On May 1, 2012, lawyers for KindHearts for Charitable Humanitarian Development, the Ohio-based charity shut down “pending investigation” by the Treasury Department in February 2006, announced a settlement agreement with Treasury ending the litigation on terms favorable to the charity. In 2009 the federal district court for the Northern District of Ohio ruled that the process Treasury used to shut the charity down while investigating alleged ties to terrorism violated the constitution, and ordered further proceedings on what remedy Treasury should provide. The settlement ends the litigation by allowing KindHearts to pay its debts and distribute the remaining funds among a list of approved charities before it dissolves. At that point Treasury will remove KindHearts from its terrorist list and pay its attorneys fees. Neither side admitted to any wrongdoing.
Prior to the settlement, the Aug. 18, 2009 federal court ruling in KindHearts v. Treasury was a positive step forward in the ongoing efforts of U.S. charities to make national security laws fair and ensure they protect vulnerable people that depend on charities for vital aid. The 100 page order found that the Department of Treasury’s (Treasury) seizure of KindHearts assets without notice or means of appeal is a violation of the Fourth and Fifth Amendments. This summary reviews the court order and notes issues to be addressed in developing better procedures.
Note: Page numbers cited refer to text of the court’s opinion.
KindHearts for Charitable and Humanitarian Development, Inc. v. Timothy Geithner, et al, Case No. 3:08CV2400 was filed in the United States District Court for the Northern District of Ohio Western Division on Oct. 9, 2008. Treasury froze its funds and seized all KindHearts’ assets on Feb. 19, 2006, pending an investigation into whether the group provided material support to Hamas, which has been designated as a terrorist organization by the United States government. To date KindHearts has not been designated. Its efforts to defend itself have been hampered by lack of specific allegations to respond to and lack of deadlines or procedures for Treasury reconsideration. Treasury has denied KindHearts’ requests to have its funds released for aid through other organizations.
The ruling recognized the impact of Treasury action. “As a result of the block, KindHearts’ assets and property, including about one million dollars in bank accounts, became frozen immediately. Through its blocking order, OFAC effectively shut the organization down.” [p. 7]
Because KindHearts has never been designated as a supporter of terrorism, the factual background of the case (see KindHearts Timeline) presents important constitutional and human rights questions about how post-9/11 emergency measures should be applied to charities in the long term.
The question before the court was not whether or not KindHearts supported Hamas, but whether the legal process used was constitutional. The court noted, “The merits of the claims are not at issue.” [p. 13] The opinion provides a useful summary of the laws and regulations at issue [p. 3-6], as well as a detailed factual history of the case. [p. 6-13].
The questions raised by KindHearts’ claims are:
4.) Was KindHearts denied due process when OFAC made a “provisional determination” that it is a supporter of Hamas one year after shutting it down pending investigation?
5.) Has OFAC unconstitutionally restricted KindHearts’ access to counsel to defend itself?
6.) Does OFAC have statutory authority to block assets where there is no nexus with a nation subject to economic embargo under the International Emergency Economic Powers Act (IEEPA)?
Was freezing (blocking) funds and assets without probable cause or a warrant an unreasonable search and seizure under the Fourth Amendment?
KindHearts argued that freezing and seizing assets pending investigation violated the Fourth Amendment’s ban on unreasonable searches and seizures, and that OFAC should have obtained a search warrant based on probable cause before proceeding. Treasury argued that economic sanctions under IEEPA are not seizures, and that it could act on the basis of “reasonable suspicion” rather than the higher standard of probable cause. It also argued that the matter should be considered under the Fifth Amendment’s bar on taking of property without due process, rather than Fourth Amendment search and seizure standards.
The court found that:
- The seize and freeze action was a seizure under the Fourth Amendment.
- OFAC should have obtained a warrant based on probable cause before taking action.
- The court declined to consider whether the Fourth Amendment would apply to final designation rather than freeze and seize pending investigation, because there has been no final agency action.
The court’s reasoning:
a.) Was OFAC action a seizure under the Fourth Amendment?
The court held that under the Fourth Amendment a seizure “does not result in passage of title to the government or even necessarily permanent deprivation. A seizure affects a possessory interest.” [p. 16] Under this standard, the OFAC freezing and seizing of KindHearts assets was a seizure.
