In an 82-page opinion issued last month, U.S. District Judge Katherine Forrest granted forfeiture of 650 Fifth Avenue, a 36-story building in midtown Manhattan which houses, among other posh tenants, the flagship store for Juicy Couture. The impending problems for 650 Fifth started when the former Iranian Shah Pahlavi formed a U.S. non-profit, which borrowed $42 million from Bank Melli in 1975 to retire a loan on the property at 650 Fifth and construct the building itself. (Bank Melli is wholly owned and controlled by the Iranian government.) What followed in 1979, of course, was the Iranian Revolution and, over the next decade, the Iranian government developed an ownership structure of the property and building at 650 Fifth, which resulted in, among other things, creation of U.S. entities controlled by the Iranian government to transfer rental income from 650 Fifth to Bank Melli.

The case is without question one-of-a-kind and, as such, grabbed news headlines when forfeiture was granted. It should be noted, however, that the issue of whether 650 Fifth was ever blocked property was not brought before the court even though Bank Melli’s property or interests in property in the United States were blocked beginning in 2007. Instead, the United States commenced a forfeiture action in 2008. 650 Fifth became, in effect, a blocked property via forfeiture on the grounds that, as Judge Forrest explained under U.S. forfeiture law, 650 Fifth Avenue is property that “bear[s] a substantial connection” to violations of IEEPA, namely violations of Iranian sanctions in which U.S. entities controlled by the Iranian government provided services to the Iranian government by way of the entities’ ownership and management of 650 Fifth, including collecting rental income from the building and remitting it to the Iranian government via Bank Melli.

In the case of 650 Fifth, forfeiture is quite a costly penalty with the building itself reportedly valued between $500 and $700 million, and the opinion stating that at least $75 million had been reinvested in the building by the Iranian government. Forfeiture of the building itself makes it one of the largest U.S. sanctions penalties ever.

The upshot of this decision for other circumstances that don’t include a Manhattan skyscraper owned and controlled by the Iranian government is a reminder that any violation of IEEPA-based sanctions carries with it a potentially hefty penalty in the form of forfeiture that won’t be found in OFAC’s regulations except their reference that sanctions violations “may also be subject to … other applicable law.” When considering what is at stake in a sanctions violation, property connected to the violation has to be part of the calculus, especially in circumstances where the government pursues a criminal violation and seeks a monetary penalty that requires forfeiture of such property to meet it. In an egregious case like 650 Fifth, the building itself fit the bill.

Clif adds: It is important to understand that the defendants in the case were found by the judge to have concealed the interest of Bank Melli and to have concealed the payment of the rent collected by the U.S. owners to Bank Melli.  This is why Juicy Couture, or the other tenants in the building, are unlikely to receive nastygrams from OFAC alleging that they violated the Iran sanctions through payment of their rent.   Also, because Bank Melli was not the owner of the building, but was simply receiving income from the building, the building itself would not be blocked.  Hence, forfeiture was the more viable option for the U.S. Government.  Plus, of course, the USG now owns the building and receives the rental income.  If it had been blocked, the current owners would still “own” the building while all rental income would sit in blocked accounts.

 

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