert witness on international and comparative law in various legal disputes, both arbitral and court-based. My post today arises out of a New York lawsuit in which I provided evidence regarding Kazakh law. The case is a great subject for my purposes, both because it involves geeky legal matters of interest to foreign relations scholars (international comity, act of state, and the presumption against extraterritoriality) and because of its underlying policy challenge, namely the use of the U.S. legal system to shelter foreign misdeeds.

      Kazakh business people sued Kazakh political insiders who allegedly looted their valuable coal-mining operation and stowed the proceeds in U.S. real estate. The litigation raises the general question of whether state common law provides any recourse to victims of foreign kleptocrats with respect to U.S. property used to store the fruits of foreign plundering. A Justice on the Supreme Court of New York (a first-instance court, notwithstanding its name) ruled that the federal policy of international comity bars such litigation across the board, even though the complaint does not seek to overturn any judgment of a foreign court. But why should the United States categorically offer a safe harbor to the fruits of lawless plunder?

      The estimable Transnational Litigation Blog published my thoughts on this matter last week. I repost here:

      To succeed in their trade, thieves need a place to stash their ill-gotten gains. Should the United States become a safe haven for international financial wrongdoing, shielding the proceeds of misdeeds whenever the thief brings corrupt government officials into the plot? Zhakiyanov v. Ogai, a recent decision of the Supreme Court of New York, indicates that the answer might be yes. It dismissed on grounds of international comity a suit seeking to recover money looted from a Kazakh dissident politician and invested in U.S. real estate. Apparently, the world’s financial capital aspires to become the fence of choice for the world’s kleptocrats. (Disclosure: I served as an expert witness on Kazakh law in the case, but did not address any of the U.S. legal issues discussed here.)

The Story

      The decision came on a motion to dismiss, so the court had to accept as true the plaintiffs’ factual claims. This is their story: As the Soviet Union was collapsing, Zhakiyanov founded a coal mining operation in Kazakhstan. Zarubekova, the other plaintiff, had a minority stake and managed the business. As their enterprise prospered, Zhakiyanov wandered into politics, obtaining appointment as governor of two of the country’s regions in succession.  By the dawn of the new century, he had become a critic of the country’s strongman, Nursultan Nazarbayev, who had successfully transitioned from the Soviet Republic’s boss (first as head of the Communist Party, then as president) to its seemingly permanent post-Soviet president. Zhakiyanov attacked the leader’s pervasive corruption, for which Nazarbayev retaliated with arrest and conviction for supposed abuses of public trust. The United States and the European Union protested at the time.

After Zhakiyanov’s arrest, Ogai, a crony of Nazarbayev, seized the opportunity. Kazakh tax authorities, sensitive to Nazarbayev’s wishes to squash any political opposition, invented a tax liability for the company that owned and operated Zhakiyanov’s coal interests. They obtained a court order that tied up the company’s cash flow. At that point, Ogai’s proxies staged a pretend shareholder meeting by fabricating the company’s shareholder register so that they could act as the firm’s owners, a common move in post-Soviet corporate takeovers. This allowed the conspirators to put their people in charge of the company. The new managers then transferred free of charge the company’s key assets, including its mining rights, to a firm owned by Ogai and his collaborators, apparently including Nazarbayev. According to the complaint, no Kazakh official actor, either judicial or government, authorized this asset stripping, although none attempted to prevent the looting, either.

      Unable to operate, the company went into bankruptcy. The conspirators used a shell company to create the pretense of competitive bidding while driving down the auction price of the remaining assets. Apparently, the government did not collect on the tax claim that kicked off the company’s troubles, presumably confident that the rightful owners would never see their money again. The looters did well with their ill-gotten assets, generating large profits that they stashed in the United States. Ogai or his wife, drawing on these funds, bought two West Side condos for $45 million, a Beverly Hills mansion for $40 million, and a residence in Encino for over $10 million.

      In 2022, mass demonstrations, prompted by the regime’s misrule and squandering of the country’s vast oil and gas revenues, drove Nazarbayev from power. The new government was not unfriendly to him but was compelled to strip his family of immunities and to open an inquiry into his misconduct. During this period of lustration, Zhakiyanov discovered Ogai’s role in destroying his company and looting its resources, including prior to its bankruptcy. Learning that Ogai had funded U.S. real estate holdings with the proceeds from the misappropriation of their property, the plaintiffs sued Ogai and his wife as well as the real estate’s holding companies in New York state court, seeking damages and imposition of a constructive trust on the real estate.

