Introduction
Once individuals are listed by the US government as an SDN or placed on a similar blacklist, the impact on their lives, both personal and economic, is immediate and profound.Footnote 1 Their bank accounts are frozen, as are their credit cards, access to other assets, and access to credit. Any US entity that transacts business with an SDN is subject to severe penalties under US law, and foreign entities that transact business with an SDN may be excluded from the US markets or the US financial system.
These designations take place without any prior notice to the persons to be listed. The reasoning for that is to avoid giving them the opportunity to hide their assets prior to being frozen. In other ex parte proceedings – that is, where only one side has access to the court – such as a hearing seeking an injunction in civil litigation, a temporary order may be granted, pending a thorough hearing involving both parties. However, in the case of blacklisting an individual, the determination is entirely ex parte. There is no comprehensive hearing in which the agency or court hears the arguments of the SDN, gives them access to the evidence against them, and provides an opportunity to refute the accusations against them prior to the designation being imposed.
In the context of US economic sanctions, the primary agency that engages in the blacklisting of persons and companies is OFAC, within the Treasury Department. In placing someone on a blacklist, the agency, such as OFAC, which oversees the implementation of economic sanctions, may rely on classified information, which will not be available to the listed person or their legal counsel. The agency may also rely on rumors, newspaper articles, or blog postings, however unreliable or unfounded these may be.
Once someone is listed by OFAC, and their assets are frozen and financial transactions are prohibited, they may want to contest their listing. In this case, they will find that the barriers are nearly insurmountable. First, the due process requirements are minimal, and easily sidestepped. The individual seeking to contest their designation will find that it is difficult or sometimes impossible to obtain the documents upon which the designation is based. What documents they do receive may be so heavily redacted as to be useless. Consequently, it is difficult to even determine whether the designation was carried out in accordance with the law, and in seeking reconsideration, or pursuing a legal challenge, the SDN is quite literally left to guess at what the evidence for their listing may be, and then produce evidence to rebut such basis and its sources that remain obscured to them.
US nationals, and those with substantial ties to the US, may seek judicial review on constitutional grounds. Even in such cases, however, they will be unlikely to succeed in court. This is because the courts generally grant a high level of deference to the actions of federal agencies, and when national security is invoked, as is the case with sanctions, that deference has been characterized by the courts as “extreme.” Notably, most of the persons and companies placed on US blacklists are not US nationals, and thus would be unable to assert such constitutional rights absent a showing of “substantial ties” to establish standing for such claims in US courts. Most sanctioned persons do not have these ties, however. Rather, they are simply persons or companies based in Latin America, Africa, Asia, the Middle East, and so forth, and do not have US immigration status, bank accounts, property, or business transactions in the US. In that case, they will have no standing to bring an action in US courts to challenge their listing on constitutional grounds, and will be relegated to seeking judicial review under the Administrative Procedure Act (APA). Meanwhile, because they are listed, any foreign bank that engages with the US financial system will often refuse to do business with them, and any foreign company that fears being excluded from the US market will often do the same. Thus, the US listing may paralyze them financially and ruin their business; and yet they will be barred from seeking redress in US courts, on the grounds that they do not have sufficient ties to give them standing to bring constitutional claims regarding the lack of due process.
All those who are listed, including foreign nationals, however, may seek to challenge their designation under the APA, which governs the operation of government agencies, including those within the Treasury Department. However, the APA places minimal limitations on executive agency powers, with few meaningful opportunities for appeal, either within the agency or in the courts. Further, the APA contains a high degree of deference toward the judgment of any agency. Moreover, in the case of national security matters, which include economic sanctions, the courts are even more reluctant to question the agency’s judgment stating that the SDN must provide the agency’s judgment with “extreme deference.”
Compounding matters further, for persons who are listed, gaining the documentation that is the basis for their designation, or even learning the specific accusations against them, is difficult and sometimes impossible. In addition, OFAC’s designation only requires showing that it is based on a reasonable cause to believe the party meets the sanctioning designation criteria arising from evidence which, again, may consist of anything from rumors, to press releases, to internet blog postings by a group with personal or political antagonism toward the individual who is listed.
In the rare event that an SDN is successful in challenging their designation, either within the agency or in the courts – a process which may take years and cost hundreds of thousands of dollars – then OFAC can simultaneously relist them, giving a new reason. This forces the sanctioned person to embark anew on the same process, which then may take years more, at considerable expense.
Unsurprisingly, the process of challenging a sanctions designation has been described by some commentators as Kafkaesque,Footnote 2 and politically driven, and the author has heard from sanctions practitioners and designated parties alike that there is no real hope for removal of sanctioned parties until the US believes it is politically expedient to do so.
This chapter explores the US sanctions delisting process. Drawing on the author’s experience in challenging US sanctions designations, as well as a variety of court decisions, this chapter provides an overview of the challenges sanctioned parties face in seeking to challenge their designations and how courts have treated such claims.
The US Sanctions Designation Process
Almost daily, news headlines flash with descriptions of new sanctions imposed against politically or financially high-profile individuals, companies, or organizations. Indeed, in 2018 alone, the Trump administration sanctioned nearly 1,500 individuals and entities.Footnote 3 Despite this, there is rarely any substantial information made publicly available about how these designations happen. So what considerations, processes, and review went into the decision to impose sanctions on a particular individual? And what criteria were met to determine whether the designation was appropriate, and what conclusions and/or findings were made in support of that determination?