This finding rejected the government’s argument that previous cases upholding freezing of charitable assets should control the issue. (Holy Land Foundation, Islamic American Relief Agency, case details here) The court said those cases addressed a different issue: whether the asset freeze was a “taking” of property under the Fifth Amendment. It then noted that “the court in Al-Haramain Islamic Foundation, Inc. v. U.S. Dept. of Treasury, 585 F. Supp. 2d, 1233, 1263 (D.Or. 2008), concluded that OFAC asset-blocking is a seizure subject to Fourth Amendment analysis.” The court cited an example from that decision: “If merely ‘holding luggage for 90 minutes’ constitutes a seizure, then surely placing an indefinite freeze on all an entity’s assets is as well.” [p. 16]
The court said its conclusion is “irrefutable on consideration of the fact that the very purpose of an OFAC blocking action is to ‘deprive the designated person of the benefit of the property, including services, that might otherwise be used to further ends that conflict with U.S. interests.” [p.17] (also citing the Al-Haramain court)
The opinion reviewed the history of IEEPA and the Fourth Amendment, finding that as a U.S. organization, “KindHearts is indisputable of the ‘the people’ protected by the Fourth Amendment. If the Constitution affords KindHearts no protection from unreasonable searches and seizures, whom among ‘the people’ does it protect, and who among the people can be certain of its protection?” [p. 19] The colonial history of Writs of Assistance from Crown judges, with their unchecked search authority, was cited as a primary inspiration for adoption of the Fourth Amendment. The court said, “To find the Fourth Amendment inapplicable to OFAC blocking actions would disregard the Amendment’s history and its role as a bulwark against the abuses and excesses of unchecked governmental power.” [p. 20-23]
The court rejected the government’s argument that it should defer to the executive branch and not review the action under Fourth Amendment standards because “external affairs” are involved. The ruling said “Contrary to defendants’ claims, courts have held that the executive’s domestic actions – even when taken in the name of national security – must comport with the Fourth Amendment.” [p. 27] IEEPA does not override this. “Legislation cannot authorize the President to ignore the Bill of Rights.” [p. 25]
b.)Whether the probable cause standard should apply
The court rejected the government’s argument that it did not need probable cause to obtain a warrant to seize the property, and could act on the basis of reasonable suspicion. It said, “searches and seizures are usually ‘reasonable’ only when conducted with a judicial warrant supported by probable cause.” [p. 28]
It then reviewed and rejected application of two exceptions to the KindHearts situation: special needs seizures and those made under exigent circumstances. In rejecting the special needs analysis, the court said, “OFAC’s exercise of its blocking power lacks the characteristics that excuse the warrant and probable cause requirements as to administrative, roadblocks, and border searches and seizures.” [p. 32] The ruling then notes that, “The government provides no explanation as to why the probable cause warrant requirements were impracticable in this case.” [p. 33] The exigent circumstances exception was rejected because law enforcement must rely on objective facts in making a claim that evidence may be destroyed or disposed of, and “[t]he government has made no such showing. In this instance the government had time to secure a warrant.” [p. 36]
The government’s contention that national security concerns override the court’s power to impose a probable cause requirement was likewise rejected. The court said domestic security concerns do not create a Fourth Amendment exemption. It noted that federal judges routinely handle classified information under the Classified Information Procedures Act (18 USC App. 3, Sec 1-16). However, the court did note that “in view of the effect of implementation of Fourth Amendment protections and processes on the President’s Article II powers, some reformulation of the probable cause requirement may be appropriate.” (emphasis added) However, the court agreed with the parties that it not take on that question in this case, saying “provision could be made for emergency seizure of assets pending such reviews when, as and if truly exigent circumstances existed – as they did not in this case, and as is unlikely in other past cases of OFAC blocking orders. In any event, great care would have to be taken to ensure that what should be rare did not become routine.” (emphasis added)
Is Treasury’s Office of Foreign Assets Control (OFAC) authority to designate or to freeze assets pending an investigation unconstitutionally vague under the Fifth Amendment?
The court found that:
Although OFAC’s authority to designate or freeze assets pending an investigation is not unconstitutionally vague on its face (in all cases), it is unconstitutionally vague as applied to KindHearts.
- The definitions of the terms “services,” “otherwise associated with,” and “material support” in IEEPA are not unconstitutionally vague.
- The lack of an intent to support terrorism requirement in E.O. 13224 does not make the statute unconstitutionally vague.
