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United States v. $1

United States District Court, District of Columbia

August 15, 2018

UNITED STATES OF AMERICA, Plaintiff,
v.
$1, 071, 251.44 OF FUNDS ASSOCIATED WITH MINGZHENG INTERNATIONAL TRADING LIMITED; $347, 446.93 OF FUNDS ASSOCIATED WITH MINGZHENG INTERNATIONAL TRADING LIMITED; $42, 632.00 OF FUNDS ASSOCIATED WITH MINGZHENG INTERNATIONAL TRADING LIMITED; $30, 258.00 OF FUNDS ASSOCIATED WITH MINGZHENG INTERNATIONAL TRADING LIMITED; $253, 638.25 OF FUNDS ASSOCIATED WITH MINGZHENG INTERNATIONAL TRADING LIMITED; and $157, 749.07 OF FUNDS ASSOCIATED WITH MINGZHENG INTERNATIONAL TRADING LIMITED; Defendants.

          MEMORANDUM OPINION ADOPTING REPORT & RECOMMENDATION OF THE MAGISTRATE JUDGE

          KETANJI BROWN JACKSON UNITED STATES DISTRICT JUDGE.

         Plaintiff United States of America commenced this civil forfeiture action in rem against $1, 902, 975.69 in illicit funds belonging to Mingzheng International Trading Limited (“Mingzheng”)-a front company that existed to launder money on behalf of the Democratic People's Republic of Korea (“North Korea”). (See Compl., ECF No. 1, ¶¶ 1-2.) During the course of an investigation into Mingzheng's activities, the FBI identified the target funds as having passed through the U.S. financial system, in route to, or from, North Korea. (See Aff. in Supp. of Pl.'s Mot. for Entry of Default J. & Order of Forfeiture, ECF No. 19-1, at 3.)[1] Eventually, these funds were frozen in accounts that Mingzheng maintained with six U.S. financial institutions, and the government commenced in rem civil forfeiture proceedings against the targeted funds.

         To that effect, on June 14, 2017, Plaintiff filed a Verified Complaint for Forfeiture In Rem. (See generally Am. Compl.) Mingzheng failed to respond, and at the government's request, the Clerk of the Court entered a default in this case. (See Clerk's Entry of Default, ECF Nos. 9-14.) The government subsequently filed a motion for default judgment pursuant to Federal Rule of Civil Procedure 55(b), and requested that this Court order the forfeiture of the named funds. (See generally Pl.'s Mot. for Default J., ECF No. 15.) On February 2, 2018, this Court referred the government's motion to a Magistrate Judge, and the matter was randomly assigned to Magistrate Judge Michael Harvey. (See Minute Order of Feb. 1, 2018; Minute Entry of Feb. 1, 2018.) Magistrate Judge Harvey ordered two rounds of supplemental briefing from the government and held a hearing regarding the government's motion. Then, on June 29, 2018, Magistrate Judge Harvey issued a Report and Recommendation recommending that this Court grant the government's motion for default judgment and order that the $1, 902, 975.69 that associated with Mingzheng be forfeited. (See R. & R., ECF No. 20, at 2, 21.)[2]

         In reaching that decision, Magistrate Judge Harvey found that the government satisfied both the substantive and procedural requirements for a default judgment, which stem from Federal Rule of Civil Procedure 55 and Supplemental Admiralty and Maritime Claims Rule G of the Federal Rules of Civil Procedure. (See Id. at 6-19.) Starting with the procedural requirements, Magistrate Judge Harvey concluded that the government had provided more than adequate notice to the general public and the individual entities who had a known interest in the targeted funds. (See Id. at 10-12.) See also Fed.R.Civ.P. Supp. R. G(4) (requiring that such notice be provided). The government notified the public by posting a notice “for 30 consecutive days on the website www.forfeiture.gov[, ]” and it further provided the three potential direct claimants with reasonable notice by contacting “law enforcement officials at the U.S. embassies in these countries, and effect[ing] service consistent with each country's laws[.]” (R. & R. at 10.) As to the remaining procedural requirements, Magistrate Judge Harvey found that the government's complaint satisfied Supplemental Rule G(2)(a)-(e) because the complaint was “verified; identifie[d] the bases for jurisdiction and venue . . .; describe[d] the property by identifying the specific amount of funds associated with Mingzheng held at each of six U.S. banks . . .; and identifie[d] the provisions under which forfeiture is sought[.]” Id. at 12 (discussing Fed.R.Civ.P. Supp. R. G(2)(a)-(e).)