The US government offers many purported reasons for imposing sanctions – for example, to protect the US financial system, support diplomatic efforts, coerce action in furtherance of US foreign policy, and so on. Traditionally, however, US economic sanctions were thought of as a means by which to protect US national security interests. While this theory has evolved, many US sanctions actions are still undertaken with the express goal of protecting US national security. For example, in a sanctions designation of a Russian government research institution connected to the development and distribution of malware, former U.S. Secretary of the Treasury, Steven Mnuchin, noted that the US “will continue to aggressively defend the critical infrastructure of the United States from anyone attempting to disrupt it.”Footnote 4
But protection of the US’s national security interest is not the only proffered justification for a sanctions designation. Indeed, the US has also used its economic sanctions authorities to promote its foreign policy goals. One of the starkest examples of this approach can be seen in US sanctions actions targeting Iran and Venezuela, even when there is no clear relation to US national security.Footnote 5 For example, in 2020, the Trump administration issued an Executive Order, E.O. 13902. The accompanying press release stated that the action was taken to “deny the Iranian government financial resources that may be used to fund and support its nuclear program, missile development, terrorism and terrorist proxy networks, and malign regional influence.”Footnote 6 However, the scope of the action went far beyond that; the Secretary of the Treasury was authorized to sanction literally any Iranian financial institution for operating in Iran’s financial sector.Footnote 7 This affected the entire economy of Iran, as well as its international trade – measures that went well beyond missile development and so forth, and which were expressly aimed at addressing “regional” issues of malign influence, not necessarily those directly threatening or impacting US “national” security.
While the legal authority authorizing the use of US economic sanctions derives from various statutes, US sanctions typically manifest themselves in the form of executive orders issued by the President which are implemented under regulations promulgated and administered by OFAC. These orders and regulations set forth the legal criteria under which a target is determined to warrant sanctioning. While numerous federal agencies may participate in particular cases, this chapter will focus on OFAC, which is the primary sanctioning agency in the US.
The criteria for designation under these sanctions regimes varies depending on the particular sanctions regime, however, there are some common categories of activities that trend across them. For example, US sanctions almost universally target the conduct of persons or companies, which are owned or controlled by, or acting for or on behalf of, persons targeted under a sanctions authority. In addition, these authorities also almost uniformly target persons providing material support or services or goods and services, directly or indirectly, to sanctioned persons.
Evidentiary Memorandum
The factual basis, and OFAC’s rationale, for a particular designation are found in the evidentiary memorandum. An evidentiary memorandum sets forth the information and evidence marshalled and relied upon by OFAC to justify its decision to sanction a particular party. The categories of information found in the evidentiary memorandum include: (1) personal identifying information; (2) the legal authority under which the sanctions action is taken; (3) background information to provide context on the sanctions or the person being targeted; (4) the basis for designation, that is to say, the conclusions and findings upon which the determination that the legal criteria for a sanctions designation is satisfied; and (5) additional information, that is to say, derogatory information concerning the subject of the targeting action which is not necessarily material to the designation action. Exhibits containing the “evidence” relied upon in support of its determination, conclusions, and findings are also attached to the evidentiary memorandum. OFAC has no duty to seek any information that runs counter to the accusations against the individual, or to consider any materials that may cast doubt on the credibility of the evidence it has collected.
Insofar as the evidentiary memorandum contains OFAC’s factual basis and reasoning for the designation, it is of critical importance to challenging a sanctions designation either through OFAC’s administrative delisting procedures or via judicial review. That is because the factual bases of the designation – and establishing that those bases are erroneous, insufficient, or have changed – are the subject of the administrative delisting process, while the reasoning in support of the designation action is at the crux of judicial review. Thus, without some level of access to the evidentiary memorandum and the ability to address it head on, no meaningful challenge to an OFAC designation can be made.
In truth, from the author’s experience, there are limited ways to obtain it: (1) a request made to OFAC’s Office of Global Targeting (OGT) seeking release of a “courtesy document,” which constitutes an unclassified version of the list of exhibits compiled in support of the evidentiary memorandum; (2) a request for its disclosure pursuant to the Freedom of Information Act 1966 (FOIA); or (3) its disclosure during litigation challenging the designation. Of those three ways, obtaining the evidentiary memorandum through litigation is the fastest, while disclosure through the FOIA process yields the most insight, by providing, for example, the rationale underlying redactions made to the evidentiary memorandum. Unfortunately, requesting the courtesy document from OGT – which is disclosed rather quickly – yields very little in terms of the content underlying the agency’s reasoning for the designation.
In short, obtaining the OFAC evidentiary memorandum underlying a designation is not easy, and there is no clear, direct path to obtaining this document, and no clear obligation on the part of OFAC to provide it, much less do so in a timely manner. And the one document that is disclosed quickly (the courtesy memo) provides little usable information. In addition, the materials provided may be heavily redacted. Indeed, it is not uncommon for nearly all of the text to be blacked out, leaving little more than page numbers and section headings (Figure 19.1).
Figure 19.1 Redacted evidentiary memorandum provided by OFAC to an SDN during litigation seeking judicial review of their listing.
Avenues for Appealing an OFAC Sanctions Designation: The Administrative Reconsideration Process and Judicial Review
Sanctions designations are undertaken ex parte – without notice to or participation of the party to be designated. Consequently, the first opportunity for a designated person to challenge their listing is through the mechanism of seeking administrative reconsideration, after the listing has taken place. Additionally, there is no equivalent of a presumption of innocence. On the contrary, the agency has great discretion in sanctioning an individual, sometimes even on the basis of very thin or questionable evidence; and it falls to the individual to then provide exculpatory evidence to OFAC or to demonstrate a change in circumstances,Footnote 8 even though the individual may be unable to find out the particulars of the wrongful acts they are accused of, let alone the evidence ostensibly proving these acts. In seeking administrative reconsideration, the blocked person “may submit arguments or evidence that the person believes establishes that [an] insufficient basis exists for the designation.”Footnote 9 But without actual knowledge of the conclusions and findings against them, the individual may be reduced to simply guessing as to the agency’s reasoning for designating them, and the particulars of their claimed misconduct; this would then provide evidence which they hope will address the claims and evidence that have been withheld from them, or redacted so extensively as to be useless. After OFAC has conducted its review of the request for reconsideration, which may (but need not) include a hearing, it “will provide a written decision to the blocked person.”Footnote 10
A “designated person can request delisting as many times as [they like].”Footnote 11 This would appear to give the individual limitless opportunities to challenge their listing. However, without access to evidence against them, it makes little difference whether they may submit two delisting requests or ten. In denying a delisting petition, OFAC has no duty to provide the SDN with the information in OFAC’s possession, which OFAC is relying upon in its denial.Footnote 12 Instead, the SDN is required to present all evidence that they “[believe] establishes that [an] insufficient basis exists for the sanction,”Footnote 13 even though they may have no idea what information OFAC relied upon to list them in the first place, or to demonstrate that there has been a change in the circumstances which originally gave rise to the designation.
