There is a perception common amongst those practicing in the field of U.S. economic sanctions, that the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”)–the primary agency responsible for administrating and enforcing U.S. sanctions–can do whatever it wants. While perhaps that view is exaggerated, it is true that OFAC has wide discretion in how it administers sanctions, and the courts have traditionally provided the agency with great deference. This is not unusual for federal agencies, who typically receive deferential treatment, which is then elevated almost beyond the point of scrutiny when those agencies are operating in the field of national security. A recent case, Okko Business v. Lew, et al., highlights the level of deference afforded to OFAC by the courts.
In Okko, a Ukrainian gas station chain had 200,000 Euro blocked after it had originated the payment as a deposit for its participation in a Belarusian oil auction. The organizer of that auction was UE Belarusian Oil Trading House (“UEB”), an entity designated pursuant to Executive Order 13405. In order to participate in the auction, Okko was required to deposit 200,000 Euro with UEB. In the event that Okko lost, or did not participate in the auction, UEB was to return the deposit to Okko within five (5) business days of receiving a written demand from Okko. If Okko were to win the auction, but fail to meet its obligations, then UEB would transfer the 200,000 Euro deposit to the seller of the oil. The deposit funds were remitted from CITI Bank Ukraine to UEB’s bank in Belarus. However, they were routed through Citibank, N.A. in the United Kingdom which blocked the transfer pursuant to E.O. 13405. Thereafter, Okko made several applications to OFAC to have the funds unblocked. In those applications, Okko noted, and provided documentation evidencing the fact, that they had cancelled the contract with UEB, and that they would refrain from transacting with UEB in the future. E.O. 13405, issued pursuant to the International Emergency Economic Powers Act (“IEEPA”), blocks the property and interests of property that are within U.S. jurisdiction, or that come within U.S. jurisdiction, of parties designated pursuant to its authority. As such, any UEB property or property interests are to be blocked upon coming within U.S. jurisdiction.
In denying Okko’s applications, OFAC repeatedly noted that: 1) U.S. financial institutions were required to block wire transfers in which a sanctions target has any interest whatsoever, direct or indirect; 2) UEB maintained an interest in the 200,000 Euro transfer; 3) OFAC only unblocked wire transfers in rare circumstances; 3) that there were no circumstances present in Okko’s transfer that would compel OFAC to unblock it; and 4) OFAC does not recognize attempts to extinguish the interests of a sanctions target once the transfer has been blocked.
Okko, in pursuing a review under the Administrative Procedure Act (“APA”) of OFAC’s decision to maintain the blocking, stated that UEB never obtained an interest in the funds deposit because under the deposit agreement the funds would either revert back to Okko or be passed on to the seller of the oil. In rejecting that argument the Court found that since the funds were to be placed into UEB’s account, and were under their control, that they undeniably had an interest in the funds, regardless of whether it was a beneficial interest.
Further, Okko argued that OFAC failed to provide a satisfactory explanation for its action, including failing to review the deposit agreement and that it automatically upheld the blocking because UEB is a designated party. In other words, Okko’s position was that the administrative record concerning the unblocking applications was devoid of any deliberative agency process. The Court found that because the administrative record contained internal emails which stated what Okko’s arguments were that they were considered.
In coming to its decision to grant OFAC’s Motion for Summary Judgment and maintain the block, the Court found that IEEPA does not impose any limit on the scope of an interest blockable under its authority. Indeed, the Court found that a sanctions target need not have a “legally enforceable ownership interest” to justify a blocking under U.S. regulations. Furthermore, the law in the D.C. Circuit is that OFAC may choose and apply its own definition of property interests, subject to deferential review. Consarc Corp. v. Iraqi Ministry, 27 F.3d 695, 701 (D.C. Cir. 1994). The Court further found that a beneficiary’s interest in the blocked property is extinguished once the property has been transferred pursuant to an OFAC license, or once the executive order underpinning the blocking is terminated. The Court, however, seems to contradict this later by stating: “The IEEPA and related regulations provide only one method by which UEB’s interest in the funds may be extinguished: a valid license from OFAC.”
In upholding OFAC’s blocking, the Court found that the reason UEB maintained an interest in the deposit is because, despite Okko’s arguments, Okko was unable to dispose of the funds while they remained in UEB’s account, and that nothing caused UEB to lack access to the account or control of the funds in it. Further, the Court noted that because the agreement between Okko and UEB required that the deposit be returned five (5) days after receiving a written demand from Okko, there was no certainty that Okko would have made that written demand.
While the Court did note that OKko had raised a question as to whether OFAC adequately explained its decision, it found that such an inadequacy did not constitute defective fact-finding procedures by the agency. In sum, the Court’s decision made it clear that under U.S. sanctions, there are no remedial measures a party can engage in to unblock assets. In the Court’s own words: “The regulations contain no provision by which the efforts of a sanctions target and a company it wishes to do business with can, on their own, ‘un-block’ assets frozen by OFAC.”
The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or firstname.lastname@example.org