Executive Order 13438: Blocking Property of Certain Persons Who Threaten Stabilization Efforts in Iraq
Released: 2014-01-24T00:00:00

Summary:
On July 17, 2007, President Bush issued Executive Order 13438, Blocking Property of Certain Persons Who Threaten Stabilization Efforts in Iraq. It is the latest in a series of executive orders based on the national emergency declared by President Bush with respect to "the unusual and extraordinary threat to the national security and foreign policy of the United States posed by obstacles to the orderly reconstruction of Iraq, the restoration and maintenance of peace and security in that country, and the development of political, administrative and economic institutions in Iraq." Regulations implementing this Executive Order were issued on September 13, 2010.
The President's authority to issue the executive order stems from the International Emergency Economic Powers Act of 1977 (IEEPA). The executive order covers financial transactions and authorizes property controls with respect to three categories of persons: (1) individuals or entities determined "to have committed, or to pose a significant risk, of committing an act or acts of violence that have the purpose or effect of ... threatening the peace or stability of Iraq ..."; (2) individuals or entities determined "to have materially assisted, sponsored, or provided financial, material, logistical, or technical support for, or goods or services in support of, such an act or acts of violence or any person whose property and interests in property are blocked pursuant to this order ..."; and (3) individuals and entities determined "to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to this order...."
This report provides a brief history of the development of presidential powers in peacetime. It discusses some of the issues that might be raised in light of the contrast between the executive order's broad language and its narrow aim—supplementation of sanctions applicable to Al Qaeda and former Iraqi regime officials to cover terrorists operating in Iraq. It examines the reach of the executive order and provides legal analyses of some of the constitutional questions raised in the courts by similar sanctions programs, noting that the broad language of the executive order is not unprecedented. The Department of the Treasury's Office of Foreign Assets Control (OFAC) has published names of persons designated under the executive order and issued regulations further refining its terms and applicability. The report examines some of the procedures available to challenge OFAC sanction regulations and briefly discusses OFAC's rules, which may be of concern to attorneys representing individuals and entities subjected to sanctions or involved in transactions with sanctioned persons.
Since December 2009, there have been no additions to the list of blocked persons and several OFAC announcements removing designated individuals and entities from the List of Designated Nationals and Blocked Persons.

subsections: section_title: Background
paragraphs: On July 17, 2007, President Bush issued Executive Order 13438, Blocking Property of Certain Persons Who Threaten Stabilization Efforts in Iraq. It is the latest in a series of executive orders based on the national emergency declared by President Bush with respect to "the unusual and extraordinary threat to the national security and foreign policy of the United States posed by obstacles to the orderly reconstruction of Iraq, the restoration and maintenance of peace and security in that country, and the development of political, administrative and economic institutions in Iraq." The broad language of this executive order has been the subject of a degree of criticism as potentially reaching beyond insurgents in Iraq to third parties, such as U.S. citizens, who may unknowingly be providing support for the insurgency.
Having declared a national emergency, the President invoked authority available under the International Emergency Economic Powers Act of 1977 (IEEPA) and ordered the blocking of financial transactions and the institution of property controls with respect to any property or interests in property of persons determined to fall within three categories of individuals or entities threatening the stabilization efforts in Iraq. Implementation of this executive order is the responsibility of the Department of the Treasury's Office of Foreign Assets Control (OFAC), which currently "administers economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction." OFAC has promulgated regulations implementing sanctions involving the Balkans, Belarus, Burma, Cote d'Ivoire (Ivory Coast), Cuba, diamond trading, Iran, Iraq, Liberia, Libya, narcotics trafficking, weapons of mass destruction proliferation, North Korea, Sudan, Syria, terrorists, and Zimbabwe.
section_title: Recent Developments
paragraphs: On September 13, 2010, OFAC issued regulations implementing Executive Order 13438 as well as various other Executive Orders issued since 2003 to deal with the situation in Iraq. These regulations, the Iraq Stabilization and Insurgency Sanctions Regulations, 31 C.F.R., Part 576, elaborate to some extent on the Executive Order. For instance, they specify that the blocking orders for persons sanctioned under Executive Order 13438 are effective on "the earlier of the date of actual or constructive notice that such person's property and interests in property are blocked," rather than, for example, on the date of publication in the Federal Register of the person's designation as a Specially Designated Terrorist. The regulations also declare to be blocked any property or interests in property of any entity in which the blocked person has, directly or indirectly, a 50% interest, whether or not that entity has been designated under the Executive Order. Persons whose interests have been blocked may challenge the blocking orders in two ways. If they can claim "mistaken identity," they may seek to have the funds or property released by observing the procedures specified in 31 C.F.R. § 501.806. They also have the possibility of seeking administrative review of their designation as a Specially Designated Terrorist by showing that the basis on which they have been designated is "insufficient" or by proposing "remedial steps" that they could take to "negate the basis for designation." 