OFAC’s regulations permit it to “request clarifying, corroborating, or other additional information,” with respect to the information put forward by the petitioning party.Footnote 14 However, there is no duty to solicit the designated person’s opinion on the facts that the agency relies upon for its denial of the delisting petition.Footnote 15 Instead, it is the sanctioned person’s burden to provide such evidence in a future petition to OFAC, thereby requiring the administrative delisting process to start anew,Footnote 16 and the SDN may once again be entirely in the dark about the particular claims or evidence against them.
Unsurprisingly, requests for reconsideration do not automatically result in delisting. Instead, these cases may go on for months or even years, all while the individual’s assets and income are frozen, and anyone who provides the SDN with financial support could be exposed to consequences under US law. For the most part, arguments for delisting due to an insufficient basis for the designation are typically granted only for situations of mistaken identity. Rarely is OFAC persuaded that its core claims are unsound, or that its evidence is not credible. In part, of course, this is because the individual is not provided with the evidence against them, and so has little chance of refuting it effectively. While, due to the confidential nature of the delistings, there does not appear to be any publicly available data on this, it is the author’s own professional experience that about 90 percent of cases arguing for reconsideration on insufficient basis have been denied, and no such cases have been granted since 2017.
Judicial Review of US Sanctions Actions: The APA and Other Legal Claims
While the administrative delisting process provides many barriers to an individual obtaining relief from a US sanctions designation, the remedies available through the courts are not much more promising. Notably, the caselaw addressing OFAC designations and delisting challenges is not favorable to plaintiffs seeking to challenge their designations, even though a growing number of such cases have been brought in the courts.
Generally, there are two types of claims brought by sanctioned parties seeking to challenge their designations in court: (1) claims made under the APA; and (2) claims made under the US Constitution. Unfortunately for sanctioned parties, neither have been terribly successful, although constitutional claims have received more serious consideration than those brought pursuant to the APA, and have thus often led to favorable outcomes out of court (e.g., settlement of the claims in exchange for delisting).
APA Claims
The APA is a statute that grants authority to US federal courts to review actions by federal executive agencies to ensure that those agencies act lawfully. The statutes authorizing the various sanctions regime traditionally do not themselves provide for judicial review. Consequently, the APA often serves as a stand in, providing standards and a procedural path for actions seeking to challenge a sanctions designation.
In addition, as most sanctions designees (referred to throughout this chapter as SDNs) cannot assert standing to bring claims under the US Constitution, the APA is often the only resort for those parties to obtain the review by a US court of the legality of their designation.
The bar for courts to set aside an agency action under the APA is extremely high. The APA requires courts to “hold unlawful and set aside agency action, findings, and conclusions” that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.”Footnote 17 In the context of APA review, reasoned decision-making requires that an agency “articulate a satisfactory explanation for its action” with a “rational connection between the facts found and the choice made.”Footnote 18 In doing so, courts are limited to reviewing the administrative record that OFAC relied upon in making the designation. The court “may not substitute [its] judgment for Treasury’s,” but can only require that the agency “examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.”Footnote 19
As previously noted, the courts provide a highly deferential standard of review under the APA, whereby they will only set aside agency action “if it is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”Footnote 20 But in the case of sanctions, the level of deference is even greater, since sanctions are considered to involve national security. Courts reviewing sanctions challenges asserting APA claims have noted that since such cases involve national security, the sanctioning agency’s determination should be provided “extreme deference.”Footnote 21
If an agency “offer[s] an explanation for its decision that runs counter to the evidence before the agency or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise,” the action is deemed arbitrary and capricious and set aside.Footnote 22 However, in practice, there are few circumstances where courts have found the agency’s decision to be arbitrary and capricious. For the most part, the courts have generally treated the “extreme deference” standard as entailing absolute deference.
Despite the level of deference provided to OFAC’s sanctions determinations,Footnote 23 courts have acknowledged that they “retain a role, and an important one, in ensuring that agencies have engaged in reasoned decision making.”Footnote 24 A reasoned decision in this context means a final determination that sanctions should be imposed must be based on an administrative record containing and “supported by substantial evidence.”Footnote 25
Even if the courts were to take a more activist approach in reviewing the agency’s determinations, the standard of review makes it almost certain that the outcome would favor the agency. Courts reviewing APA claims do not review the evidence from the perspective of “whether [it] could support the petitioner’s view of the issue, but whether it supports the agency’s ultimate decision.”Footnote 26 In doing so, courts have found the OFAC’s resolution of which pieces of evidence were most credible and convincing is enough to affirm OFAC’s determination; thus, it is OFAC’s reasoning, not the SDN’s argument,Footnote 27 that is reviewed for soundness. If OFAC’s decision corresponds to the evidence on which it is based – however partial or dubious the evidence may be – then the decision will be upheld. Conversely, if the SDN provides evidence that it did not engage in the misconduct of which they are accused, however well documented that may be, their evidence is largely irrelevant, since it is primarily OFAC’s reasoning that is subject to the court’s review.
Types of APA Claims
Sanctions designation challenges under the APA have run the gamut from claiming that the designation was undertaken in excess of statutory authority or not in accordance with law; was arbitrary and capricious or lacked substantial evidentiary support; was unreasonably delayed or withheld; or violated due process rights espoused by the APA. Each category of claim and the courts’ recent treatment of them is reviewed below. However, for each of these categories, the results are similar: almost none are successful.
“Arbitrary and Capricious” and “Lack of Substantial Evidence” Claims.
Perhaps the most common APA challenge to a sanctions designation is one that alleges that the action is arbitrary and capricious. Under this type of claim, if an agency “offer[s] an explanation for its decision that runs counter to the evidence before the agency or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise,” in theory, the action is deemed arbitrary and capricious and set aside.Footnote 28
Claims that OFAC’s designation actions are arbitrary and capricious under the APA may take on many forms, from contentions that actions are procedurally flawed to substantive claims regarding decisions the designated parties deem illogical.Footnote 29 For example, OFAC sometimes designates an SDN for conduct that had ceased prior to their designation. OFAC has also refused to delist an SDN, even though the conduct in question took place, in some cases, years before the SDN was listed. In cases such as these, the SDNs have sometimes brought litigation arguing that OFAC’s actions are arbitrary and capricious.