      This story resonates with other ploys by post-Soviet regimes to ruin their adversaries and reward their cronies. The Yukos affair, a tale I have told many times over, involved a bogus tax claim that froze the assets of a company belonging to Mikhail Khodorkovsky, a prominent Putin critic. A rigged auction followed, finding a new home for the company’s key assets in Rosneft, a firm run by Igor Sechin, a close crony of President Putin, with bankruptcy to follow later. In the Kazakh case, the tax claim opened the door to a takeover of the target firm followed by asset stripping, something missing from the Yukos story. Moreover, the plunderers in Kazakhstan owned outright the entities that did the looting, while Sechin’s vehicle Rosneft, although under his domination and control, nominally is publicly owned. The parallels, however, remain striking.

International Comity

      Faced with the Zhakiyanov complaint, the New York Supreme Court ruled that principles of international comity barred it from even considering the case. It cited Royal Wulff Ventures LLC v. Pimero Mining Corp. (2019), a Ninth Circuit case that applied the act of state doctrine to bar a securities fraud case based on the defendants’ allegedly false claim about their company’s eligibility for a tax break.  The New York state judge ruled that she could not determine whether Ogai had acted wrongfully without reviewing the lawfulness of the Kazakh tax and bankruptcy proceedings in derogation of comity and act of state. Because U.S. law (supposedly) forbids our courts from determining whether Kazakh courts corruptly tolerated or ratified illegal acts, the judge believed she lacked the power to decide whether Ogai, a private person, had done anything wrong in suborning Kazakh authorities to backstop his unlawful looting.

      International comity is a principle of deference to foreign countries. It’s a good principle that I have defended in my scholarship. Comity is not, however, a ground for shielding all foreign financial misconduct from judicial review. U.S. law has never thought it proper to protect a fraudster just because the scheme uses government actors as accomplices. Under the Foreign-Country Money Judgments Recognition Act (adopted by New York), a foreign court judgment procured by fraud, for example, will not be recognized and enforced in the United States, even though applying that rule requires a U.S. court to review how a foreign court conducted itself.

      International comity has great force in parallel bankruptcy proceedings. To quote the Restatement (Fourth) of the Foreign Relations Law of the United States, “Bankruptcy cases represent a special instance where a court will defer to the forum having primary jurisdiction to ensure a coherent resolution of the proceeding” (Section 425, comment d). But in Zhakiyanov, most of the asset stripping took place before the Kazakh proceedings commenced. The provenance of the money ultimately closeted away in U.S. real estate was not part of a foreign bankruptcy proceeding, but rather a straightforward looting operation.

      In W.S. Kirkpatrick & Co. v. Environmental Tectonic Corp., International (1990), an engineering firm sued its competitor for bribing government officials to defeat its bid on a Nigerian construction project. The Supreme Court ruled that the case should proceed, even though the plaintiff’s claim depended on showing that a foreign official acted improperly. It would be one thing, the Court explained, for a U.S. court to overturn a governmental decision as to who had won the bid. What the plaintiff wanted, instead, was a chance to show that its rival had acted wrongfully and caused it injury. Such victims deserve their day in court, the Court unanimously held. U.S. courts may not have the power under the act of state doctrine to overturn the official acts of foreign governments, but they do not have to let the persons who partner with corrupt officials get away scot-free. Similarly, a U.S. court would have no authority to order the Kazakh government to refund any taxes collected from the plaintiffs’ company. But, according to the complaint, it was the political persecution of Zhakiyanov that opened the door to the cosplay shareholder meeting and the resultant looting that the new managers carried out. The Kazakh judicial proceedings did not cause the looting.

