The Judiciary Strikes Back: OFAC's Blocking of Assets in Light of KindHearts v. Geithner
| Author | Erich C. Ferrari |
| Position | Founder and Senior Principal of Ferrari Legal, EC. |
| Pages | 02 |
Page 11
The comedian Dave Chappelle during a skit on his now off the air comedy program, "Chappelle's Show," once said, "Go ahead and sanction me with your army. Oh wait you don't have an army!"1 The skit was one in which Mr. Chappelle played the role of an African-American version of George W. Bush and the comment was made in regards to former United Nations Secretary General Kofi Annan.2 The comment was interesting and pertinent to the topic of this article for two reasons: 1) it demonstrated a commonly held belief that sanctioning is an ineffective way to exert influence in a foreign policy context, and 2) it shows that the general population does not understand what sanctions are and how they work.
This article is not about U.S. sanctions, but about a recent court decision. Yet to understand that decision and its implications, one must have an understanding as to how U.S. trade sanctions are administered and the legal authorities underlying their existence. This article will address those topics before diving headlong into the one hundred page order that constitutes the KindHearts Humanitarian Charitable Org. v. Geithner, decision {KindHearts); a decision which could dramatically impact the way U.S. domestic corporations do business internationally.3
To achieve this aim the author will first introduce the government agency responsible for administering U.S. sanctions: The United States Department of the Treasury Office of Foreign Assets Control (OFAC). While explaining how this agency works, attention will be paid to the statutory authority that empowers OFAC to block or freeze the assets of its targets. Next, this article will discuss the decision in KindHearts to see how the United States District Court for the Northern District of Ohio Western Division came to the conclusion in KindHearts that OFAC's blocking actions were unconstitutional. In doing so, this article will analyze the claims and defenses presented by the parties and how they were addressed by the court. In conclusion, this article will discuss how the decision could dramatically change the way businesses challenge OFAC blockings and the implication that will have on US companies engaging in transactions abroad.
Mr. Chappelle might be surprised to learn that armies are not responsible for the imposition and administration of the U.S sanctions programs. As mentioned earlier, the government agency responsible for administering U.S. trade sanctions is OFAC. OFAC administers fifteen different sanctions programs, some of which are country-based and some of which are subject-based.4 In furtherance of its mission, OFAC is authorized to levy civil and criminal penalties, block those assets of foreign and domestic individuals and entities that are deemed to be subject to U.S. jurisdiction, and to designate such individuals and entities as "Specially Designated Nationals" (SDNs).5 While OFAC has these powers, this article focuses on OFAC's ability to block assets and the impact those blockings have on individuals and entities operating both domestically and internationally. Such blockings are thought to constitute civil penalties, and indeed the court in KindHearts viewed the blocking in that case as such. Although a full length discussion of such distinction is outside the scope of this article, it is important to keep in mind when reading the decision in KindHearts, as the court there relies on legal authori-Page 12ties typically associated with criminal matters. To avoid confusion it should be remembered that blocking and designations are viewed as civil actions; while OFAC's use of criminal penalties is typically associated with criminal pecuniary penalties and referrals to the Department of Justice for prosecution.
OFAC's authority for these blockings arises from two main pieces of legislation: 1) the International Economic Emergency Powers Act (IEEPA) and 2) the Trading With the Enemy Act (TWEA).6 Traditionally, the TWEA, enacted in 1917, was the legislative vehicle through which sanctions and embargoes were imposed on foreign nations.7 In 1977, however, Congress amended the TWEA and enacted the IEEPA, which called for the President to declare a national emergency when dealing with an extraordinary or unusual threat to national security, economy, or foreign policy of the United States when that threat arises from, or in part from, a source outside of the United States.8 In addition, the IEEPA authorizes the President to block any property in which a foreign country or a national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States.9 In colloquial terms, "blocking" is what is referred to as the "freezing of assets."