The courts have rejected these claims, however, as long as the relevant authority, such as the executive order, authorizes OFAC to blacklist individuals for conduct that occurred in the past – even if it was legal at the time it occurred, and had stopped, sometimes years earlier. In examining such a claim, the court in Olenga v. Gacki noted the language of the relevant Executive Order permitting designation of persons determined to “have engaged in, directly or indirectly … actions or policies that undermine democratic processes or institutions …”Footnote 30 In reviewing that language the court determined that OFAC could indeed designate a person for their past conduct, at least to the extent such past tense language was present in the designation criteria of the particular executive order.Footnote 31 Other courts have followed suit and allowed for historic conduct to be relied upon for a sanctions designation action. In doing so, courts have held that where the executive order relied upon for the designation contains criteria written in past tense, the SDN need not be engaged in sanctionable conduct at the time of their designation or the review of their delisting petition for OFAC to reasonably conclude that they should be or remain designated.Footnote 32
Naturally, SDNs have also presented claims that the conduct that they purportedly engaged in did not meet the designation criteria of a particular sanctions authority, and thus OFAC’s determination that they meet that criteria was arbitrary and capricious. For example, an SDN may be blacklisted on the grounds that he provided material or financial support to someone else who was blacklisted. In these cases, the courts will not look at the underlying fact of whether the SDN provided the material or financial support. Rather, they will primarily consider OFAC’s rationale for that determination and how the agency reasoned from their evidence to reach that decision.
Courts, however, have routinely found that OFAC’s decision to designate or deny a delisting petition was not arbitrary and capricious, as long as OFAC was “reasonable.” For example, where OFAC relies on specific examples of conduct that, in its reasonable judgment, constituted material or financial assistance to another sanctioned person or furthered the national emergency underlying a designation, OFAC’s action is not arbitrary or capricious.Footnote 33 What is significant here is that the focus is on OFAC’s reasoning and not whether the factual claims are actually true.
It is important to recall that OFAC’s reasoning only concerns whether there is a rational connection between its findings and the evidence before it. But, again, OFAC has no obligation to use evidence that is thorough or impartial, or even credible. And as long as its decision to list an SDN, or deny a petition for delisting, is rationally connected to the evidence it has gathered, then courts will not set aside that decision as arbitrary and capricious, and OFAC’s decision will stand, even if it is factually groundless.
OFAC is also entitled to rely on the documents and views of the other government agencies that consult with OFAC on its decision to designate or delist SDNs. For example, in one case, OFAC relied upon the State Department’s public statements in assessing the SDN’s evidence and argumentation, and then denied the SDN’s request to be delisted.Footnote 34 This guidance was deemed by the court to be credible because the State Department is viewed as a subject matter expert on foreign policy determinations, and thus it is appropriate for OFAC’s decision-making to turn upon the State Department’s assessment of the foreign policy implications of certain conduct.Footnote 35
The courts have, however, sometimes rejected sanctions agencies’ interpretations of authorizing language as arbitrary and capricious. In Luokong Technology Corp., for example, the court found that reliance on the interpretation of certain language when imposing sanctions was contrary to how that language is ordinarily used or interpreted by courts. The court considered this to be evidence that the agency – in that case, the Department of Defense – engaged in arbitrary and capricious decision-making with respect to the designation.Footnote 36 In doing so, courts have rejected requests to accept an agency’s interpretation of a term over that of the plain text of a sanctions–related authority.Footnote 37 Indeed, courts have stated that to allow such interpretations to rule over plain meaning would be to render a sanctioning agency’s power to sanction nearly limitless.Footnote 38 The court found that misinterpretations or misapplications of language not only support a holding that the action was arbitrary and capricious, but also that it exceeded statutory authority or was not in accordance with law.Footnote 39
While the court in Luokong rejected the agency’s interpretation when it ran counter to the plain meaning of the text, the courts have had no objection when the agency uses interpretations of key terms in one context and gives the same term an entirely different reading in another. For example, in Deripaska v. Mnuchin, OFAC interpreted the word “agent” one way under E.O. 13661, while interpreting it differently under Foreign Terrorist Organization Sanctions Regulations. This pattern of varying interpretations can create considerable confusion for individuals and companies that are obligated to comply with multiple sanctions regimes administered by OFAC, where the same terms are employed, and OFAC is entitled to interpret and apply the language differently in each sanctions regime.
Moreover, this issue of varying definitions and interpretations goes beyond just the common usage of certain words; it also extends to whether certain activities fall under certain text used in one sanctions program but not in another. Indeed, in those instances where a term is defined under a certain sanctions authority to cover particular activities, parties seeking delisting have argued that there should be consistency with respect to the coverage of those activities by the same terms used under a sanctions authority that does not define it.Footnote 40
OFAC’s response has been to say that its interpretations of terms used in different sanctions programs are informed by the unique foreign policy and national security circumstances at play in each sanctions regime and therefore an interpretation in one program is not determinative of an interpretation in other programs.Footnote 41 Courts have accepted this line of reasoning, again by relying on extreme deference to OFAC’s decision-making, and by determining that if the definition that OFAC relies upon is reasonable, the court will not disturb the agency’s decision to interpret the term in that manner,Footnote 42 even if OFAC is using entirely different definitions across the sanctions regimes that it administers.
