New Dilemmas Facing the U.S. Courts in the Era of the Panama Papers and Offshore Fraud

George Benaur, Benaur Law LLC

In recent years, there have been many news headline stories about offshore companies and complex webs of corporate entities moving funds across the continents without detection. The Panama Papers, for example, have caused a huge stir in the financial industry, with corruption and legal issues still unfolding as a result of their discovery and publication. As more news of ongoing corruption in tax havens occurs in the future, with huge international money laundering scandals unfolding as we speak, the U.S. courts are bound to face new pressures that will test the current state of the law on many applicable legal issues.

For a litigator analyzing international business fraud claims sought to be brought in the United States and dealing with foreign nationals coming to the United States to pursue claims, as well as for the United States judges no doubt, there are new and progressively complex questions that need to be answered. These questions and the new, complex fact patterns presented by newly discovered international offshore corporate fraudulent practices and new technologies, such as blockchain ICOs, for example, may lead to development of new laws.

One of such questions involves the scope of jurisdiction for American courts, and the well-known forum non conveniens defense. The defense of forum non conveniens has been used by U.S. courts to dismiss many foreign nationals’ cases, when those cases involved entities or conduct that occurred outside of the United States. Sometimes, the results are controversial and on their face may not seem entirely fair. Even if the claim was valid and against an American company, courts have often dismissed cases, finding that they could be litigated in the country where the alleged wrongful conduct occurred. One controversial case involved Chevron, for example, where the Court blocked U.S. enforcement of a $9.5 billion Amazon pollution judgment obtained in Equador. See . There are scores of other examples and each case needs to be evaluated based on its specific facts and circumstances.

As a general rule, the forum non conveniens doctrine is very logical. It is a discretionary device permitting a court to dismiss a claim even if the court is a permissible venue with proper jurisdiction over the claim. Wiwa v. Royal Dutch Petroleum Co., 226 F.3d 88, 100 (2d Cir. 2000). In other words, if the Court finds that it does not really make sense or would somehow be unfair to litigate the claim in the U.S. courts, for a multitude of different reasons, the appellate courts will generally honor the judge’s decision. The “central purpose” of the inquiry is “to ensure that the trial is convenient.” Norex Petroleum Ltd. v. Access Indus., Inc., 416 F.3d 146, 154 (2d Cir. 2005) (quoting Piper Aircraft Co. v. Reyno, 454 U.S. 235, 256, 102 S. Ct. 252, 70 L. Ed. 2d 419 (1981)). The determination is within the district court’s discretion and will not be overturned on appeal unless it was “clearly abused.”

Courts generally follow certain specific methodologies for deciding such matters. In New York’s Second Circuit for example, courts follow this approach: “At step one, a court determines the degree of deference properly accorded the plaintiff’s choice of forum. At step two, it considers whether the alternative forum proposed by the defendants is adequate to adjudicate the parties’ dispute. Finally, at step three, a court balances the private and public interests implicated in the choice of forum.” Norex, 416 F.3d at 153 (internal citations omitted).

The fact of the matter, however, is that the doctrine of forum non conveniens will eventually need to be re-evaluated. In certain circumstances, the forum where the alleged fraud occurred many not be so easy to identify, and in fact, it may involve a multitude of jurisdictions. Blockchain ICOs are a good example. To trace the alleged fraud, discovery is needed in many cases. One simply cannot know where the fraud originated, because the fraudsters took great care to prevent anyone from finding them. And it is not simple, especially at the beginning of the case, to identify who was involved in the fraud, where it occurred, and where it would be most “convenient” to litigate the case.

New technologies and corporate offshore structures will also impact other areas of the law, including questions of the choice of law. In international business fraud cases, for example, Courts have considered in which forum the “primary tort” occurred, when deciding questions of which law to apply in fraud cases. See e.g., LaSala v. Bank of Cyprus Public Co. Ltd., 510 F. Supp. 2d 246, 266 n.7 (S.D.N.Y. 2007) (“Thus, normal interest analysis is appropriate even for plaintiffs’ aiding and abetting claim.”); Cromer Fin Ltd v. Berger, 2003 U.S. Dist. LEXIS 10554 at *8 (S.D.N.Y. 2003) (“This Court has held that, as the forum in which the primary tort occurred, New York has the greatest interest in applying its law to the claim of aiding and abetting fraud.”). But when the fraud is international in scope, and involves many different countries and participants internationally, and add on top of that new technologies that no one fully understands, the question of where the “forum” or where is it “convenient” to litigate is no longer an easy one to answer for the courts. On the other hand, U.S. courts are already woefully overburdened with cases and it is questionable that they can effectively handle the flood of litigation that would ensue if many new cases are filed and fully litigated to conclusion here.

A review of the case law demonstrates that all international business fraud cases are different from one another. Each case presents new and unique circumstances that need to be evaluated anew by the U.S. courts facing them. There is no one blanket rule that can be applied across the board and every case needs to be analyzed separately before one can effectively say whether the foreign plaintiff does or does not have claims in the United States. Throughout my career, however, I have definitely noticed a rise in international litigation claims being pursued in the United States courts and in cooperation between U.S. courts and foreign courts. Chapter 15 of the U.S. Bankruptcy Code, which allows for recognition of foreign bankruptcies in the U.S. is another example. Same is true for Section 1782, which allows for discovery (e.g. document productions and depositions) in the United States in aid of a foreign proceeding (e.g. a criminal investigation or a divorce). More and more cases are being filed and they are bringing new challenges for the courts and litigators alike.

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