Last Friday the U.S. Court of Appeals for the Ninth Circuit released its opinion in a case brought by the Al Haramain Islamic Foundation (“AHIF”) in which AHIF challenged its designation as a terrorist-supporting organization by the Office of Foreign Assets Control (“OFAC”). Although the court found that there was sufficient evidence to support OFAC’s designation of AHIF and its blocking of AHIF’s assets, it found that OFAC’s procedures were deficient and it remanded part of the case to the district court for further proceedings.

The first area in which the Ninth Circuit chided OFAC was in relation to OFAC’s reliance on confidential information to designate AHIF as a specially designated global terrorist (“SDGT”) under Executive Order 13,224 without providing any information to AHIF concerning that confidential information. While the court held that the government’s interest in national security and the prevention of terrorism did not require it to disclose the confidential information to AHIF or to not rely on undisclosed confidential information in making its determination, the court held that there were procedures short of those options that were mandated by the Due Process clause. Specifically, the Ninth Circuit noted that OFAC should provide, subject to exceptions for special cases, either an unclassified summary of the evidence or access to the evidence by an attorney with an appropriate security clearance.

The second area of criticism of OFAC by the court also related to the requirement of the Due Process clause and specifically to its requirement to provide to AHIF adequate notice of the basis for AHIF’s designation as an SDGT. The court noted that OFAC never supplied a statement of reasons to AHIF but only provided it with several unclassified documents and a request the AHIF supply OFAC with a copy of the Koran. (I must admit that I am completely baffled by OFAC’s Koran request. If, for some reason, OFAC needed to research Islamic principles a free copy of the Koran can easily be found for download at the Gutenberg Project in both a translation by J.M Rodwell and a translation by George Sale.)

Even though the Ninth Circuit found that OFAC violated AHIF’s Due Process rights, it declined to take further action on these violations on the basis that AHIF was not harmed by these violations. Basically, the court relied on the legal doctrine known as “guilty as hell.” In effect, the court said that AHIF was so clearly a terrorist-supporting organization that it would have lost even if OFAC had supplied a statement of reasons for the designation as well as an unclassified summary of the confidential evidence or access to that evidence by an attorney with a security clearance.

The third area in which the court took OFAC to task, and which resulted in the remand to the district court, was OFAC’s violation of AHIF’s Fourth Amendment rights by seizing AHIF’s assets through the blocking process without a judicial warrant. The court did credit OFAC’s concern with “asset flight” and permitted OFAC to initially seize assets without a warrant pursuant to the emergency exception to the Fourth Amendment. But that exception would still require a judicial warrant before the assets were permanently blocked.

This decision accords with a prior district court decision in the KindHearts case. Other district court have ruled that blocking assets isn’t a seizure because the government doesn’t take possession of the blocked assets, a strained rationale at best. See Islamic Am. Relief Agency v. Unidentified FBI Agents, 394 F. Supp. 2d 34, 47-48 (D.D.C. 2005); Holy Land Foundation for Relief and Development v. Ashcroft, 219 F. Supp. 2d 57, 79 (D.D.C. 2002). Because the Ninth Circuit’s rationale only applies to assets held by U.S. citizens, and because most blocked assets belong to foreign citizens, it is unlikely that this warrant requirement, even if followed by OFAC, would have a significant impact on OFAC’s practices.

Only a few nanoseconds after JPMorgan Chase Bank agreed to pay $88.3 million dollars to the Office of Foreign Assets Control (“OFAC”) to settle charges that the bank violated the agency’s sanctions on Cuba, Iran and other countries, the Louisiana Municipal Employees Retirement System has filed a derivative action seeking to have the bank’s directors repay the $88.3 million fine. The lawsuit apparently focuses on statements by OFAC in its press release which noted that after an internal investigation revealed wire transfers to a Cuban national, “the bank failed to take adequate steps to prevent further transfers.” Because of this, the JPMC directors are alleged to have been complicit in the transfers and to have failed to exercise adequate oversight of the bank.

Now, there’s no need to stay up tonight and lose any sleep worrying that the directors of JPMC will have to reach into their own wallets and cough up any of this money. That’s what director’s and officer’s (“D&O”) insurance coverage is for, and it should pay legal fees and any judgments or settlements unless dishonesty by the directors can be proved. Of course, monetary awards against directors are rare in derivative actions, so the action is likely to be settled, with the settlement amount paid by the company that issued the D&O coverage. Still, this case is a reminder that settlements of export and economic sanctions violations may not end with payment to the agency.

By now you’ve probably read the JPMorgan Chase Bank (“JPMC”) agreed to pay to the Office of Foreign Assets Control (“OFAC”) the whopping amount of $88.3 million to settle charges that it violated just about every sanctions program on OFAC’s books. This enormous fine is due, it would appear, in large measure to JPMC not taking OFAC’s rules or its investigatory process terribly seriously.

Most of the agreed fine is based on $178.5 million in wire transfers to Cuba. OFAC emphasized that, after a November 2005 internal investigation that revealed that transfers made through a correspondent account involved Cuban funds, JPMC took no steps to prevent further transfers involving Cuban property. The OFAC report does not state whether or not these further transfers involved the same correspondent account or the same Cuban nationals.

JPMC is also alleged to have made a loan to a bank issuing a letter of credit for a transaction that was being shipped on a blocked vessel affiliated with the Islamic Republic of Iran Shipping Lines. At some point, JPMC determined that the loan was likely a violation and decided to file a voluntary disclosure. That apparently did not do the bank too much good because OFAC pointed out that the bank dawdled for four months in getting the voluntary disclosure on file:

Although JPMC supervisors and managers determined that this trade loan was likely an apparent violation of the WMDPSR [Weapons of Mass Destruction Proliferators Sanctions Regulations] and, in late December 2009, decided to submit a voluntary self-disclosure to OFAC, JPMC did not mail its voluntary self-disclosure until March 2010, three days prior to the date on which JPMC received repayment for the loan without OFAC guidance or authorization. JPMC also failed to respond promptly and completely to an OFAC administrative subpoena seeking information on this transaction.

Four months, which may be a short period as measured in corporate time, can hardly be called much of a delay on OFAC time given that it may take the agency six months or more to respond to simple requests. Still, the lesson here is that initial notifications should be filed with OFAC right away.

The third thing that ticked off OFAC was the way JPMC dealt with OFAC’s investigation of a JPMC wire that referenced Khartoum:

In response to this subpoena and a subsequent communication, JPMC compliance management failed to produce several responsive documents in JPMC’s possession, and repeatedly stated that JPMC had no additional responsive documents. OFAC ultimately provided JPMC with a list of multiple responsive documents that OFAC had reason to believe were in JPMC’s possession based on communications with a third-party financial institution. This prompted JPMC to correct its prior statements that the bank possessed no additional responsive documents and to produce more than 20 responsive documents.

What might have been a simple matter to resolve was complicated here by JPMC’s response to the subpoena. Suffice it to say, it’s never a good idea to say that no documents exist unless you are absolutely certain that no documents exist.