A list of designees added to OFAC's Special Designated Nationals and Blocked Persons List under Executive Order 13438 was issued by Treasury on January 9, 2008. It included Ahmed Fruzandeh, Brigadier General, Commanding Officer of the Iranian Islamic Revolutionary Guard Corps-Qods Force, Ramazan Corps, who "leads terrorist operations against Coalition Forces and Iraq Security Forces, and directs assassinations of Iraqi figures." Also included were two Iran-based Iraqi nationals, and one Syria-based Iraqi national as well as Al-Zawra Television Station, based in Syria. The Treasury announcement includes a description of the activities of the designees that have led to the prohibition of transactions between them and any U.S. person and the freezing of any of their assets that are under the jurisdiction of the United States.
On September 23, 2008, the names of five newly designated individuals and two newly designated entities were added to the list of blocked persons and entities under the authority of Executive Order 13438. One Iranian national was included, as were three Iraqi nationals, and one Syrian national. The newly designated entities were both broadcasters operating in Syria: Al-Ra'y Satellite Television Channel, Near Damascus in the Yaafur area, and Suraqiya for Media and Broadcasting, Damascus.
On July 16, 2009, OFAC announced the names of one newly designated entity and one newly designated individual whose property and interests in property are blocked pursuant to Executive Order 13438. On January 5, 2010, OFAC added the following designee to the list of entities and individuals whose property is blocked pursuant to Executive Order 13438: Jaysh Rijal Al-Tariq Al-Naqshabandi (a.k.a. Armed Men of the Naqshabandi Order; a.k.a. Naqshabandi Army; a.k.a. "AMNO"; a.k.a. "JRN"; a.k.a. "JRTN"), Iraq; website: http://www.alnakshabandia-army.org ; http://www.alnakshabandia-army.com [IRAQ3].
On January 10, 2012, OFAC removed the following individual from the list of blocked persons: Dr. Safa Al Habobi, Flat 4D Thorney Court, Palace Gate, Kensington, United Kingdom (former Minister of Oil).
On July 7, 2012, OFAC removed the following entities from the list of blocked persons: Alfa Company Limited for International Trading and Marketing, P.O. Box 910606, Amman 11191, Jordan; Nabil Victor Karman, c/o Alfa Company Limited for International Trading and Marketing, P.O. Box 212953, Amman 11121, Jordan; Trading and Transport Services Company, Ltd., Al-Razi Medical Complex, Jabal Al-Hussein, Amman, Jordan; P.O. Box 212953, Amman 11121, Jordan; P.O. Box 910606, Amman 11191, Jordan [IRAQ2].
On January 3, 2013, OFAC removed one entity and one individual from the list of Designated Nationals and Blocked Persons: Euromac European Manufacturer Center SRL, Via Amerer 5, Monza Italy; and Jeanne Speckman of the United Kingdom.
section_title: Statutory Basis: IEEPA
paragraphs: The July 17, 2007, executive order cites as its authority IEEPA. Under IEEPA, once the President has declared a national emergency with respect to a threat "to the national security, foreign policy, or economy of the United States" from a source "in whole or in substantial part outside the United States," broad authority is available to the President to impose an economic embargo over transactions and property in which a foreign nation or foreign person has an interest. Specifically, the statute authorizes the President to
(A) investigate, regulate, or prohibit—
(i) any transactions in foreign exchange,
(ii) transfers of credit or payments between, by, or through, or to any banking institution, to the extent that such transfers or payments involve any interest of any foreign country or national thereof; and
(iii) the importing or exporting of currency or securities ... and
(B) investigate, regulate, direct and compel, nullify, void, prevent or prohibit, any acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in, or exercising any right, power, or privilege with respect to, or transactions involving, any property in which any 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.