While courts have generally deferred to OFAC’s varying interpretations of authorizing language, even when it is inconsistent, they have been less deferential when OFAC asserts that its decision is based on a “potential” satisfaction of a legal authority’s designation criteria. Indeed, in Luokong, the court held that potential satisfaction of designation criteria inherently cannot constitute substantial evidence of satisfaction of those criteria.Footnote 43 Where the agency’s findings are simply that a party may have future potential dealings with someone, and that such future dealings would be sanctionable, then a designation on those grounds is likely arbitrary and capricious.Footnote 44
As such, an agency’s sanctions designation is arbitrary and capricious when it is not supported by substantial evidence.Footnote 45 To establish substantial evidence, the court must ask, “whether a reasonable mind might accept a particular evidentiary record as adequate to support a conclusion.”Footnote 46 In Xiaomi, the sanctioning agency sought to justify its decision to sanction a Chinese company as a Chinese Communist military company because the SDN was engaged in the production of technology that was viewed as having military capabilities.Footnote 47 The court did not find that evidence to be substantial, however, because that technology was proclaimed by the company to be used for consumer electronics and technology, and indeed, was widely used in the consumer electronics industry.Footnote 48 The court found that to accept the government’s purported evidence as substantial would provide no limit to what they could use to justify a designation of a company as purportedly being a Chinese military company.Footnote 49 Accordingly, the designation on those grounds was found to be arbitrary and capricious.Footnote 50
In recent cases, reviewing courts have found other circumstances to evidence arbitrary and capricious action when reviewing sanctions designation actions. For example, one court found that an evidentiary memorandum justifying a sanctions designation failed to articulate a satisfactory explanation for the sanctions.Footnote 51 In doing so, the court pointed to several deficiencies in the memo which supported its finding. First, the court noted that the memo did not expressly identify the source of the authority for the designation, and that even when it quoted portions of the purported authority for the sanctions those quoted portions were incorrectly stated.Footnote 52 In addition, the agency relied on inaccurate and out of date summaries of the sanctioned person’s business, and misnamed the sanctioned entities or parties it purportedly had dealings with.Footnote 53 The court found that these errors undermined confidence in the care the agency took in the decision-making process.Footnote 54 Second, the memo’s analysis merely consisted of a recitation of the misquoted sanctions designation criteria, two facts pulled from the plaintiff’s Annual Report, and then the blanket conclusion that the sanctions designation criteria were met.Footnote 55 The court noted that the lack of analysis failed to connect the facts to the conclusion – which is the most critical step in the reasoned decision-making process.Footnote 56 The court thus found that merely restating the language of the sanctions authority and following it with a conclusory statement does not adequately explain the basis for its decision.Footnote 57
Thus, there have been some circumstances where the courts have set aside sanctions designations as arbitrary and capricious. But those are rare. For the most part, the courts have shown an extreme degree of deference to OFAC, even where evidence supporting its judgment is barely credible and where its interpretations are inconsistent. And of course, OFAC may simply base its listing on classified materials, which may be based on questionable claims made by persons who are not particularly credible.
Arguments That OFAC Exceeds Its Statutory Authority or Is Not Acting in Accordance with Law.
There have also been numerous challenges brought by SDNs asserting that OFAC did not have the statutory authority to impose sanctions against the SDN. This claim might be made either in regard to the SDN’s initial listing or in response to an SDN’s petition to be delisted. Although raised under the APA, these claims usually allege that an Executive Order or implementing regulations violate the First and Fifth Amendments to the US Constitution, and/or exceed OFAC’s statutory authority under the IEEPA.Footnote 58
IEEPA, the primary statutory authority in most US sanctions regimes, requires the President to declare a national emergency that is the justification for the sanctions. Many claims have been brought on the argument that the publicly stated reasons for a designation do not appear to align with a declared emergency for which a sanctions authority was effected.Footnote 59 For example, this issue has been raised when a press release announcing a sanctions designation gave reasons for the sanctions that appear untethered to the national emergency on which the sanctions authority was based.Footnote 60
The courts, however, have not been very receptive to this argument. Recently, a court noted that as long as OFAC’s administrative record shows that the SDN was listed for a proper purpose, then OFAC’s public statements that run counter do not constitute prima facie evidence that the listing is not in accordance with the law.Footnote 61 In doing so, the court focused not on whether the reasons for imposing the sanctions were correct – that is to say, whether it was in response to the declared emergency identified by the sanctions authority – but rather, whether OFAC had a reasonable cause to believe that the designation criteria was satisfied.Footnote 62 Further, according to the court, if a press release identifies one reason for the imposition of sanctions connected to a threat identified in the declared national emergency then that qualifies as a legitimate basis for the imposition of sanctions, regardless of whether the other reasons constitute threats underlying that emergency.Footnote 63 Moreover, the same court found that there are no authorities to support an argument that public statements can supplant the stated reasons for the sanctions as identified in an evidentiary memorandum compiled in support of the designation.Footnote 64
Another example of such a challenge to OFAC claims, and one treated more favorably by the courts, involves situations where OFAC claims that the designation is justified based upon its consultation with other agencies; but in fact, OFAC never consulted them.Footnote 65 When reviewed in the context of a preliminary injunction, this type of claim has been deemed to have a high likelihood of success.Footnote 66 Indeed, in examining such a claim, a court found that failure to consult all relevant agencies can show that a designation was not carried out in accordance with law, or at a minimum that there was a lack of care taken in determining the basis for the sanctions.Footnote 67 The latter of these points could contribute to an order to delist an individual.Footnote 68
Arguments That OFAC Engaged in Unreasonable Delay or Unlawful Withholding.