The IEEPA authorizes the promulgation of sanctions programs by the Executive. Specific sanctions programs are implemented through executive orders. The Executive Order that instituted the Global Terrorism Sanctions—the sanctions at issue in KindHearts—was Executive Order (E.O.) 13,224.10 E.O. 13,224 provides that if an individual or entity is found acting, being owned by, controlled, associated with,11 assisting, sponsoring, or providing material support to designated terrorists, the individual or entity is designated as a Specially Designated Global Terrorist (SDGT) and its assets may be blocked or frozen.12 The executive's authority was further enhanced in this regard by the Patriot Act, which amended the IEEPA so as to allow OFAC to freeze assets pending an investigation.13 Moreover, the amendment allowed the Executive to freeze assets indefinitely and prohibit transactions to and from an individual or entity even without that individual or entity being designated an SDGT14 Nearly two years after these amendments, the Department of the Treasury promulgated regulations implementing E.O. 13,224; these regulations are found at 31 C.F.R. Part 594.15
Once OFAC has designated an individual or entity as an SDGT, all property and interest in property held by those persons that is subject to U.S. jurisdiction is blocked.16 In other words, those individuals and entities no longer have access to those assets. Property subject to blocking includes bank accounts, real property and even personal property such as computers.17 However, as will be seen in KindHearts, an individual or entity need not be designated an SDGT to have their assets blocked.
As ominous as all this sounds, 31 C.F.R. § 501.807 does provide procedures for individuals seeking to have their name or entity removed from OFAC's SDN list.18 Specifically, designees may submit evidence and arguments in support of a written request for reconsideration.19 Furthermore, the regulations allow for a designee to request an oral hearing in addition to their written request, however, OFAC is not obligated to grant such a hearing.20
KindHearts is a Toledo, Ohio based nonprofit organization whose stated aim is to administer humanitarian relief abroad.21 On February 19, 2006, OFAC froze the assets of KindHearts and provisionally designated KindHearts as an SDGT pending further investigation.22 At the time of the blocking, KindHearts had approximately one million dollars in various accounts frozen.23 The government also executed search warrants on Kind-Hearts' headquarters, as well as the residence of their President, Khaled Smaili.24 KindHearts was notified that the blocking was being implemented pending an investigation of KindHearts' provision of assistance, material and financial support to, and/or association with Hamas.25 According to the press release issued by the Department of the Treasury at the time of the blocking, KindHearts was suspected of contributing to Hamas-affiliated organizations.26 Moreover, the press release alleged that Kind-Hearts was acting as a replacement for the Holy Land Foundation for Relief and Development and the Global Relief Fund; two organizations that had previously been place on the SDN list as SDGTs.27
KindHearts brought suit in the United States Northern District Court of Ohio Western Division claiming that OFAC's action violated their Fourth Amendment Rights. The decision in KindHearts was remarkable because of its application of a Fourth Amendment analysis to OFAC's blocking actions.28 In making this determination the court addressed numerous claims raised by KindHearts, as well as the defenses put forth by OFAC.29 The ultimate finding was that OFAC's actions violated KindHearts'Page 13procedural due process rights guaranteed by the Fourth Amendment to the United States Constitution.30
KindHearts claimed that OFAC's actions constituted an unreasonable seizure; that the statutory provisions are void for vagueness; and that the blocking of KindHearts's assets was a denial of procedural due process.31
OFAC counter claimed that the Fourth Amendment has never been applied by the Supreme Court to the imposition of economic sanctions under the IEEPA and the TWEA and that any judicial desire to invoke the Fourth Amendment should be trumped by deference to the executive's unique role in foreign affairs.32 This second argument is one that has traditionally been relied upon by the judiciary in a variety of national security matters, particularly those involving economic sanctions.33
KindHearts argued that OFAC's block on its assets pending an investigation is an unreasonable seizure within the meaning of the Fourth Amendment.34 OFAC acted to block the assets without a warrant and relying only on reasonable suspicion that KindHearts met the criteria for...
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