This language is derived from section 5(b) of the Trading with the Enemy Act of 1917 (TWEA), which grants authority to the President to block and freeze enemy property and interests in property and to regulate financial transactions involving enemy countries, their nationals and their allies during a declared war. It was first used in peacetime in 1933, in the midst of the Great Depression, when President Franklin D. Roosevelt proclaimed a bank holiday and closed banks in the United States, thereby interfering with both foreign and domestic financial transactions, in response to what he deemed to be a national banking emergency related to "extensive speculative activity abroad in foreign exchange ... [resulting] in severe drains on the Nation's stocks of gold." Congress immediately ratified this action and amended TWEA, extending the emergency powers granted under the original legislation to cover both wartime and "any other period of national emergency declared by the President" and provided the President with authority to regulate purely domestic transactions. President Roosevelt invoked TWEA again in peacetime in 1939, as Hitler was advancing in Europe, to block assets of Norway and Denmark and their nationals. Eventually TWEA was used to block assets of the Axis enemies of the United States. A 1940 amendment expanded presidential power under TWEA by specifically authorizing asset freezes and expanding authority beyond transactions with enemies or allies of enemies to cover financial transactions in which any foreign state or foreign national had an interest. TWEA, thus, was used to block assets of friendly nations threatened by Axis occupation. A 1941 amendment to TWEA added the power to seize and vest title to any property of a foreign person or nation. This amendment extended the "power of seizure ... to all property of any foreign country or national so that no innocent appearing device could become a Trojan horse," i.e., it was designed "to reach enemy interests which masqueraded under ... innocent fronts." The Supreme Court upheld the seizing and vesting of property of a non-enemy alien in wartime; it also upheld the authority of the Treasury Department to vest assets of an enemy (Austrian) entity, making them unavailable to U.S. creditors despite a New York court's having appointed a temporary receiver to collect the Austrian concern's assets and ultimately distribute them to U.S. creditors.
In the 1970s, during the Vietnam War, congressional concern with ways to oversee presidential use of emergency power led to questioning of the broad invocation of TWEA in circumstances not directly related to war and not substantially originating abroad. One result was the enactment of the National Emergencies Act of 1976 (NEA) and IEEPA, in 1977. NEA sets forth various procedures to be followed by the President when declaring a national emergency, such as Federal Register publication and specification of the provisions of law under which the actions under the national emergency are to be taken. It specifies procedures for terminating national emergencies and provides a role for Congress by imposing presidential reporting requirements and establishing congressional review procedures. NEA terminated existing national emergencies, except for those invoking section 5(b) of TWEA, therefore, imposing no notice and reporting requirements on the President when invoking section 5(b). This was changed with the enactment of IEEPA.
IEEPA was enacted primarily, according to the Senate Report accompanying the legislation, as a direct response to expanding use of emergency power by Presidents:
The purpose of the bill is to revise and delimit the President's authority to regulate international economic transactions during wars or national emergencies. The bill is a response to two developments: first: extensive use by Presidents of emergency authority under section 5(b) of the Trading With the Enemy Act of 1917 to regulate both domestic and international economic transactions unrelated to a declared state of emergency and, second, passage of NEA, which provides safeguards for the role of Congress in declaring and terminating national emergencies, but exempts section 5(b) of the Trading With the Enemy Act from its coverage.
By restricting the use of TWEA section 5(b) to wartime, IEEPA draws a distinction between the power provided Presidents in declaring peacetime national emergencies having their origin abroad and that available when war has been declared. Nonetheless, because of the need to provide Presidents with sufficient flexibility to respond to emergencies, the breadth of authority provided in IEEPA is considerable with respect to affording powers to the President to impose economic sanctions in peacetime emergencies originating abroad. To use these powers, the President must declare a national emergency with respect to "any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy or economy of the United States." Once such a national emergency has been declared, IEEPA provides the President with broad power to impose controls over economic transactions involving transfers abroad and foreign property controls.
(1) Under IEEPA, the President may "under such regulations as he may prescribe, by means of instructions, licenses, or otherwise ... investigate, regulate, or prohibit" any foreign exchange transaction, any transfers of credit or payments involving any foreign interest, and the import or export of currency or securities "by any person, or with respect to any property, subject to the jurisdiction of the United States."
(2) IEEPA also empowers the President to "investigate, block during pendency of an investigation, regulate, direct and compel, nullify, void, prevent or prohibit, any acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in, or exercising any right, power, or privilege with respect to, or transactions involving, any property in which any foreign country or national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States."
(3) IEEPA does not provide authority to block international communications, information or informational materials. Humanitarian aid is excepted to the blocking authority; however, humanitarian aid may be restricted if the President determines that humanitarian aid "would seriously impair his ability to deal with" the national emergency; is coerced; or would endanger U.S. armed forces.