Another claim frequently brought by SDNs is that OFAC has unreasonably delayed a decision on a pending delisting petition. These types of claims are common, as OFAC often takes years to adjudicate a delisting petition presented to it, and in some instances may take years to even ask questions in response to such petitions. One recent example of this type of claim was raised in Pejcic v. Gacki. In 2004, OFAC designated plaintiff Pejcic under E.O. 13219, as amended by E.O. 13304, for materially assisting, or providing financial or material support for, Radovan Karadzic, a designated person and convicted war criminal, and for actively obstructing or posing a risk of actively obstructing the Dayton Accords.Footnote 69 In response, Pejcic initiated a delisting petition in 2017, which was denied by OFAC in December 2019 – nearly three years after he filed his petition.Footnote 70
That delisting petition was only denied, however, following a civil lawsuit brought against OFAC for, among other claims, unreasonable delay in adjudicating the delisting petition.Footnote 71 Following OFAC’s denial of the delisting petition, Pejcic amended his complaint which persisted in its claim that there was an unreasonable delay in the processing of the petition.Footnote 72 Even though OFAC eventually issued a ruling, Pejcic argued that his claim regarding the unreasonable delay was not moot.Footnote 73 In general, even after a legal claim is resolved, it may not be subject to dismissal for mootness if the wrongful act is capable of repetition, but would also evade review. Pejcic argued that OFAC’s unreasonable delay in responding to his petition met this standard.Footnote 74 This was because, according to Pejcic, OFAC had not adjudicated the delisting petition for nearly three years, and thus delayed his ability to file future delisting petitions.Footnote 75 The court, however, rejected Pejcic’s argument that OFAC’s delay was unreasonable, or that he was likely to be subject to unreasonable delays in the future.Footnote 76
In addition, other plaintiffs have argued that OFAC’s failure to delist them constituted the unlawful withholding of an agency action under the APA.Footnote 77 While the APA requires the courts to “compel agency action unlawfully withheld or unreasonably delayed,” the courts have found that this provision only applies when there is a failure to undertake a discrete agency action that it is required to take.Footnote 78 There must be “a ministerial or non-discretionary duty amounting to a specific, unequivocal command.”Footnote 79 Accordingly, in cases where OFAC has responded to the SDN’s request to delist but the SDN disagrees with OFAC’s decision, courts have found unlawful withholding claims to be moot.Footnote 80
Finally, some SDNs have sought to bring unreasonable delay claims under the APA, claiming that that OFAC’s withholding of a decision on a petition for administrative reconsideration until litigation is brought, and then – in the midst of litigation – adjudicating that petition is impermissible as capable of repetition, yet evading review. Capable of repetition, yet evading review is an exception to when courts may review for unreasonable delay, an agency action that has already been taken.Footnote 81 The claims occur whether the challenged agency action is too short in duration to be litigated prior to cessation, and there is a reasonable expectation that the complaining party will be subjected to the same action again.Footnote 82
In the context of sanctions litigation, this type of argument was pursued by Lilijana Karadzic, an individual sanctioned under E.O. 13304, the Western Balkans sanctions program. In determining whether OFAC’s delay in processing Ms. Karadzic’s delisting petition, only to decide it once she sought judicial review for unreasonable delay based on capable of repetition, yet evading review, the court found the claim to be moot.Footnote 83 In making that determination, the court held that any decision on the merits of Ms. Karadzic’s APA claims would not affect her rights currently, nor would they have any chance of affecting her rights in the future, other than speculatively.Footnote 84 Further, the court held that the claims are not capable of repetition, yet evading review because requests for removal from the SDN List are not too short in time to be litigated prior to cessation or expiration.Footnote 85 It did not matter, the court found, if declaratory judgment was sought because OFAC’s adjudication of the petition for reconsideration removes any substantial controversy of immediacy and reality regarding the agency action purportedly unreasonably delayed.Footnote 86 Further, even if OFAC takes years to decide a renewed petition for reconsideration only to await litigation for unreasonable delay to adjudicate that petition, it does not evade review because such facts speak to unreasonable delay itself, not evasion of review.Footnote 87 Indeed, the court noted, for evasion of review to occur, the agency action should be two years’ in duration or longer, lest they cannot be fully litigated prior to cessation.Footnote 88 As Ms. Karadzic had admitted in her pleadings that her petition for reconsideration took about three and a half years to be resolved, and that most such petitions take two years or more, the court found that there was no evasion of review, and thus held her claims as moot.Footnote 89
Constitutional Claims
Constitutional claims, such as those involving due process rights under the Fifth Amendment, involve different standards which may offer SDNs a stronger basis for their petitions to be delisted than the APA provides. But SDNs must have standing to make these claims. “Standing” is the right of a party to bring suit in court.Footnote 90 The plaintiff must show that a given court has the power to hear the specific kind of claim that is brought to the court, such as a federal court that can adjudicate constitutional matters.Footnote 91 US persons may assert that their constitutional rights have been violated. But most SDNs are not US persons. For a foreign SDN residing outside the US to have standing to assert rights under the US Constitution, they must have a “substantial connection” to the US.Footnote 92 Courts have found that, without “substantial connections” to the US, there is no standing for foreign SDNs to bring due process claims under the US Constitution in challenging a designation.Footnote 93 But the law is largely unsettled as to what exactly meets the “substantial connection” test.Footnote 94
As a result, courts have engaged in fact-dependent, case-by-case assessments to determine whether constitutional protections apply.Footnote 95 For example, in National Council of Resistance of Iran v. Department of State, an SDN challenging its designation was found to have had substantial connections to the US because of an overt presence they maintained in a building in Washington, DC, and their interest in a small bank account in the US.Footnote 96 Despite this precedent, it remains unclear whether those rights turn on the presence of property in the US, or whether SDNs can raise certain constitutional claims, but not others.Footnote 97
The established precedent is that “non-resident aliens who have insufficient contacts with the United States are not entitled to [constitutional] protections.”Footnote 98 However, courts have taken divergent approaches in these cases. For example, a number of courts have declined to decide whether the plaintiffs were entitled to constitutional protections because they determined – regardless of any rights to due process – that the SDNs had already received such process.Footnote 99 Those courts have thus frequently declined to decide whether foreign plaintiffs can assert rights under the Constitution where, even assuming they could, the agency had been determined to have not violated those rights.Footnote 100 Some courts have found standing to sue where OFAC did not contest that the SDN has concrete and particularized, and actual or imminent injury-in-fact, that there is a causal connection between the injury and challenged OFAC action, and where a favorable decision would redress the injury.Footnote 101 On the other hand, some courts have taken the approach that foreign plaintiffs with no documented ties to the US lacked entitlement to the Constitution’s protections, and thus the courts do not have jurisdiction to hear the claim.Footnote 102
The extent of constitutional rights afforded to SDNs challenging their designations by OFAC is a hotly contested topic. But the traditional posture of the courts has been that “a foreign entity without property or presence in [the US] has no constitutional rights, under the due process clause or otherwise.”Footnote 103 Thus, it is possible – and indeed, it occurs with some frequency – that foreign individuals or companies might find their assets frozen and their transactions blocked by banks all over the world because they have been listed by OFAC; yet the courts will find that they do not have “substantial ties” to the US and therefore cannot assert in US courts that they have been denied due process or other constitutional rights.