      The Zhakiyanov suit does not seek to undo any dispositions of property by a Kazakh court. Rather, it asks a U.S. court to reach legal conclusions about events that the Kazakh court might have seen as relevant to its ultimate conclusions. Most importantly, no Kazakh proceeding ever had jurisdiction over the U.S. real estate subject to the Zhakiyanov suit. In these circumstances, U.S. courts are not bound by the decisions of foreign judges, and indeed reject them for many reasons, not the least corruption in their procurement. To choose a highly salient example, twenty years ago a U.S. federal court refused to accept a ruling by Russia’s High Commercial court, an apex court, about the validity of a transaction that determined the ownership of overseas copyrights of cartoons produced in the Soviet Union. The U.S. judge believed that improper government interference produced the Russian decision, rendering it a legal nullity in the United States, and rejected a Russian state company’s claim that rested on that decision.

      To be sure, the United States does not and should not hold itself out as a general forum for disputes over overseas fraud. In RJR Nabisco, Inc. v. European Community (2016), the Supreme Court embraced some boundaries when it limited civil claims under U.S. antiracketeering law (RICO) to misconduct causing injury within the United States. That holding poses an insurmountable barrier to a kind of lawsuit that popped up in the early years of this century, where Russian entrepreneurs claimed that other Russians with better political connections had muscled them out of their non-U.S. assets, including through bankruptcy proceedings. None of those earlier cases, however, involved the stashing of the fruits of the crime in the United States, and thus the ownership of assets that could be reached only by a U.S. court. By contrast, U.S. courts have not been shy about entertaining ownership disputes over art and other valuable objects where one claimant was the victim of looting by the opposing claimant with the protection, but not direct participation, of a foreign government.

      Before RJR, some lower courts, rather than anticipating that decision’s reading of RICO, dismissed claims involving foreign civil RICO injuries on the basis of forum non conveniens. That doctrine is controversial, more in the academy than the courts, and several distinguished scholars associated with [the Transnational Litigation Blog] have penned powerful attacks. Zhakiyanov, however, has nothing to do with that doctrine. Under the local action rule universally applied in the United States (as well as most other jurisdictions around the world), only courts having jurisdiction over real property can determine its title or execute judgments against it. Accordingly, only U.S. courts (more precisely, those in New York and California) have the power to take action against the properties purchased with funds from the Kazakh looting.

Conclusion

      A final caveat. The events alleged in the Zhakiyanov complaint may make out the elements of criminal money laundering, and the United States might still prosecute the Ogais and their U.S. holding companies. A successful criminal case might bring about restitution to the plaintiffs. But the chance that U.S. prosecutors might champion their cause is not itself a reason for shutting down the plaintiffs’ access to U.S. civil justice. If ownership of U.S. real estate rests on overseas looting, carried out with the connivance, but not at the command, of foreign governments, surely civil courts with jurisdiction over that property should have the power to hear the claim. British indifference to the origins of real estate investment has led, some argue, to rise of Londonistan, a festering pool of corruption and instability. Surely, we do not want to repeat that mistake on these shores and give rise to our own Manhattanistan.

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      Addendum for Substack: Skeptical readers may ask whether allowing foreign events to intrude into disputes over the ownership of U.S. property might run afoul of the presumption against extraterritoriality, a doctrine of statutory interpretation invoked by the Supreme Court of the United States with increasing frequency over the last thirty years. My discussion of RJR Nabisco in my original post addresses that point, but some elaboration might help.

      The presumption pushes Congress to regulate overseas people, events, and transactions expressly and deliberately.  More precisely, it limits the interpretive discretion of judges, who otherwise have tended to apply an open-ended balancing test that, defenders of the presumption argue, undermines legal stability and hijacks important policy choices best made by the legislature. Reasonable people can disagree about the matter: I make a case for the presumption here.

      The point is that disputes over the ownership of property only rarely and incidentally, if ever, implicate the presumption. A fundamental principle of property law is that a victim of an unlawful conversion of property may seek to regain ownership, absent the interposition in the chain of title of a good faith purchaser. When a rightful owner seeks to regain property from someone who obtained it by fraud or outright seizure, property law does not ignore overseas misconduct. One might imagine a different rule – say, what happens in Almaty stays in Almaty – but such an edict does not fit well in a world where people and their property cross national boundaries so readily. The baseline common-law principle protecting rightful owners does not depend on federal legislation, but rather a fundamental policy choice made by states. There are very few places in the United States, if any, that have elected to foster dens of thieves. Why should they?