(4) Until 2001, IEEPA did not authorize the vesting of property, i.e., taking title to blocked or frozen property. With the enactment of the USA PATRIOT Act in 2001, IEEPA provides authority for the President, during "armed hostilities" or when the United States has been attacked, to confiscate property of foreign persons, organizations, or countries he has determined to have "planned, authorized, aided or engaged in" the armed hostilities or attacks and to vest title in any agency or person for the benefit of the United States. The first and, to date only, use of this power under IEEPA occurred on March 20, 2003. On that date, in Executive Order 13290, President Bush ordered the blocked "property of the Government of Iraq and its agencies, instrumentalities, or controlled entities" to be vested "in the Department of the Treasury.... [to] be used to assist the Iraqi people and to assist in the reconstruction of Iraq." A subsequent executive order ordered further blocking and confiscation of property of former Iraqi officials and their families and the vesting of title in the Department of the Treasury to be transferred to the Development Fund for Iraq to be "used to meet the humanitarian needs of the Iraqi people, for the economic reconstruction and repair of Iraq's infrastructure, for the continued disarmament of Iraq, for the cost of Iraqi civilian administration, and for other purposes benefitting of the Iraqi people."
Unlike the language of TWEA, the language of IEEPA appears to withhold certain powers from the President: (1) IEEPA provides no explicit authority over purely domestic transactions; (2) IEEPA provides no explicit authority to regulate gold and silver bullion; (3) IEEPA provides no explicit authority to seize records; and (4) IEEPA provides no authority to interfere with international communications. Because IEEPA covers "any interest" in property by a foreign national or government and provides the President with expansive power to issue interpretative regulations, there has been some speculation that "any large scale financial transaction, even if it involved only United States parties, might be subject to regulation if it affected the economy of a foreign nation."
Constitutional challenges to actions taken under IEEPA's authority to regulate foreign transactions and property have generally failed. Regulations issued under the authority of IEEPA placing controls on foreign assets have been upheld against claims of impermissible delegation and violation of the U.S. Constitution's Fifth Amendment. The fact that blocked assets are those of a U.S. person and purely domestic has not been held to place them beyond the reach of the President's power to subject them to freeze orders under IEEPA so long as there is an "interest" of a foreign country or national. Moreover, provided the executive order declaring the national emergency makes the requisite findings with respect to regulating humanitarian assistance, a freeze order directed against assets intended for humanitarian aid is enforceable. It has also been held that notice and a pre-seizure hearing are not constitutionally mandated with respect to freeze orders. It has also withstood challenge on First Amendment grounds.
The Supreme Court has upheld Presidential exercise of authority under IEEPA on very broad grounds, saying that when "taken pursuant to specific congressional authorization, it is 'supported by the strongest presumptions and the widest latitude of judicial interpretation, and the burden of persuasion would rest heavily upon any who might attack it.'"
section_title: Executive Order 13438 Coverage
subsections: section_title: Persons Covered
paragraphs: The executive order does not identify particular persons whose property is to be blocked or frozen; rather it leaves identification of the particular individuals and entities to the Secretary of the Treasury, in consultation with the Secretary of State and Secretary of Defense. These individuals are to fall into three categories provided in the executive order:
(1) Individuals or entities determined "to have committed, or to pose a significant risk, of committing an act or acts of violence that have the purpose or effect of ... threatening the peace or stability of Iraq or the Government of Iraq ... or ... undermining the efforts to promote economic reconstruction and political reform in Iraq or to provide humanitarian assistance to the Iraqi people...."
(2) Persons or entities determined "to have materially assisted, sponsored, or provided financial, material, logistical, or technical support for, or goods or services in support of, such an act or acts of violence or any person whose property and interests in property are blocked pursuant to this order...."
(3) Persons determined "to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to this order...."
The executive order, moreover, provides that these prohibitions include "the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any person whose property and interests in property are blocked pursuant to this order, and ... the receipt of any contribution or provision of funds, goods, or services from any such person." There is also a prohibition covering transactions by a U.S. person, or within the United States with the purpose of evading the prohibitions of the executive order; attempts to violate any of the prohibitions, and conspiracy formed to violate the executive order's prohibition.
In issuing the executive order, the President made the requisite finding with respect to aid and, thus, prohibited humanitarian assistance; he also made a finding that for effectiveness sake, no prior notice need be given to those with a constitutional presence in the United States whose property and interests in property are to be blocked "because of the ability to transfer funds or other assets instantaneously."
section_title: Objectives
paragraphs: In 2007, Molly Millerwise, who was at that time a spokesperson for the U.S. Department of the Treasury, reportedly provided certain information concerning the background and objectives of the executive order, including a statement that appears to indicate that one of the desired effects of the order is to motivate foreign financial institutions to voluntarily comply with these prohibitions. She also is reported to have indicated that the executive order: (1) is needed to supplement current sanctions programs because these cover elements of the former Saddam Hussein regime and Al Qaeda, but not insurgent groups now active in Iraq; (2) is intended to apply to "Shia militia groups linked with Iran, Sunni insurgent groups with sanctuary in Syria and some of the indigenous Iraqi insurgent groups"; (3) will result in blocking of assets of U.S. residents and citizens "because they're actively abetting a panoply of insurgent and militia groups"; (4) will result in a list that Treasury is compiling of entities and individuals covered by the order that will be ongoing and made public.
section_title: Transactions Covered
paragraphs: The executive order blocks "all property and interests in property" of the three categories of persons, supra at footnote 25 , provided that the property or interests in the property are in the United States or come within the control of U.S. persons. Although the executive order does not define "property" or "interests in property," OFAC regulations define these terms to have a broad reach. "Interest" when used in connection with property is defined to mean "an interest of any nature whatsoever, direct or indirect." In defining "property," the regulations provide a list of categories, but make it clear that the list is "not by way of limitation."
section_title: Implementation
paragraphs: Executive Order 13438 covers essentially five categories of individuals or entities: (1) those committing acts of violence having the effect of destabilizing Iraq; (2) those committing acts of violence with the purpose of destabilizing Iraq; (3) those posing a significant risk of committing such acts of violence; (4) those providing support for such acts of violence, and (5) those providing support for any person whose property has been blocked pursuant to the executive order. The executive order also forbids transactions by U.S. persons that evade or have the purpose of evading the prohibitions of the executive order, attempts to avoid the order, and conspiracies to violate the order.
The executive order leaves the process of designating specific individuals and entities whose transactions and property are to be frozen or blocked to the Secretary of the Treasury, in consultation with the Secretaries of State and Defense. A list of designees added to OFAC's Special Designated Nationals and Blocked Persons List under this executive order was issued by Treasury on January 9, 2008. The Treasury announcement includes a description of the activities of the designees that have led to the prohibition of transactions between them and any U.S person and the freezing of any of their assets that are under the jurisdiction of the United States. There is authority for the issuance of blocking orders prior to OFAC's listing of persons to be sanctioned under the executive order. The expectation, however, is that ultimately the names of blocked individuals and entities identified for blocking orders will be publicly disseminated by being added to OFAC's Special Designated Nationals and Blocked Persons List.
The executive order authorizes the Secretary of the Treasury, in consultation with the Secretaries of State and Defense, to issue regulations. Regulations were issued on September 2, 2010. They use broad definitions of "property," and "transfer" to block the transfer of property of any kind. There is one blanket exception: the blocking orders do not apply to property and interests in property "controlled by the military forces of the United States and their coalition partners present in Iraq and acting under the command or operational control of the commander of the United States Central Command." The regulations include extensive bans on trade and financial transactions, authorize certain activities pursuant to a general license, and permit other activities pursuant to a specific license, issued upon application to OFAC on a case-by-case basis. The regulations specify the types of legal services that may be provided pursuant to a general license but permit reimbursement only on the basis of a specific license. The regulations incorporate by reference the recordkeeping and reporting requirements applicable to all OFAC sanction programs.
Under the regulations, violation of sanctions under Executive Order 13438 are subject to the penalties applicable under IEEPA. With the enactment of P.L. 110-96 , civil penalties for IEEPA violations are defined in terms of the greater of $250,000 or twice the amount of the transaction on which the penalty is based; criminal penalties are $1 million and 20 years' imprisonment. Included in the regulations are requirements for the issuance of a pre-penalty notice and procedures for responses and for settlement.
section_title: Reach—Is It Limited to "Foreign" Persons?
paragraphs: Neither the executive order nor the regulations limits potential targets to "foreign" persons, as some executive orders have done. So far, the list of blocked persons under the regulations includes no U.S. person. At the time the executive order was issued, there was some indication that the primary focus was foreigners. A Treasury Department spokesperson said at that time that the list, when issued, would include "Shia militia groups linked with Iran, Sunni insurgent groups with sanctuary in Syria and some of the indigenous Iraqi insurgent groups." Since September 11, 2001, the practice seems to have been that foreign terrorists have formed the preponderance of designees on OFAC's lists, but blocking orders, seizures, and penalties have been directed against U.S. persons based on allegations that they have in their possession property or interests in property which are either legally or beneficially the property of a designated or blocked person, or that they have been conducting prohibited transactions in blocked property or with blocked persons.