First Amendment
Where the above discussion has concerned cases brought by the SDNs, there have also been several challenges brought by US persons who had dealings with an SDN prior to its designation. In these situations, a number of US persons have challenged the President’s exercise of IEEPA authority on the grounds that it violates the US person’s rights under the First Amendment. For example, some of these plaintiffs have asserted that their First Amendment rights were violated when sanctions regulations and executive orders barred certain speech and advocacy in supporting a sanctioned party and subjected them to potential civil or criminal liability.Footnote 104
Generally, under the First Amendment, the government may regulate the time, place, and manner of speech and expression, but not the content. However, in this case, the government’s restriction on speech is content-based: speech is restricted if it has the function or purpose of benefitting the sanctioned party.Footnote 105 Despite this, the courts have found that “[p]rotection of the foreign policy of the United States is a governmental interest of great importance.”Footnote 106 Moreover, in this context – and similar to the APA review discussed elsewhere in this chapter – the “evaluation of the facts by the Executive … is entitled to deference” given the “sensitive and weighty interests of national security and foreign affairs” at issue.Footnote 107 Therefore, courts have generally accepted the government’s claimed interest in the enforcement and administration of sanctions authorities.Footnote 108
Even so, the courts have placed some restrictions. A sanctions authority may not chill speech more than is necessary to achieve the objectives of the sanctions designation. In the case of Open Society Justice Initiative, the U.S. Department of State listed two prosecutors of the ICC, Ms. Fatou Bensouda and Mr. Phakiso Mochochoko, claiming national security concerns. In Open Society Justice Initiative, the court ruled that “national-security concerns must not become a talisman used to ward off inconvenient claims – a ‘label’ used to ‘cover a multitude of sins.’”Footnote 109 Thus, the national security justifications for seeking to prevent and potentially punish Plaintiffs’ speech may be inadequate to overcome the interests furthered by the protection of First Amendment rights.Footnote 110 And in some cases, the courts have found that even where OFAC offers the possibility of licensing speech or advocacy related to SDNs, even the potential for enforcement may impair an individual’s First Amendment rights.
But, again, this constitutional claim is available only to US persons and those with substantial ties to the US. Foreign nationals without such ties may be blacklisted for their association or advocacy for an SDN and will have no recourse under the First Amendment.Footnote 111
Fifth Amendment: Due Process
The use of asset freezes and other forms of blacklisting by the UNSC as well as by the US have long been criticized for the lack of due process. Certainly, these measures run counter to many of the principles that are basic to the rule of law: clear and consistent standards, applied transparently, where the person being punished has the right to see and contest the evidence against them, and so forth. These principles are contained in the Fifth Amendment’s due process protections.
Challenges under the Fifth Amendment to the US Constitution to the process afforded to SDNs looking to challenge their designations are also among the most common claims courts review in the context of challenges to US sanctions designations. To begin with, courts have routinely found that there is no constitutional requirement that OFAC must notify the individual, and provide an opportunity to be heard before issuing the order to freeze their assets. The rationale is that “any delay or pre-blocking notice would afford a designated entity the opportunity to transfer, spend, or conceal its assets,” defeating the purpose of the sanctions programs.Footnote 112
While this reasoning is compelling, it does not apply, of course, in the post-deprivation context, after the person’s assets have been frozen. However, even after the listing has taken place, courts have viewed the due process entitlements very narrowly, giving great deference to OFAC. OFAC has traditionally maintained that even if a plaintiff SDN can assert a Fifth Amendment claim, OFAC’s administrative procedures provide all the process that SDNs are due.Footnote 113 Courts, as usual, have agreed.Footnote 114
Courts have traditionally applied the three factors under the familiar Mathews v. Eldridge balancing test when considering whether constitutionally sufficient due process was afforded to an SDN.Footnote 115 This test requires consideration of (1) “the private interest that will be affected by the official action”; (2) “the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards”; and (3) “the Government’s interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.”Footnote 116
Despite these considerations, courts reviewing constitutional due process claims arising in SDN designation challenges have found the Mathews standard to be flexible, in that it only requires “that process which is due under the circumstances of the case.”Footnote 117 For example, where OFAC is required to provide an SDN with the documentary evidence on which their listing is based, OFAC may redact some or all of the text, making the document virtually useless in the individual’s efforts to understand and appeal their listing. In addition, in applying the Matthews test, the courts have found that OFAC need only disclose part of its reasons for listing, again making it difficult if not impossible for the SDN to prepare an effective appeal.Footnote 118 The proffered reason for these rejections is that IEEPA allows for designations based on classified information where the disclosure of that information is made to a reviewing court ex parte and in camera.Footnote 119 Courts have held this to mean that the designated party has no need for the classified information, and that due process only requires OFAC to provide the unclassified portions of the administrative record.Footnote 120 Courts have gone so far as to suggest that not only is this all that is required, but that even this is beyond what the Constitution requires.Footnote 121 As a result, OFAC may rely on classified information in rendering its decision, so long as it provides the SDN with the unclassified portions of the administrative record. Moreover, courts have found that OFAC is not bound by the Federal Rules of Evidence when designating individuals and entities and may consider any source so long as it is relevant.Footnote 122 This has led to courts upholding OFAC designations based on internet sources, intelligence data, hearsay declarations, press stories, criminal indictments, news articles, information from other government agencies, and open-source materials generally, and may include information that pre-dates designation.Footnote 123 Even where OFAC actually obscures the reasons and evidence for a designation action, the courts have had little objection.Footnote 124
Despite this incredibly favorable posture towards OFAC, courts have at least acknowledged that an OFAC designation has dire consequences for a designated party’s interests, and that when the blocking is predicated on redacted evidence the risk of erroneous deprivation is particularly high.Footnote 125 Still, these same courts have also found that the third Mathews factor – “the governmental interest at stake” – is dispositive “in the extraordinary [circumstance] where the government’s withholding is justified by ‘the privilege and prerogative of the executive’ in protecting vital national security interests.”Footnote 126 Moreover, courts have noted that forcing the executive to disclose classified information would “compel a breach of the security which that branch is charged to protect.”Footnote 127 Indeed, it is due to this “extreme importance of maintaining national security” that courts reject any position which would not permit OFAC to use classified information in designating a target.Footnote 128
However, in an effort to reconcile the dissonance between the harm to private interests and the government’s interests against disclosure, courts have noted that, in certain limited circumstances, OFAC may provide designees with sufficiently specific “unclassified summaries that describe the ‘who,’ ‘what,’ ‘when’ and ‘where’ of the allegations.”Footnote 129 While the disclosure of those unclassified summaries sounds promising, courts have not expressly required those summaries and have permitted OFAC to provide these summaries in seemingly random order and disconnected from any specific portion of the evidentiary memorandum.Footnote 130 Thus, even the very limited information that is provided to an SDN regarding the evidentiary basis for their listing may be communicated in such a way that it is difficult, if not impossible, for the SDN to respond effectively.
