Thursday, February 25, 2010

Investment Firm Not Liable Under RICO for Customer's Money Laundering Scheme

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

The receivers of seven insurance companies that lost nearly $200 million to Martin Frankel, an investor who had purchased the companies in order to loot their assets, could not prevail in a RICO conspiracy claim against Dreyfus Service Corp., the investment company that Frankel used to launder the insurance companies’ funds before moving them to his personal Swiss bank account, the U.S. Court of Appeals in New Orleans has ruled. Their claim failed because Dreyfus was not aware of Frankel’s money laundering activities.

According to the receivers, Dreyfus was liable for treble damages under RICO because the investment company had “effectively joined the conspiracy” by deliberately turning a blind eye to Frankel’s “obviously suspicious” activities.

Had Dreyfus discharged its duties properly, the receivers argued, the investment company would have uncovered Frankel’s money laundering scheme and the insurance companies’ losses would have been averted.

Deliberate Ignorance

The receivers tacitly acknowledged that no one at Dreyfus actually knew about Frankel’s ongoing activities. Nevertheless, they argued that constructive knowledge—and thus a violation of the federal money laundering statute, a RICO predicate act—could be established under the doctrine of deliberate ignorance. Deliberate ignorance existed when a conscious effort was made to avoid positive knowledge of unlawful conduct so one's personal knowledge could be denied if the lawbreaker was caught, the court observed. The doctrine required a conscious action that, in light of the known facts, amounted to a “charade of ignorance.”

Although the structure and speed of Frankel’s transactions were “suggestive of money laundering” and Dreyfus’s efforts to identify the origin, legitimacy, and ultimate destination of the funds passing through its accounts were “non-existent,” evidence failed to show that anyone at Dreyfus either knew or “purposely contrived” to avoid knowing that Frankel was engaging in money laundering, the court decided.

Purposeful Contrivance

The receivers argued that purposeful contrivance was present because Dreyfus’s management: (1) knew that the structure of their corporate policies on the creation, verification, and maintenance of investment accounts created a high probability that the accounts would be used for money laundering; (2) knew what steps it could take to detect money laundering activity; and (3) declined to take those steps. At worst, however, Dreyfus’s activities rose to the level of recklessness, in the court's view. Frankel’s transactions went unnoticed because Dreyfus had not trained its service personnel to recognize the signs of money laundering.

The opinion is Chaney v. Dreyfus Service Corp., CCH RICO Business Disputes Guide ¶11,803.

No comments: