Last Friday, the Ninth Circuit Court of Appeals, found that parts of the designation and blocking process that the United States Department of the Treasury Office of Foreign Assets Control (OFAC) engages in are unconstitutional. Specifically, the court held that OFAC’s designation and blocking process, in regards to domestic organizations, violates the 5th Amendment to the United States Constitution by failing to provide adequate notice, a meaningful opportunity to respond, and by failing to prepare and disclose an unclassified summary of the basis for the the designation. Moreover, the court held that OFAC violated the Fourth Amendment when it froze a designated party’s, Al-Haramain-Oregon, assets without a warrant.

Particularly interesting was the court’s contention that, “OFAC’s interest in preventing terrorism is extremely high. But we cannot accept OFAC’s contention that its blocking orders are per se reasonable in all circumstances, solely by virtue of that vital mission.” This reasoning is a departure from former jurisprudence where court’s have typically deferred to the executive branch in matters of national security.

Moreover, the court acknowledged that an OFAC designation is akin to what I often refer to as an economic death penalty. Specifically the court stated, “Although an entity can seek administrative reconsideration and limited judicial relief, those remedies take considerable time, as evidenced by OFAC’s long administrative delay in this case and the ordinary delays inherent in our judicial system. In sum, designation is not a mere inconvenience or burden on certain property interests; designation indefinitely renders a domestic organization financially defunct.” I would expand upon the court’s contention and say that such characterization is also appropriate for designated foreign organizations.

Furthermore, OFAC stated during the appeal that providing a brief unclassified summary of the reasons why a party was designated would be such a burden that it would prevent OFAC from being able to carry out its mission. The court dismissed this as unrealistic, stating that providing a short unclassified summary would only amount to a small expenditure in resources.

In the end, however, the court did find that the violations of Al-Haramain’s constitutional rights were harmless and that OFAC did not abuse its discretion in designating the Oregon based charity. So what does this all mean for future designation cases?

First, it should be noted that Al-Haramain-Oregon is a domestic organization, therefore, it is afforded the protections of the U.S. constitution. Most parties designated by OFAC are in fact foreign individuals or entities with no substantial connections to the United States. As such, they do not have standing in federal court and cannot raise the same sort of claims as Al-Haramain did in this case.

Second, and most important, is what this decision means. It was not just a 59 page academic exercise. This decision was a clear warning by the judiciary to OFAC that there are flaws in their designation and blocking procedures. While they did acknowledge that OFAC was correct in their decision to designate Al-Haramain, they also clearly stated that the manner in which that decision was made, while harmless, was unconstitutional.

A former boss of mine used to say, “You have to do things in the right way or it’s wrong.” That saying immediately popped into my head upon reading this decision. It will interesting to see if OFAC revamps its approach in designating and blocking as a result of the Ninth Circuit’s decision. I think there will be some changes, however, I believe those changes will only be in regards to the process for designating and blocking of domestic organizations. Moreover, it’s my opinion that these changes will be internal and most of us never know about them or will not not find they occurred for some time.

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 ferrari@ferrari-legal.com.