When an SDN petitions for reconsideration, OFAC may respond by sending a questionnaire seeking information from the petitioning party. The questionnaire may be narrow or broad, may be limited to the known allegations, or may be a “fishing expedition” seeking information unrelated to the case. The courts have found that these questionnaires provide the SDN with additional notice about the allegations and evidence against them, since they ostensibly reveal what OFAC deems relevant in reconsidering a designation action.Footnote 131 In other words, courts believe that it comports with due process to expect SDNs to divine from OFAC’s questions what the reasons for OFAC’s future decision to maintain their designation might be.Footnote 132 The position of the courts then can be summarized by stating that OFAC’s reconsideration process provides adequate due process when SDNs have notice, access to the unclassified record, and a meaningful opportunity to respond,Footnote 133 notwithstanding how vague, partial, redacted, disorganized, and unhelpful OFAC’s disclosures to the SDN may be.
Conclusion
The foregoing summation of the current state of the law with respect to challenges of US sanctions designations does not paint a pretty picture for SDNs seeking to have their designations removed. To put it mildly, there are major hurdles to challenging a sanctions designation, whether that challenge is presented to OFAC in the administrative delisting context, or before a court of competent jurisdiction.
As noted above, challenges brought under the APA present serious difficulties insofar as a sanctions determination will not be disturbed so long as the agency imposing sanctions presents a rational connection between the sanctions designation and the information in the agency’s possession. Further, while the US Constitution would afford the SDN a more impartial consideration, most SDNs would not be allowed to assert constitutional claims, given a lack of standing due to their being foreign nationals. This standing issue is further exacerbated by the lack of clarity as to what constitutes “substantial connections” to the US for purposes of establishing standing to assert such constitutional claims.
Regardless of whether the SDN can obtain a fair review of their sanctions designation, they will remain impaired in their ability to argue that the determination is flawed because it has been universally established that OFAC can rely on classified evidence – and even classified reasoning – to impose a sanctions designation. Further, as noted above, there is no obligation on OFAC to share any classified information, in any form, with the party seeking delisting. This leaves the SDN unable to know what they need to address in challenging their designation, how to address it, nor even whether the information or arguments they submit to OFAC or the court are relevant.
In addition, OFAC has made it a practice that if it cannot maintain the initial designation in the face of information demonstrating that the initial basis for designation was insufficient or has changed, then OFAC will simply change the criteria and/or the bases of the designation and create a new agency action. This has been done without any advance notice to the SDN challenging the designation and with no opportunity to rebut OFAC’s redesignation on new grounds, prior to it occurring. The courts have not blinked at this practice, and indeed have affirmed such actions as being within OFAC’s rights, telling the SDN they can simply begin the administrative delisting process – a process that may take years – anew.
What does this mean for those persons who have been sanctioned by the US? Is this simply a nuisance or is it an economic death penalty? While referring to sanctions as an economic death penalty might seem extreme, there certainly is significant harm suffered by SDNs. Indeed, the author is familiar with many stories of the loss of employment by thousands of people as the result of a sanctions designation of their employer; arrests due to allegations by OFAC underlying a sanctions designation; and even the loss of the ability to obtain medical insurance – due to an SDN’s designation – which led to denial of medical treatment, which ultimately resulted in death.
This harm is not exclusive to those SDNs in or with connections to the US. Most of these consequences are suffered outside of the US, as SDNs and their property interests are largely located outside of the US, and foreign counterparties align their actions with the US so as not to expose themselves to US sanctions consequences. Thus, the concept of US sanctions being designed to protect the US financial system from illicit actors is pretextual, given that most of the compliance with US sanctions, and consequences suffered by the SDNs, are occurring abroad.
It is not only that SDNs are suffering these consequences; they are also mostly impaired in their ability to defend themselves against those consequences, as described above. Without access to evidence underlying, or even the reasons for, a sanctions designation, with OFAC receiving extreme deference in their decision-making, and with OFAC’s ability to change the basis of a designation or obscure evidence that will be relied on for that change or to deny a delisting petition, SDNs challenging their designation are aiming at a moving target while blindfolded, not merely stumbling towards a moving target.Footnote 134
This already “Kafkaesque” scenario,Footnote 135 is further complicated by the fact that OFAC’s administrative delisting process takes years to resolve, and courts are comfortable with allowing that process to extend even further, by suggesting to SDNs that they can simply renew their delisting petition if OFAC denied them or changes the basis of their designation. In short, it seems that the courts are fine with SDNs’ challenges to their designation remaining in perpetual limbo, so long as OFAC or another sanctioning agency switches the authority relied upon or the bases for designation from time to time. This, taken along with OFAC’s ability to rely on past conduct, makes OFAC’s authority nearly limitless.
Sanctions designations are used with increasing frequency, and are impacting individuals, companies, and countries throughout the world. These designations may effectively bankrupt individuals and drive companies out of business, imposing economic and personal damage that continue indefinitely, and may be irreparable. This is a deeply problematic process that runs counter to many of the principles of the rule of law that are fundamental to Western law: the obligation of the government to clearly state what is and is not allowed; to give those charged or penalized a clear statement of the accusations against them and the evidence supporting it; to give them the opportunity to examine and contest the evidence against them; and to provide a meaningful opportunity to seek appeal.
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