The court’s reasoning:
a) OFAC’s authority is not criminal in nature nor does it regulate free speech
A successful general constitutional challenge to IEEPA must show the statute is “impermissibly vague in all its applications,” unless the statute is of a criminal nature and implicates protected conduct under the First Amendment. (Citing U.S. v. Salerno, 481 U.S. 739, 745 (1987). [p. 45] Reasoning that there is no First Amendment right to support terrorists, the court held that OFAC’s blocking and designation authorities do not substantially implicate protected speech. Moreover, OFAC’s authority results in civil as opposed to criminal sanctions. Therefore, in order to challenge IEEPA on its face, plaintiffs must show the statute is impermissibly vague in all its applications. KindHearts did not do so.
b) OFAC’s authority to block (freeze) assets pending investigation is not unconstitutionally vague on its face, however, it is unconstitutionally vague as applied to KindHearts
Earlier in the decision, the court found the KindHearts asset freeze was a seizure under the Fourth Amendment. As a result, the “[a]pplication of the Fourth Amendment to blocks pending investigation provides the criteria otherwise unavailable under the IEEPA and E.O. 13224, for such seizures.” [p.53] Because OFAC must show probable cause that KindHearts violated the prohibitions in IEEPA and E.O. 13224 before freezing its pending investigation, the court rejected KindHeart’s argument that OFAC’s authority is unfettered or unconstitutionally vague in all cases. However, because OFAC failed to follow the Fourth Amendment in imposing the freeze pending investigation in KindHearts’s case, OFAC’s authority was unconstitutionally vague as applied to them.
c) The criteria for designation is not unconstitutionally vague
E.O. 13224 Section 1(d)(i)-(ii) authorizes the Secretary of Treasury to designate entities that “assist in, sponsor, or provide financial, material, or technological support for, or financial or other services to in support of” or are “otherwise associated with” individuals or groups designated as foreign terrorists. [p.53] KindHearts argued that E.O. 13224 is unconstitutionally vague because it lacks an intent requirement and the terms “services,” “otherwise associated with,” and “material support” in IEEPA are unconstitutionally vague on their face. The court concluded “lack of an intent requirement does not make an otherwise clear statute unconstitutionally vague.” [p. 60]
Other courts have struck down the definition of “services” under the Antiterrorism and Effective Death Penalty Act of 1996 (“AEDPA”) as unconstitutionally vague because the term included “expert advice or assistance,” which the courts held reaches protected First Amendment activity. See Humanitarian Law Project v. Mukasey, 509 F.3d 1122, 1136 (9th Cir. 2007). The court noted that, in contrast to AEDPA, the absence of “expert advice or assistance” in E.O. 13224’s definition of “services” persuaded other courts adjudicating the same issue under IEEPA to uphold the constitutionality of the term against vagueness challenges. See, e.g., Al Haramain Islamic Foundation, Inc. v. U.S. Dept. of Treasury, 585 F. Supp. 2d 1233 (D. Or. 2008). Therefore, the common meaning of “services” in E.O. 13224 sufficiently constrains executive discretion, thereby overcoming KindHearts vagueness challenge.
With regard to “material support,” the court rejected plaintiffs’ contention that two different definitions of the same term (in the Immigration and Naturalization Act (“INA”) and AEDPA), makes the term unconstitutionally vague. Rather, the court concludes, “existing case law and common meaning provide a ‘broad concept’ of material support that is sufficiently clear,” including the giving of funds. As a result the court rejected KindHeart’s facial challenge.
Similarly, the court rejected plaintiff’s vagueness challenge to the term “otherwise associated” based on the phrase’s arguable inclusion of First Amendment protected speech and association. The court was satisfied that the recently-adopted definition in 31 C.F.R. § 594.316 limited its applicability to protected speech and conduct. That definition states “the term “to be otherwise associated with,” as used in Sec. 594.201(a)(4)(ii), means:(a) To own or control; or (b) To attempt, or to conspire with one or more persons, to act for or on behalf of or to provide financial, material, or technological support, or financial or other services, to.”
The court found that:
OFAC’s actions regarding the KindHearts asset freezing order failed to provide meaningful notice and an opportunity to be heard in violation of KindHearts’ due process rights.
- IEEPA’s Section 1702(a)(1)(B) authority to block assets pending an investigation is not unconstitutional on its face (in all cases).
- The absence of a notice requirement, an opportunity to be heard, or pre- or post-deprivation process in IEEPA is not unconstitutional on its face (in all cases).
