On June 20, a federal jury awarded a $60 million damage verdict against mammoth credit reporting agency Transunion arising from the company’s misuse of the Office of Foreign Assets Control’s List of Specially Designated Nationals and Blocked Persons (the “SDN List”) on credit reports. The plaintiffs in that case where individuals who were not on the SDN List but whom Transunion identified as such, resulting in adverse credit decisions for these individuals.

The class action lawsuit was based on a number of related violations of the federal Fair Credit Reporting Act and a similar California statute. Among the violations at issue were the provisions of section 1681(e) which requires credit bureaus to “follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates.” The Third Circuit in Cortez v. Trans Union, 617 F.3d 688 (3d Cir. 2010), previously rejected Transunion’s efforts in that case to make the implausible argument that the SDN List information it supplied with respect to credit applicants was not part of their credit report.

In the current case, the complaint details the experience of one of the representative plaintiffs with Transunion’s OFAC reporting. That plaintiff, named Sergio L. Ramirez, had a car loan denied because his name was similar to two entries on the SDN List, namely, Sergio Humberto Ramirez Aguirre and Sergio Alberto Cedulo Ramirez Rivera. Not only were the names different, but also the birthdate for Plaintiff Ramirez, which Transunion had in its file on the plaintiff, was different from the birthdates listed in the entries for the two aforementioned SDNs.

OFAC has issued guidance about the use of the SDN List by credit bureaus:

The text on the report should explain that the individual’s information is similar to the information of an individual on OFAC’s SDN list. It should not state that the information matches or that the credit applicant is in fact the individual on the SDN list unless the credit bureau has already verified that the person is indeed the SDN.

Even assuming that Transunion followed this guidance, which is not clear, it seems hard to justify transmitting the information to the car dealership when Transunion had information that clearly indicated the credit applicant was not either of the SDNs. It seems to me that credit bureaus can easily protect themselves from outcomes like the $60 million verdict by transmitting SDN information with a disclaimer but doing so only in cases where the credit bureau does not itself have information, such as birthdates, places of birth, etc., sufficient to resolve the potential hit.

I love Delaware. I’ve spent many days on the Delaware beaches. Even so, recent legislation proposed in the Delaware House deserves ridicule and I’m willing to do that, even if that means I’m banned from ever having another slice of Grotto Pizza or bucket of Thrasher’s Fries.

The bill in question, House Bill No. 57, prohibits the Delaware Secretary of State from registering LLCs where the members are subject to OFAC sanctions.  It also requires registered agents to screen members to avoid presenting applications with sanctioned members.

The bill is the brainchild of the Delaware Coalition for Open Government  (“DelCOG”), which after untold hours researching Delaware LLCs, has discovered two (yes, two) cases where Delaware has registered LLCs on the OFAC SDN List. The companies in question are 200G PSA Holdings, LLC and Agusta Grand I, LLC, which were designated as Specially Designated Narcotics Traffickers by OFAC on February 13, 2017. Both companies were registered in Delaware, respectively, on January 29, 2013, and October 28, 2014. Because the designation occurred after the companies were registered in Delaware, the proposed legislation would not have had any impact on the registration of these companies.

DelCOG and the bill’s drafters seem to be unaware that SDNs will get registered in Delaware only when their designation occurs after registration. If it occurs before, the companies will be unable to pay their fees because banks will almost certainly block all payment of registration and agent fees. So the proposed legislation does not really accomplish its intended purpose at all.

What is does do is create is ample opportunity for confusion. Here’s some language from the bill:

The Secretary of State shall neither certify for formation or domestication nor register as a limited liability company any citizen, group, organization, or government of a listed Sanctioned Nation in the Active Sanctions Program of, or any Specially Designated National listed as such by, the Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury when federal law is violated thereby.

The phrases “listed Sanctioned Nation in the Active Sanctions Program” is not defined in the proposed bill. This is an apparent reference to this web page on the OFAC site which lists countries subject to comprehensive sanctions like Syria and Iran but also countries with regime-based sanctions, such as Iraq and Venezuela, where only designated individuals and entities are affected. This sets up the possibility that when anyone in Venezuela (who is not an SDN) is a member of an LLC seeking registration the Delaware Secretary of State will have to decide whether this violates federal law. The same will occur if the member is a U.S. permanent resident that is also an Iranian citizen. Neither of these instances would violate federal law, but who knows what the Secretary of State of Delaware will decide.

The proposed legislation also wanders into CFIUS territory with equally dubious results. The bill requires registered agents to determine if the purpose of the proposed LLC conflicts with the “prohibited or restricted investment … requirements” of Exon-Florio, 50 U.S.C. App. § 2170. In such cases, the registered agent cannot file the registration application on behalf of the LLC and must advise them to file a CFIUS notice. Apparently, the drafters of the bill are not aware that the CFIUS notice process is voluntary.

This bill amply demonstrates the problems that arise when states take it upon themselves to interpret and enforce federal law.

Photo Credit: Rehoboth Boardwalk by Clif Burns Copyright 2014 Clif Burns. All rights reserved.

The Office of Foreign Assets Control today issued FAQs on the process whereby OFAC removes people from its List of Specially Designated Nationals and Blocked Persons. Sadly, the answers to those FAQs don’t really tell the whole story.  You might refer instead to Frequently Mis-Answered Questions

For example, OFAC says that it delists “hundreds” of entities each year. Although that has been the case lately, that has not always been the case, as OFAC’s archive of changes demonstrates. In 2001 and 2002, no entities were delisted and many less than 100 were delisted in 2005. Just over 100 were delisted in 2009

And although OFAC says the purpose of designation is not punitive but is to change behavior, this is hard to credit fully given the barriers OFAC erects to make delisting difficult. The principal ground for delisting is, as OFAC says in the FAQs, that the SDN has stopped the behavior that led to designation. The problem is OFAC will not ever reveal the specific basis for any designation. OFAC also makes it difficult to obtain paid legal representation because a license from OFAC is usually required to authorize payments to the lawyer, a lengthy and uncertain process that will lead most lawyers to decline representation. The only reliable way to get off the list is, as OFAC says, to die, but that, as they say, is cold comfort.

The 900 pound gorilla in the SDN listing room, of course, is still not addressed by these FAQs. If you are a terrorist or drug dealer that is designated by OFAC there is at least a process for removal. If you, however, aren’t a terrorist or drug dealer, but have a name similar to one, you are out of luck. Even though banks will routinely refuse to deal with people with similar names, there is no avenue for these innocent victims of the designation process to obtain relief from the agency.