Prior to the issuance of the regulations, the piggybacking potential of the executive order raised questions. One issue was whether the executive order's application to anyone who provides "support" for a designated entity might affect U.S. persons inadvertently involved in some form of assistance, such as arranging transportation for, selling consumer goods to, or providing routine legal assistance to an entity which becomes blocked under the executive order. Could such U.S. persons find themselves designated under the authority of the executive order and thereby have all of their assets subject to blocking whether or not the assets have any nexus with the transaction with the blocked entity or with any foreign entity? With respect to those whose property is to be blocked on the grounds of providing material assistance to those who are designated as committing or posing a significant risk of committing acts of violence, the scope covered by the executive order raised an array of questions including: (1) To what extent are lawyers representing persons and entities on the list subject to the order? (2) To what extent are donors to various U.S. charities operating internationally subject to the order?
There is some clarification of these issues in the licensing sections of the regulations. For example, one provision of the regulations blocks charitable contributions for blocked persons unless specifically authorized. Another provides general license authority for the provision of specified legal services to blocked persons and blocks all other types of legal services unless a special license is obtained.
An example of how OFAC implements financial transaction and property controls imposed under executive orders invoking IEEPA is illustrative of the reach of such sanction regulations. The Global Terrorist Sanctions Program implements Executive Order 13224 of September 23, 2001. That executive order declared a national emergency with respect to "grave acts of terrorism and threats of terrorism committed by foreign terrorists." It contained a list of foreign terrorist persons and provided authority for administrative designations of various categories of persons, some of which need not be confined to foreign persons. Subsequently, some U.S. based charitable organizations were listed on OFAC's terrorist lists. Under the Global Terrorism Regulations, U.S. financial institutions are required to take precautions lest they engage in prohibited transactions. The names of persons whose property is blocked are published both on OFAC's website and in the Federal Register . The regulations prohibit various transactions, specify procedures to comply with the prohibitions, and define applicable terms. They also specify such matters as the nullification of property transfers made in violation of the regulations, report and recordkeeping requirements, and penalties and penalty procedures.
The reach of Executive Order 13438 is not unprecedented. The language is similar to at least one other order, Executive Order 13219 of June 25, 2001, Blocking Property of Persons Who Threaten International Stabilization Efforts in the Western Balkans. That executive order, among other things, authorizes property and transaction controls with respect to persons designated by the Secretary of the Treasury in consultation with the Secretary of State as having committed or posing "a significant risk of committing, acts of violence that have the purpose or effect of threatening the peace or diminishing the stability or security of any area or state in the Western Balkans regime, undermining the authority, efforts or objectives of international organizations or entities present in the region, or endangering the safety of persons participating in or providing support to the activities of those international organizations or entities." Also covered by Executive Order 13219 are persons determined "to have actively obstructed, or pose a significant risk of actively obstructing, the Ohrid Framework Agreement of 2001 relating to Macedonia, United Nations Security Council Resolution 1244 relating to Kosovo or the Dayton Accords or the Conclusions of the Peace Implementation Conference held in London on December 8-9, 1995, including the decisions or conclusions of the High Representative, the Peace Implementation Council or its Steering Board relating to Bosnia and Herzegovina."
Given the concern that Executive Order 13438 might place those lawyers who are providing legal assistance to targets of the freeze orders at risk, it is noteworthy that, on July 9, 2003, OFAC issued a general license to permit U.S. persons to provide professional legal services relating to the representation of persons whose property is blocked in matters pending before the International Criminal Tribunal for the former Yugoslavia.
section_title: Attorney-Client Implications
paragraphs: The potential impact of OFAC regulations on attorney-client relationships has been the focus of some litigation and commentary in legal journals. The one federal case that has dealt with the issue is American Airways Charters, Inc. v. Regan . It held that, under the Cuban sanctions, OFAC had authority to require a license for payment of legal fees from blocked assets, but not to "condition the bare formation of an attorney-client relationship on advance government approval." The holding does not rest on constitutional grounds, but rather on the court's analysis of whether preventing a designated entity from obtaining counsel could be said to further the purposes for which the particular provision of TWEA on which OFAC relied had been enacted. By concluding that the basic intent of Congress was to deny an enemy nation use of economic resources, the court found that access to legal services, without access to any blocked funds, was not within the coverage contemplated by TWEA. Language in the opinion suggests that OFAC's exercise of the power to prevent a designated person from consulting an attorney might raise due process concerns as tantamount to denying the person the right to a meaningful challenge of the designation.