- The court cannot yet determine the extent to which KindHearts has been prejudiced by the violation of its constitutional rights, and ordered further hearings.
The court’s reasoning:
While IEEPA does not require OFAC to provide any process to an American corporation before it freezes its assets, IEEPA can be applied constitutionally. For instance OFAC could have, but did not:
- provide adequate notice of the blocking action;
- specify any objective criteria for blocking KindHearts’ assets;
- promptly give KindHearts the unclassified administrative record on which it relied in taking its blocking action; and
- provide a prompt post-deprivation hearing.
Because OFAC could have provided these steps, the court held that OFAC’s authority under IEEPA to freeze assets pending an investigation is not unconstitutional on its face (in all cases). However, the manner in which OFAC applied its blocking authority pending investigation to KindHearts resulted in a violation of its due process rights.
The court went to define what is required. For notice to be adequate, it “should give the party an understanding of the allegations against it so that it has the opportunity to make a meaningful response. The party must be able to know the conduct on which the government bases its action, so that it can explain its conduct or otherwise respond to the allegations. It must also have reasonable access to the evidence that the government is using against them.” [p. 68] The court weighed “1) the private interest . . . affected by the official action; 2) the risk of an erroneous deprivation of such interests through the procedures used; and 3) the Government’s interest , including the function involved and the fiscal and administrative burdens that . . . additional or substitute procedural requirement would entail.” [p. 68]
The KindHearts freeze order merely recited verbatim general criteria from E.O. 12334 and referenced IEEPA. OFAC refused to respond to KindHearts counsel’s request for access to the full administrative record. Though the subsequent notice of provisional designation did state new or alternative grounds for the potential designation, the belated unclassified administrative record provided did not explain how the documents related to OFAC’s charges against KindHearts.
The court noted “that OFAC has not explained, either to KindHearts or this court, why it failed to provide timely notice of the basis and reasons for its blocking order, or why it took so long for it to provide the scanty information it ultimately produced.” [p. 76] As a result, “KindHearts remains largely uninformed about the basis for the government’s actions. To the extent that it has become usefully informed, that information came only after long, unexplained and inexplicable delay and following multiple requests for information.” [p. 73] Accordingly, the court found that “OFAC violated KindHearts’ fundamental right to be told on what basis and for what reasons the government deprived it of all access to all its assets and shut down its operations.” [p. 76]
KindHearts was also unconstitutionally denied a prompt post-deprivation hearing as a result of OFAC’s inexplicable fifteen month delay and inexcusable misplacement of a 1369-page submission by KindHearts. OFAC waited more than thirty months to provide KindHearts with redacted records in support of its blocking action. As a consequence, the court held that “OFAC has failed to provide a meaningful hearing, and to do so with sufficient promptness to moderate or avoid the consequences of delay. OFAC did not provide timely or sufficient notice to enable KindHearts to prepare an effective challenge.” [p. 80]
(See the Timeline of the KindHearts case here http://www.charityandsecurity.org/litigation/KindHearts_Timeline.)
Although the court found that the post-freeze process was unconstitutional, it said found the record in the case is insufficient to determine whether and to what extent KindHearts is prejudiced by the post-freeze process. The court deferred ruling on this issue until after further proceedings.
The court found that:
- The due process challenge to the provisional SDGT designation is not ready to be decided.
The court‘s reasoning:
As the parties do not dispute KindHearts’ right to adequate pre-designation notice and an opportunity to be heard, the dispute focuses on whether due process was provided in conjunction with OFAC’s provisional designation of KindHearts as a SDGT. OFAC stated it will not designate KindHearts before considering a response from it. Accepting this statement as true, the court refrained from making a decision on the issue on the grounds that the provisional determination did not constitute a final agency action because the provisional designation does not “mark the consummation of the agency’s decision-making process.” [p. 84] The court held the issue was not yet ripe for judicial review.
Has OFAC unconstitutionally restricted KindHearts’ access to counsel to defend itself?
The court found that:
- KindHearts has no constitutional claim to its frozen funds to compensate counsel.
- OFAC’s application of its attorney fee policy to KindHearts was arbitrary and capricious.
- OFAC’s attorney fee policy is not arbitrary and capricious on its face (in all cases).
The court’s reasoning:
a) KindHearts does not have a constitutional claim to its frozen funds to compensate counsel.