         As to the substantive requirements, Magistrate Judge Harvey found that the government alleged ample facts in its complaint to establish a reasonable belief that the government could prove by a preponderance of the evidence that these funds were subject to civil in rem forfeiture, as required by Fed.R.Civ.P. Supp. R. G(2)(f). (See Id. at 8, 18-19.) The government's complaint notes that no person or entity may legally assist North Korea in accessing the U.S. financial system without a license from the federal government, pursuant to regulations issued under the International Emergency Economic Powers Act (“IEEPA”), 50 U.S.C. § 1701, et seq., and it alleges that Mingzheng had violated that prohibition with regard to the targeted funds. (See Compl. ¶¶ 32-35; 37-40.) Additionally, the complaint explains that Mingzheng also violated the federal money laundering statute (see Id. ¶¶ 1-2), which prohibits individuals from moving money within, to, or from the United States with the intent to promote a “specified unlawful activity[, ]” 18 U.S.C. § 1956(a)(2)(A), such as a violation of the IEEPA, see Id. § 1956(c)(7)(D). Either of these two alternative theories suffice to subject Mingzheng's illicit funds to civil forfeiture. See Id. § 981. (See also R. & R. at 6.)

         After explaining these conclusions, Magistrate Judge Harvey informed the parties of their right to file written objections to specific portions of his report, and explained that such submissions must state the basis for any objection. The parties had 14 days after they received the Magistrate Judge's Report and Recommendation to file any such objections, see LCvR 72.3(b), but no objections were submitted.

         Given all of the above and after reviewing Magistrate Judge Harvey's report, this Court agrees with the Report and Recommendation's thorough analysis and conclusions. The Court will therefore ADOPT the Report and Recommendation in its entirety. Accordingly, Plaintiff's Motion for Default Judgment will be GRANTED and an order of forfeiture against Mingzheng totaling $1, 902, 975.69 will issue.

         A separate Order consistent with these conclusions will accompany this Memorandum Opinion.

         REPORT AND RECOMMENDATION

         Plaintiff United States of America (“Plaintiff” or “the government”) brought this civil forfeiture action in rem against funds totaling $1, 902, 975.69 (“Defendant Funds”) associated with Mingzheng International Trading Limited (“Mingzheng”), which are currently held in blocked funds accounts at six U.S. financial institutions. Plaintiff has now filed a Motion for Default Judgment pursuant to Rule 55(b) of the Federal Rules of Civil Procedure 55(b), 18 U.S.C. § 983(a)(4)(A), and Rule G of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions (the “Supplemental Rules”). The motion was referred to the undersigned for a Report and Recommendation on February 1, 2018, and, after two rounds of supplemental briefing and an oral argument, is ripe for resolution.[1] For the reasons set forth below, the undersigned recommends granting Plaintiff's Motion and issuing an order of forfeiture against the Defendant Funds totaling $1, 902, 975.69.

         I. STATUTORY FRAMEWORK AND BACKGROUND

         On June 14, 2017, the government filed a Verified Complaint for Forfeiture In Rem (the “Complaint”) against Defendant Funds totaling $1, 902, 975.69 associated with Mingzheng in connection with an alleged scheme to launder U.S. dollars on behalf of sanctioned entities in the Democratic People's Republic of Korea, commonly known as North Korea. [Dkt. 1]. This action arises from a FBI investigation of Mingzheng, a company incorporated in Hong Kong, for violations of the International Emergency Economic Powers Act (the “IEEPA”), 50 U.S.C. § 1701 et seq., among other statutes. Id., ¶ 1.

