Caught in the crosshairs: developing a Fourth Amendment framework for financial warfare.

Author:Jones, Chris

Table of Contents Introduction I. "Guerrillas in Gray Suits": The Treasury Department's Army A. The Rise of OFAC B. Preparing for Battle: OFAC's Designation Process C. Leveraging the Private Sector II. The Fourth Amendment and Twenty-First-Century National Security III. Fourth Amendment Challenges to OFAC Blocking Orders A. The Deference View: Sanctions Are Not a Seizure B. The Special Needs View: A Warrant Requirement Is Not Practical C. The Expansive Warrant View: OFAC Actions Are Not a Special Need D. The Maybe View: OFAC Actions Can Require a Warrant 1. Al Haramain on appeal 2. Kadi IV. Developing a Fourth Amendment Framework for Financial Warfare A. Reject Categorical Determinations 1. OFAC blocking actions are not entirely beyond the scope of the Fourth Amendment 2. OFAC actions shuold not be subject to a warrant requirement B. Adopt a Reasonableness Test to Evaluate OFAC Blocking Actions 1. The factors a. The person's known jurisdictional proximity to the United States b. The legal sufficiency of the designation package c. Warrant practicability d. Designations "pending investigation" e. The authorizer for the blocking 2. The remedy 3. The application Conclusion Introduction

The key officials shuffle into the conference room at "the Annex," compensating for lack of sleep with caffeine. The meeting has only one item on the agenda: how to respond to the Russian incursion into Ukraine. (1) The briefing slides for the meeting, however, are not what one would expect, such as intelligence on "little green men" (i.e. Russian soldiers in unmarked military uniforms), (2) possible military targets, or options for covert action. Instead, the "guerrillas in grey suits" (3) debate a different set of questions: What sectors of the Russian economy are most vulnerable? Which oligarchs are closest to Putin? How much do we know about the Russian banking industry? This is not a meeting of the National Security Council, the Joint Chiefs of Staff, or the State Department. Instead, it is a meeting of the Office of Foreign Assets Control (OFAC)--"one of the government's most powerful yet least understood offices." (4)

In the twenty-first century, economic sanctions are "fast becoming the policy tool of choice for the United States." (5) For a wide range of foreign policy challenges--terrorism; nuclear proliferation; issues in countries including Iran, Iraq, Libya, Syria, and Ukraine; and even persons undermining democratic institutions in Zimbabwe (6)--the United States relies heavily on sanctions to advance its foreign policy goals. In 2014, the Obama administration "confronted a long list of security challenges," and it "responded to each with the same tool: financial sanctions." (7) Indeed, there are currently twenty-nine separate sanctions programs in place. (8)

The reach of these programs is staggering. OFAC--the small office located within the Treasury Department responsible for implementing these sanctions--issues sanctions that apply to U.S. citizens located anywhere in the world and all persons and entities within the United States. (9) It also asserts jurisdiction over any money that enters the U.S. financial system--a significant amount of global commerce given that "all financial roads lead to New York." (10) Practically, the burden falls on the private sector, namely banks, to enforce sanctions. When OFAC determines that a person (natural or corporate) is subject to sanctions, financial institutions are then responsible for freezing any assets currently held by this person and prohibiting any future transfers to these people. (11) The penalties for failing to comply are enormous. Since 2008, OFAC has announced at least 156 civil penalties for sanctions violations totaling S4.1 billion in penalties. (12) In Summer 2014, BNP Paribas made headlines with an $8.9 billion dollar settlement with various U.S. entities, including a $963 million settlement with OFAC, for a host of sanctions violations. (13) Given these penalties (and the need to access U.S. markets), ignoring OFAC is simply "not an option for most banks or businesses." (14)

The financial stakes of U.S. sanctions programs are enormous. Although the information available publicly is limited, a few examples highlight the scope of how much money OFAC directly disrupts. In 2004, an official testified that OFAC interdicted "at least $1 million and sometimes as much as $35 million" every week. (15) A 2007 OFAC report, meanwhile, announced it had disrupted more than $1 billion worth of assets of narcotraffickers and their networks. (16) OFAC has also used sanctions to target gangs and organized crime, including the El Salvadoran gang MS-13. (17) In 2011, OFAC froze $37 billion of Libyan government assets in one fell swoop as the civil war during the Arab Spring was unfolding. (18) The indirect impact of sanctions is also massive. Sanctions, as intended, have had a large impact on targeted countries. A senior U.S. official testified in 2014 that Iran's economy is twenty-five percent smaller than it would have been without U.S. sanctions. (19) Similarly, although there are many factors that have contributed to the recent economic downturn in Russia, sanctions have played a role. (20)