Though the government may not deny civil litigants their right to obtain counsel, there is no right to access frozen funds to pay for it. The court agreed with OFAC’s position that the Constitution does not guarantee compensation for counsel in civil cases, and thus “KindHearts has no constitutional claim to such funds.” (emphasis in original) [p. 92] Whether OFAC applied this policy arbitrarily and capriciously to KindHearts is a separate ground to challenge the constitutionality of OFAC’s actions.
b) OFAC’s attorney fee policy is not arbitrary and capricious on its face.
OFAC’s attorney fee policy “is aimed at enhancing the ability of a blocked party that lacks alternative access to funds to acquire legal representation in connection with its designation or the blocking of its property and interests in property.” [p. 94] In spite of this, OFAC caps attorney fees to preserve blocked funds to “1) depriv[e] a sanctioned entity of the benefits of its property and preventing it from using its assets to further ends conflicting with United States interest; 2) preserve[e] blocked funds as a negotiating tool for use by the President in addressing the relevant national emergency; and 3) preserving the blocked assets for legal judgments.” [p. 94] Finding that this explanation “is rationally related to the advancement of legitimate government interests,” the court upheld OFAC’s attorney fee policy. [p. 95]
c) OFAC’s application of its policy to KindHearts arbitrary and capricious and therefore unconstitutional.
While KindHearts counsel requested $46,000 for attorney services provided over three years, OFAC authorized $27,040. The court said OFAC did not provide satisfactory reasons for such a modest amount in light of the complexity of the case and the delay caused by OFAC. OFAC did not authorize the full award of $28,000 pursuant to the arguably applicable Equal Access to Justice Act and Criminal Justice Act, leaving the court questioning how OFAC arrived at $27,040. “Not compensating counsel for work done as a result of OFAC-caused delay is an abuse of OFAC’s discretion, and supports a finding of arbitrary agency action.” [p. 97]
With regard to OFAC’s policy for capping attorney fees, the court found there is “a disconnect between OFAC’s response to the fee requests in this case and the legitimate governmental interests it states its policy furthers.” The court said:
- Authorizing $46,000 in attorney fees does not threaten to dissipate the corpus of approximately $1 million of KindHearts’ frozen funds.
- There is no evidence that OFAC considered whether releasing the requested $46,000 would compromise its interest in preserving funds to pay possible future judgments against KindHearts.
- The funds belong to an American corporation as opposed to a foreign government or a foreign private entity with influence over relations with the United States, and thus “[p]reserving the funds for use by the President as a negotiating tool does not seem at all likely in this case.” [p. 98] “Even if a risk exists that funds will be needed for any of either of these purposes . . . [d]enying a corporation access to counsel is tantamount to depriving it of the right to defend itself.” [p. 98]
- “[P]aying counsel for putting OFAC to the test of the Constitution and laws of the United States” furthers United States interests. [p. 98]
The court found that:
- IEEPA grants OFAC the authority to block any assets in which any foreign national, not just foreign nations and foreign nationals linked to a sanctioned nation, has any interest.
- “Any interest” in the blocked assets is interpreted broadly such that Khaled Smali’s, President of KindHearts, status as a foreign national satisfies the requirement.
The court’s reasoning:
IEEPA authorizes the President to “investigate, block during the pendency of an investigation, regulate, . . . or prohibit . . . transactions involving . . . any property in which any foreign country or a national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States.” 50 U.S.C. 1702(a)(1)(B) (emphasis added). [p.40-41] The court concluded that the phrase “nationals thereof” means foreign nationals as there is no textual reason to interpret “thereof” as a limitation. (Citing the reasoning in Al Haramain Islamic Foundation, Inc. v. U.S. Dept. of Treasury, 585 F. Supp. 2d 1233 (D. Or. 2008) and Humanitarian Law Project v. U.S. Dept. of Treasury, 463 F. Supp. 2d 1072-73 (C.D. Cal. 2006)) Moreover, Congress’ approval of President Clinton’s previous asset blocks of individuals not associated with sanctioned nations further supports a finding that IEEPA is not limited to nation-to-nation diplomacy.
A showing of probable cause to believe that foreign nationals occupy key executive positions or were members of the entity’s board satisfies IEEPA’s requirement that a foreign national has an interest in KindHeart’s assets. OFAC met this requirement by showing that Khaled Smali, the President of KindHearts, is a foreign national.