         The IEEPA grants the President of the United States authority to regulate “any unusual and extraordinary threat, ” originating in whole or in substantial part outside of the U.S., to the national security, foreign policy, or economy of the United States. 50 U.S.C. § 1701; [Dkt. 1, ¶ 1]. The authority is expansive, and includes the power to investigate, regulate, or prohibit payments “between, by, through, or to any banking institution” to the extent that they involve an interest of any foreign country or national, and to prohibit transactions involving any property in which a foreign country or national has an interest. 50 U.S.C; § 1702; [Dkt. 1, ¶ 1]. Pursuant to Executive Order 13382 and the regulations implementing it, 31 C.F.R. § 544.101 et seq., no U.S. person may provide financial or other services to a person or entity listed as a “Specially Designated National, ” or “SDN, ” except as authorized or licensed by the Treasury Department's Office of Foreign Asset Controls (“OFAC”); nor may a non-U.S. person “cause the provision of financial or other services by a U.S. person for the benefit” of a SDN without the permission of OFAC. [Dkt. 1, ¶¶ 8-9 (citing 31 C.F.R. § 544.405, 50 U.S.C. § 1705)]. Violation of those provisions is a crime pursuant to 50 U.S.C. § 1705, and 18 U.S.C. § 371 criminalizes conspiracy to violate the IEEPA. Id., ¶ 6.

         U.S. financial institutions must comply with OFAC's sanctions programs, as well as with anti-money laundering requirements set forth in the Bank Secrecy Act, a statute administered by the Financial Crimes Enforcement Network (“FinCEN”). Id., ¶ 11. These anti-money laundering requirements include measures focused on regulating foreign financial institutions conducting U.S. dollar transactions, which are processed via correspondent bank accounts in the United States.[2]Id., ¶ 12. The federal anti-money laundering statute, 18 U.S.C. § 1956, makes it a crime to transport, transmit, or transfer (or attempt or conspire to transport, transmit, or transfer) funds or a monetary instrument to a place in the United States from a place outside of the United States with the intent to promote specified unlawful activity, including violating the IEEPA. Id. ¶¶ 15-17 (citing 18 U.S.C. § 1956(a)(2)(A), (c)(7)(D), (h)). A provision of the Bank Secrecy Act enacted as Section 311 of the USA PATRIOT Act provides FinCEN a range of options, known as “special measures, ” to be used to target money laundering and terrorist financing concerns. Id., ¶ 20 (citing 31 U.S.C. § 5318A). Violation of such special measures is a crime pursuant to 31 U.S.C. § 5322. Id.

         Finally, any property that constitutes or is derived from proceeds traceable to a violation of the IEEPA, and any property involved in a transaction or attempted transaction that violates the federal anti-money laundering statute, is subject to forfeiture. Id., ¶¶ 18-19 (citing 18 U.S.C. § 981(a)(1)(A), (C)).

         In March 2013, OFAC denominated North Korea's primary foreign exchange bank, the state-run Foreign Trade Bank, a SDN. Id., ¶¶ 1, 32. In May 2016, FinCEN made a Section 311 finding deeming the entire North Korean financial sector as a primary jurisdiction of money-laundering concern, noting that it consists exclusively of state-controlled financial institutions, which continue to use front companies to conduct transactions supporting the proliferation of weapons of mass destruction and development of weapons in violation of international and U.S. sanctions. Id., ¶¶ 22-23. According to the Complaint, investigations by law enforcement have discovered that North Korean financial facilitators engage in wire transfers of payments denominated in U.S. dollars from foreign financial institutions overseas, which are cleared through a U.S. correspondent bank account and then transmitted to offshore accounts maintained by front companies on behalf of North Korean financial institutions. Id. at 25. Pursuant to a restructuring of the North Korean banking industry in the early- to mid-2000s, North Korean banks are required to maintain currency clearing accounts at the Foreign Trade Bank, which are used to clear transactions among North Korea's commercial banks. Id., ¶ 31. FinCEN's Section 311 finding specifically noted that the Foreign Trade Bank used front companies to facilitate transactions, processed through U.S. correspondent accounts, involving millions of U.S. dollars. Id., ¶¶ 34-35.