Despite the American Airways ruling, OFAC's regulations continue to include bans on the provision of legal services. Some of the recent regulations differ both in purpose and scope from those at issue in American Airways. Whether the differences will be sufficient for courts to find that OFAC's reach extends to the formation of lawyer-client relationships with blocked persons is a question that remains unanswered until a proper case is presented. OFAC's Global Terrorism Sanctions Regulations, promulgated after the September 11, 2001 terrorist attacks, differ from the sanctions at issue in American Airways . They rely on the authority of IEEPA rather than TWEA and focus on private individuals and entities rather than on a particular foreign nation. Moreover, they coincide with the changed congressional focus reflected in the post September 11, 2001 IEEPA amendments and the tendency of the courts to uphold OFAC's authority in the face of constitutional challenges.
The legal services provisions of the Iraq regulations are similar to other OFAC regulations which prohibit the provision of services, including legal services, to designated persons or blocked entities and require a specific license for all but a limited list of legal services for which a general license is provided in the regulations. For reimbursement for any legal services, application must be made to OFAC for a specific license.
OFAC's Global Terrorism Sanctions Regulations, which appear to be the model for the Iraq regulations, illustrate this framework. Under 31 C.F.R. § 594.406, "U.S. persons may not, except as authorized by or pursuant to this part, provide legal ... services to a person whose property or interests in property are blocked pursuant to § 594.201(a)." Under 31 C.F.R. § 594.506, five types of legal services are authorized "provided that all receipts of payment of professional fees and reimbursement of incurred expenses must be specifically licensed." Other legal services must be specifically licensed. The types of legal services which may be provided without a specific license are:
(1) Provision of legal advice and counseling on the requirements of and compliance with the laws of any jurisdiction within the United States, provided that such advice and counseling are not provided to facilitate transactions in violation of this part;
(2) Representation of persons when named as defendants in or otherwise made parties to domestic U.S. legal, arbitration, or administrative proceedings;
(3) Initiation and conduct of domestic U.S. legal, arbitration, or administrative proceedings in defense of property interests subject to U.S. jurisdiction;
(4) Representation of persons before any federal or state agency with respect to the imposition, administration, or enforcement of U.S. sanctions against such persons; and
(5) Provision of legal services in any other context in which prevailing U.S. law requires access to legal counsel at public expense.
The descriptions of legal services permitted under the general license have been criticized as ambiguous and narrow. For example, the first one authorizes providing legal counsel to comply with U.S. laws. but not to facilitate prohibited transactions without any elaboration on how to distinguish what is allowed from what may cross the line and subject the lawyer to liability. This might mean that any prudent lawyer will decide not to provide any legal services regarding attempted transactions without securing a specific license. The fact that OFAC's list is ever-growing with names added frequently also means that lawyers providing legal services to clients involved in business transactions with designated persons or entities prior to their designation likely must apply for a specific license to continue the legal services since the general licenses apply only to legal services provided to or on behalf of blocked persons, not to individuals and entities involved in transactions with them.
section_title: OFAC Administrative Procedures
paragraphs: OFAC regulations specify procedures for imposing and challenging penalties imposed under TWEA and for each of the sanctions programs operating under authority of IEEPA, including the Iraq regulations. The Iraq regulations address the Pre-Penalty notice and provide explicit rights to respond, to obtain extensions of the time for response, to representation, and a right to seek judicial review when a Penalty Notice is finally issued. The explicit rights provided in connection with TWEA sanctions are: right to receive a prepenalty notice; right to provide a written response to the prepenalty notice; right to request a hearing on the record before an administrative law judge for any penalty assessed; right to discovery in preparation for the hearing (subject to various privileges); and an opportunity—after the hearing—to file proposed findings and conclusions of law. There is also the possibility of an OFAC review of the administrative law judge's conclusion.
The general OFAC regulations also include an appendix detailing OFAC's procedures for enforcement of sanctions as they relate to banking institutions supervised by one of the federal banking regulators. Among its highlights are annexes providing "Risk Matrices," which banking institutions may use to evaluate their compliance programs, and an outline of "Sound Banking Institution OFAC Compliance Programs." The enforcement procedures cover such issues as (1) the effect of voluntary disclosure by an institution with respect to a violation of the sanctions; (2) OFAC's policy of acting promptly in the face of significant violations, leaving other apparent violations for inclusion in periodic reviews scheduled according to an institution's "risk profile"; and (3) OFAC coordination with the banking regulators in determining use of enforcement tools. The civil enforcement tools which OFAC may use against a banking institution include administrative subpoenas, cease and desist orders, evaluation letters, civil penalty proceedings, and suspension or revocation of OFAC licenses. OFAC may refer potential criminal violations to the Department of Justice and also pursue civil penalties. There is also a list of factors which OFAC will consider in determining whether to impose any civil penalties. It includes such factors as the institution's history of sanctions violations, its compliance programs, the size of the institution in relation to the number of its violations, and whether the violations are atypical. Also included are the following considerations: whether there has been a voluntary disclosure by the institution or an effort to conceal the harm attributable to the violation; whether the institution has undertaken actions to correct the situation; and OFAC's evaluation of the potential deterrent effect of a sanction.
