City firm avoids order to pay out escrow funds due to prosecution risk

Clyde & Co: In a bind

A major City law firm should not be ordered to pay into court $325m it is holding in an escrow account, because it risks being prosecuted in America if it does, the High Court has ruled.

Mr Justice Miles said Clyde & Co was “in a bind which it did not create and from which it would like to be released” – but not while it was at risk of criminal prosecution or civil liability.

This case is about $325m held on trust in a NatWest bank account by Clyde for PetroSaudi Oil Services (Venezuela) Ltd (POS).

Clyde acted for POS in an international arbitration with Venezuelan company PDVSA Servicios over a gas drilling contract.

It also agreed to act as escrow agent – subject to information barriers separating those acting for POS and those acting as escrow agents – under a tri-partite agreement subject to the orders of the arbitral tribunal.

The tribunal made a final award in favour of POS on 17 July 2020 for an amount greater than the monies held in escrow and ordered Clyde to pay it to POS.

PDVSA then brought a claim in the English court seeking to stop this, pending a challenge to the final award in the French courts. It obtained an interim injunction but this was discharged after a full hearing, meaning the funds are payable to POS.

However, there have been proceedings in both Malaysia and the USA in which it has been alleged that the funds represent the proceeds of the 1MDB fraud. POS denies this.

1MDB was a wealth fund owned by the Malaysian state. The Malaysian government alleges that billions were looted from 1MDB and then laundered.

“The scandal has spawned numerous proceedings around the world,” the judge noted. A former Malaysian prime minister was jailed over it last year.

Meanwhile, last September, the District Court for the Central District of California acceded to an application from the US Department of Justice (DOJ) to issue an in rem forfeiture warrant over the funds. The warrant directs US law enforcement officers to arrest and seize the funds.

The warrant was served on Clyde in London and the DOJ contends that this gives the Californian court forfeiture jurisdiction over the funds. It has threatened Clyde with prosecution if it transfers them to POS.

Advice from US lawyers indicated that this was a real possibility and so it has not made monthly payments to POS for business and legal expenses that the High Court has allowed.

POS commenced the current claim last November, seeking an order to pay the funds into court and then pay out £2.2m in unpaid monthly amounts for creditors and $2.6m in unpaid legal fees, and a monthly payment of $1.1m to cover both thereafter.

Though the DOJ opposes this, it did not seek to intervene in the hearing.

Miles J said Clyde’s overall position was that “it would like to bring the escrow arrangement to an end and that it has no wish to obstruct POS from paying its business expenses or legal fees” – but not at the risk of exposing itself to a real and material risk of criminal prosecution or civil liability in the US by transferring the funds, even by paying them into court.

The maximum sentence in the US for doing so is five years. Expert evidence adduced by Clyde from a retired US judge was that the DOJ “has a policy of prosecuting individuals, so that any person in Clyde responsible for effecting a transfer of the funds would potentially be open to prosecution”. The potential fine is double any amounts paid to POS.

Miles J concluded that “while the risk of prosecution is perhaps not high, there is a real (as opposed to theoretical or remote) risk that the DOJ will prosecute Clyde if it parts with the funds, even into the English court under a compulsory order (the making of which Clyde has opposed).

“I am persuaded by the evidence of Judge Gleeson, who has great experience in this area, that there is a such a risk of prosecution.

“He says in essence (and I accept) that an order of the English court for the sums to be paid into the English court might dissuade the DOJ from prosecuting, or a court from convicting, but there remains a real risk of prosecution.”

This was despite the fact that, without releasing the funds, POS would not be able to pay its creditors or defend itself in the various proceedings it is facing.

The judge noted too that POS has not taken all the steps it could to seek a variation of the US warrant.

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