Washington, D.C. (January 4, 2024) - In a continuation of efforts to increase the bite of U.S. sanctions, on December 29, 2022, President Biden signed the Consolidated Appropriations Act of 2023, Pub. L. 117–328 (H.R. 2617), into law (CAA). This Act provides the Attorney General with authority to send the proceeds from certain forfeited asset sales of sanctioned Russian oligarchs and other entities supporting Russia's invasion of Ukraine to the Ukrainian people. Earlier this year, the Biden Administration approved the first transfer of such assets when Attorney General Merrick Garland authorized the transfer of $5,379,876.96 from Russian oligarch Konstantin Malofeyev's bank account as foreign aid to Ukraine.

Authority to Send Proceeds from Sale of Certain Forfeited Assets to Ukraine

An amendment to the CAA created § 1708(a), which provides: "The Attorney General may transfer to the Secretary of State the proceeds of any covered forfeited property for use by the Secretary of State to provide assistance to Ukraine to remediate the harms of Russian aggression towards Ukraine." H.R. 2617–742 (Dec. 29, 2022) (enacted) (emphasis added). "Any such transfer shall be considered foreign assistance...[and] the Attorney General in consultation with the Secretary of the Treasury and the Secretary of State" must submit a report to the appropriate congressional committee within 15 days. Nothing in the CAA changes the judicial or administrative appeals process.

The CAA's transfer provision applies to two broad types of "covered forfeited property." H.R. 2617–742, § 1708(c)(2) (emphasis added). First, "The term 'covered forfeited property' means property forfeited under" (1) 18 U.S.C. Ch. 46 (civil and asset criminal forfeiture); (2) 18 U.S.C. § 1963 (Racketeer Influenced and Corrupt Organizations Act) and "which property belonged to, possessed by, or was controlled by a person subject to sanctions." H.R. 2617–742, § 1708(c)(2) (emphasis added). Second, the term "covered forfeited property" also includes property "involved in an act in violation of sanctions enacted pursuant to Executive Order 14024, and as expanded by Executive Order 14066 of March 8, 2022, and relied on for additional steps taken in Executive Order 14039 of August 20, 2021, and Executive Order 14068 of March 11, 2022." Id. In other words, the Act permits the Attorney General to seize and forfeit property formerly owned or controlled by Russian oligarchs, potentially ensnaring purchasers who would have to prove being an innocent owner. See 18 U.S.C. § 983(d).

Konstantin Maloyev's forfeited bank account assets implicate the first type of "covered forfeited property" under the CAA.

The Contents of Konstantin Malofeyev's Bank Account Sent to Ukraine

On December 19, 2014, the Department of Treasury's Office of Foreign Assets Control placed Konstantin Malofeyev on the Specially Designated Nationals and Blocked Persons list (SDN List) for violations of Executive Order 13,660 related to the Government of the Russian Federation's annexation of the Crimea region of Ukraine. Verified Civil Complaint for Forfeiture, United States v. $5,379,876.94 in United States Currency Formerly on Deposit in Sunflower Bank, N.A. Account 1101996560, Held in the Name of "OFAC Blocked Account Maloyfeyev," Case No. 1:22-cv-10148-JMF, at ¶ 13 (N.Y.S.D. Nov. 30, 2022). On April 4, 2022, a Southern District of New York grand jury indicted Malofeyev with conspiracy to violate the International Emergency Economic Powers Act ("IEEPA"), 50 U.S.C. § 1705. Superseding Indictment, United States v. Konstantin Malofeyev, Case No. 21-cr-676 (S.D.N.Y. Apr. 4, 2022) (subsequently unsealed).

Malofeyev allegedly employed U.S. citizen John Hanick to engage in various financial transactions involving Malofeyev's blocked property in violation of IEEPA. See Verified Civil Complaint for Forfeiture, ¶ 17. Malofeyev and Hanick thereafter allegedly made an investment of approximately $10 million in a Texas Bank via a Seychelles-based shell company called Investment Market Group Limited. Id. at ¶ 20(b). The Texas Bank filed a blocked asset report with OFAC regarding Malofeyev's ownership of the shell company. Id. at ¶ 20(e). An unindicted Russian attorney, however, falsely represented that ownership over the shell company had been transferred to an unrelated third party. Id. at ¶ 21(f). In June 2016, the Texas Bank merged into Sunflower Bank. Id. at ¶ 22(a).

The U.S. sought forfeiture of the approximately $5.4 million in the Sunflower Bank account under the authority of 18 U.S.C. § 981(c) for violations of IEEPA. On February 2, 2023, the U.S. sought a judgment of forfeiture, United States v. $5,379,876.94, DE 6 (S.D.N.Y. Feb. 2, 2023), which the district court granted the same day, Id. at DE 8 (S.D.N.Y. Feb. 2, 2023).

After judgment, the Department of Justice determined Malofeyev's seized assets constituted "covered forfeited property"; the civil asset forfeiture statute authorized the forfeiture; and the currency belonged to a person subject to sanctions. In May 2023, Attorney General Garland authorized the transfer of these assets to Ukraine.

Conclusion

In addition to $45 billion in the Additional Ukraine Supplemental Appropriations of 2023, Congress provided for allowing as forfeited cash the proceeds from the sale of forfeited assets from individuals violating certain U.S. laws and/or subject to U.S. sanctions. While Konstantin Malofeyev's case involves the first actual transfer of Russian-Oligarch-related assets sent to Ukraine, it will not be the last. In fact, the Biden Administration's ability to supplement foreign aid to Ukraine with Russian Oligarchs' assets may prove to incentivize Justice Department forfeiture actions involving "covered forfeited property."

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