section_title: Challenging Designations
paragraphs: Broad-based challenges to OFAC designations have generally been unavailing. There is, however, one case, KindHearts for Charitable Humanitarian Development, Inc. v. Geithner , in which a federal district court has found an OFAC blocking order freezing the assets of a United States-based charitable organization to be a seizure within the meaning of the Fourth Amendment to the U.S. Constitution. OFAC regulations include provisions which permit particularized administrative appeals of OFAC designations on limited grounds.
OFAC regulations include provisions governing availability of information, procedures to have funds unblocked on grounds of mistaken identity, and procedures for removing names from OFAC's lists of designated persons. With respect to release of information, the regulation covers only public information available under the Freedom of Information Act; information which the Privacy Act requires to be made available to individuals; OFAC forms; and information on civil penalties. The regulations specify that OFAC must release certain information on its website with respect to the civil penalties which it has imposed, including the name and address of the entity penalized; the sanctions program involved; a description of the violation; whether there was voluntary disclosure; and whether there is a settlement or imposition of penalty. Names of individuals may not be released, and OFAC may choose to disclose more information than required. There is no indication of the extent to which OFAC must or may disclose any information concerning the evidence relied on for making a designation under a sanctions program or for blocking transactions and property. Challenges to IEEPA designations confront the prospect that the evidence on which the government has based its designation is classified and may be presented to the court ex parte and in camera.
The OFAC regulations also include general provisions permitting challenges to blocking orders on the grounds of mistaken identity. Under 31 C.F.R. § 501.806, a person whose funds have been blocked who believes that there has been mistaken identity may challenge the order by following the prescribed procedures. These require a written request to OFAC containing various information about the transaction being blocked and the basis on which the applicant believes the blocking to have resulted from mistaken identity.
OFAC's regulations provide procedures to (1) have funds unblocked that have been blocked through mistaken identity and (2) have a designation reconsidered or to assert that changed circumstances have rendered a designation inapplicable. Persons named to one of the terrorist lists may challenge the designation by presenting arguments or evidence that there is an insufficient basis for the designation. The same officer responsible for making the designation, OFAC's director, is responsible for reviewing the challenge to the designation. The regulations contain no specifications with respect to the review process, such as requirements for a written record, a hearing on the record, or specified time line for consideration of the challenge to the designation. Without a full written record, for a federal court challenge to an OFAC designation to succeed, the plaintiff must convince the court that OFAC's designation is arbitrary and capricious; were a full record available, the issue might be whether the designation was based on substantial evidence in the record.
In mistaken identity applications, any party to a transaction in which funds have been blocked may direct a written request to OFAC for the release of the funds. That request must include various types of specific information and documentation, such as the identity of the requester, the nature of the transaction and of the applicant's interest in the transaction, the amount in question, and why the applicant believes that the transaction has been blocked due to mistaken identity. Upon receipt of this information, OFAC may require the applicant to provide more documentation. There have been instances in which listed persons have been able to have their names removed from OFAC's lists by showing that OFAC has made a mistake. In 1989, for example, an OFAC list of specially designated Cuban nationals included the Spanish government's tobacco monopoly, Tabacalera; a month later the company was removed from the list.
section_title: Potential Impact of OFAC Designations
paragraphs: OFAC designations have repercussions both in the United States and in terms of the international banking system. OFAC has characterized its anti-terrorism economic sanctions programs as a "wide-ranging assault on international terrorism and its supporters and financiers," and reported that these programs have resulted in the blocking, as of December 31, 2009, of almost $20 million in terrorist assets, of which over $11.2 million is that of Al Qaeda. The total dollar amount of terrorist assets which have been blocked does not represent the total effect of the economic sanctions. When OFAC designates an organization or an individual under its terrorists' programs, the impact may extend beyond assets frozen by the United States. Not only does the international banking community have to provide transparency in its transactions with U.S. financial institutions to prevent them from unknowingly handling prohibited transactions, but the designation of an international terrorist may inspire international cooperation. OFAC reports that "banks and other private institutions around the world voluntarily consult OFAC's [terrorist] list[s] and routinely report denying access to their institutions."