         The Complaint alleges that confidential sources have identified Minzheng as a front company laundering U.S. dollar payments on behalf of the Foreign Trade Bank through a covert Chinese branch of the bank in Shenyang. [Dkt. 1, ¶¶ 37-40]. The government has identified twenty U.S.-dollar wire transfers in October and November 2015 (comprising the Defendant Funds) either sent or received by Minzheng, each of which was subject to a blocking order by OFAC because it involved a SDN-namely, the Foreign Trade Bank-whose property and interests in property are blocked pursuant to U.S. law.[3] [Dkt. 1, ¶ 45; Dkt. 19-1 at 4-5]. It asserts, based on information from a confidential source, that many of these transfers included coded numbers used by the Foreign Trade Bank to instruct Kim Tong Chol to make the payments. [Dkt. 1, ¶ 42; Dkt. 19-1 at 6- 7]. According to the government, other transactions involved a party that was previously used as a supplier for North Korean purchases managed by the Foreign Trade Bank, a front company operated by a covert Foreign Trade Bank branch, and other front companies allegedly associated with the Foreign Trade Bank. [Dkt. 19-1 at 7-10]. The government alleges that all of these transactions were made on behalf of the Foreign Trade Bank [Dkt. 19-1 at 5] and that they were accomplished without a license from OFAC [Dkt. 1, ¶¶ 59-60].

         In addition, the Complaint and the government's other submissions allege that Minzheng conducted numerous illegal transactions with North Korean financial facilitators, such as Dandong Hongxiang Industrial Development Company Ltd., an entity-sanctioned by the Treasury Department and the subject of federal criminal charges in the District of New Jersey-that acted for a sanctioned North Korean bank that is subordinate to the Foreign Trade Bank; ZTE Corporation, a company which the government alleges has significant relationships with North Korean commercial enterprises, and which recently pled guilty to violations of U.S. sanctions; and Dandong Kehua Economy and Trade Co., and Dandong Zhicheng Metallic Material Co., Ltd, companies designated by OFAC as SDNs for violations of sanctions against North Korea. [Dkt. 1, ¶¶ 47-58; Dkt. 19-1 at 10-13].

         In light of these allegations, the government seeks forfeiture of $1, 902, 975.69 in funds pursuant to 18 U.S.C. § 981(a)(1)(A), which authorizes forfeiture of property “involved in a transaction or attempted transaction in violation of [18 U.S.C. §] 1956, ” the federal money laundering statute, and pursuant to 18 U.S.C. § 981(a)(1)(C), which authorizes forfeiture of property “which constitutes or is derived from proceeds traceable to a violation” of the IEEPA.[4]

         II. LEGAL STANDARDS

         Rule 55 of the Federal Rules of Civil Procedure sets out a two-step process for entry of a default judgment. See Bricklayers & Trowel Trades Int'l Pension Fund v. KAFKA Constr., Inc., No. 16-CV-01424 (CRC), 2017 WL 3475014, at *2 (D.D.C. Aug. 11, 2017). A party must first request the Clerk of Court to note default against the defendant for failing to “plead or otherwise defend.” Id. (quoting Fed.R.Civ.P. 55(a)). Rule 55 then allows a court to enter a default judgment upon the party's request. Fed.R.Civ.P. 55(b)(2). Default judgment “must normally be viewed as available only when the adversary process has been halted because of an essentially unresponsive party. In that instance, the diligent party must be protected lest he be faced with interminable delay and uncertainty as to his rights.” Jackson v. Beech, 636 F.2d 831, 836 (D.C. Cir. 1980) (quoting H.F. Livermore Corp. v. Aktiengesellschaft Gebruder Loepfe, 432 F.3d 689, 691 (D.C. Cir. 1970)). However, a notation of default against a defendant does not automatically entitle a plaintiff to a default judgment; instead, “the defendant['s] default notwithstanding, the plaintiff is entitled to a default judgment only if the complaint states a claim for relief.” Jackson v. Corr. Corp. of Am., 564 F.Supp.2d 22, 26-27 (D.D.C. 2008) (quoting Descent v. Kolitsidas, 396 F.Supp.2d 1315, 1316 (M.D. Fla. 2005)); see also City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 137 n.23 (2d Cir. 2011) (stating, “Most of our sister circuits appear to have held expressly that a district court may not enter a default judgment unless the plaintiff's complaint states a valid facial claim for relief, ” and collecting cases from the First, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth, ...


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