Caught in the crosshairs of this financial warfare is a significantly underappreciated legal issue: Do economic sanctions, which arguably "seize" property without a warrant, violate the Fourth Amendment? Historically, this issue was not a problem because economic sanctions were targeted entirely against foreign countries--entities that do not enjoy Fourth Amendment protection.

In today's complex financial landscape, however, the issue is not so simple. Many financial transactions involve a party protected, or at least arguably protected, by the Fourth Amendment. In the wake of anti-terrorism-financing measures taken after 9/11, a number of people challenged the Treasury Department's authority to freeze assets without a warrant. Courts have come to four very different answers. Some courts have held that the Fourth Amendment simply does not apply, or that it applies, but a special needs exception precludes a warrant. Other courts have held that a warrant is generally required or that, based on the facts of the case, a warrant is required in that instance.

This Note conducts the first comprehensive analysis of these cases in order to develop a new Fourth Amendment jurisprudential framework. Currently, there is very little legal literature discussing OFAC. There are a few pieces, for example, criticizing various aspects of the due process afforded in an OFAC "blocking" action--an announcement that entities holding assets subject to sanctions must freeze them. (21) To the extent that some commentators flagged the Fourth Amendment issue many years ago, their analysis of the initial cases on the subject adopted an all-or-nothing view. A note (22) and an unpublished paper (23) staked out one end of the spectrum: OFAC actions clearly violate the Fourth Amendment. Another note came to the exact opposite conclusion, incorrectly predicting that the first court decision to hold that OFAC blocking orders violated the Fourth Amendment was "likely an anomaly." (24) These all-or-nothing views--OFAC actions clearly violate or do not violate the Fourth Amendment--do not account for the myriad factual situations that arise. While courts have started to recognize these complexities, there has been no effort to develop a comprehensive framework to analyze the Fourth Amendment constitutionality of OFAC actions.

This Note aims to achieve that goal. Part I explains in detail how the OFAC sanctions process works. This institutional account is crucial to a new framework for analyzing the Fourth Amendment constitutionality of OFAC actions. Part II outlines current Fourth Amendment doctrine. In particular, Part II discusses the "special needs" exception, which features prominently in cases about OFAC blocking orders. Part III analyzes the cases that have challenged OFAC blocking orders. Four major viewpoints have emerged about the constitutionality of OFAC blocking orders: (1) they do not present a cognizable Fourth Amendment claim; (2) they are subject to the Fourth Amendment "special needs" exception; (3) they violate the Fourth Amendment; and (4) they may violate the Fourth Amendment, depending on the facts. Lastly, Part IV proposes a new jurisprudential framework for evaluating the Fourth Amendment constitutionality of OFAC blocking orders. To resolve the fractured status quo, I propose a multifactor reasonableness test with specific criteria to provide clear guidance to courts and the executive branch.

  1. "Guerrillas in Gray Suits": The Treasury Department's Army

    1. The Rise of OFAC

      Economic warfare is nothing new in international relations.25 In the United States, presidential authority to use economic sanctions against foreign countries was first officially codified in 1917 by the Trading with the Enemy Act (TWEA). (26) A few decades later, the United States officially established the Office of Foreign Assets Control to target Chinese assets during the Korean War. (27)

      The legal authorities for the vast majority of today's sanctions programs were created in the late 1970s. Under the TWEA, there was no procedure in place to terminate a national emergency declared by the President. In the 1970s, Congress created the Special Committee on National Emergencies and Delegated Emergency Powers to address the fact that "emergency laws and procedures in the United States ha[d] been neglected for too long," and the committee recommended passing the National Emergencies Act. (28) Ultimately, Congress decided to "delineate the Executive Branch's exercise of emergency economic powers in response to wartime and peacetime crises." (29) It passed two pieces of legislation that underpin nearly all of the sanctions programs today: the National Emergencies Act (NEA) (30) and the International Emergency Economic...

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