KindHearts Case: US Federal District Court rules that asset freezing of a terror supporting organization pending investigation is unconstitutional

by Ido Rosenzweig and Yuval Shany

Introduction

Last month, in a precedential ruling issued by US Federal District Court in Ohio,[1] it was held that the decision of the Office of Foreign Assets Control (OFAC) in the Treasury Department to freeze all of the assets of KindHearts charity organization, pending investigation into whether it is a Specially Designated Global Terrorist (SDGT)—which provides financial support to the Hamas terror organization--was unconstitutional for lack of due process.

This decision undermines one of the most significant counter-terrorism tactics of the US administration. The decision also illustrates the tension between efforts by US legislative and executive branches to hinder the ability of local corporations such as KindHearts to provide financial aid to terror organizations (such as Hamas), on the one hand, and the Federal Court's role of ensuring that such measures are meted out within the framework of checks and balances imposed by the US Constitution, on the other hand.

Background

KindHearts,[2] a non-profit corporation, was incorporated in Ohio on 22 January, 2002 as a humanitarian charity organization whose goal is to provide humanitarian aid without regard to religious or political affiliation. KindHearts was founded after OFAC shut down several Muslim-affiliated charities.

On 24 September, 2001 (two weeks after the September 11 terror attack), President Bush issued Executive Order 13224 (E.O. 13224),[3] which in combination with International Emergency Economic Powers Act (IEEPA),[4] authorized the Secretary of Treasury, in
consultation with the Secretary of State and Attorney General, to designate individuals or entities whose property or interests in property should be blocked because they “act for or on behalf of” or are “owned or controlled by” designated terrorists, or because they "assist in, sponsor, or provide financial, material or technological support for, or financial or other services to or in support of" or are "otherwise associated" with designated terror organizations.

According to section 10 of E.O 13224, this designation can be made without any prior notice, in order to avoid the frustration of the order by prior notice that would allow the targeted persons to transfer their funds or assets. In October 2001, the Patriot Act amended IEEPA in order to allow OFAC to temporarily impose the blocking effects associated with a designation (including a freeze of the organization’s assets and the criminalizing of all of its transactions), pending the investigation of the question whether this organization should or should not be designated as a SDGT.

On 6 June, 2003, the Treasury Department published the regulations implementing E.O 13224, under which a designated entity may seek administrative reconsideration by OFAC after being designated and having its property frozen.

On 19 February, 2006, after obtaining search warrants, the OFAC moved to freeze all of KindHearts' assets (about one million US dollars) pending investigation into whether it should be designated as SDGT[5] under International IEEPA and E.O 13224. OFAC claimed that KindHearts provides material support to Hamas, which is also an SDGT. Since April 2006 KindHearts representatives attempted, with only limited success, to contact the OAFC in order to receive the administrative records used in the course of the investigation. On 25 May, 2007, OFAC informed KindHearts that it had provisionally determined to designate it as a SDGT. Attached to the letter were 35 unclassified documents on which (according to the OFAC) the provisional determination was made.

Throughout that period, and until filing the petition in November 2008, KindHearts provided detailed information to the OFAC about its operations and requested that the OFAC specify its reasons for blocking its assets pending investigation. However, the OFAC ignored KindHearts' submissions and repeatedly delayed responding to its requests.

Since 19 February, 2006, when OFAC first notified KindHearts of the block pending investigation, OFAC has not designated KindHearts a SDGT. Yet, for almost three years, OFAC has continued to block KindHearts’ property and property interests and criminalized all transactions with it. As a result, OFAC has effectively shut KindHearts down.

In its petition, KindHearts claimed that OFAC’s actions were unconstitutional under the Fourth and Fifth Amendments: 1) OFAC’s block was an unreasonable seizure in violation of the Fourth Amendment; 2) provisions authorizing OFAC to designate a SDGT and block its assets pending investigation are void due to their vagueness under the Fifth Amendment; 3) OFAC denied KindHearts procedural due process before provisionally determining it to be a SDGT and blocking its assets; and 4) OFAC has unconstitutionally restricted plaintiff’s access to the resources it needs to mount a defense. KindHearts further claimed that OFAC blocked KindHearts’ assets without proper statutory authorization.

The decision was delivered by Chief Judge James Carr on 18 August, 2009.

The decision

In his judgment, Judge Carr undertakes a comprehensive analysis in order to determine whether OFAC's freeze of KindHearts' assets was constitutional under the Fourth and Fifth Amendments to the US Constitution.

Judge Carr begins with an examination of whether the OFAC’s block pending investigation constitutes an unreasonable seizure in violation of the Fourth Amendment. Neither the IEEPA nor E.O. 13224 requires a warrant or probable cause to effect a block pending investigation. The defendants (the US Government) argued that the economic sanctions authorized by that statute and the Executive Order are not "seizures" and therefore the Fourth Amendment is inapplicable. Alternatively, the defendants disputed the contention that traditional warrant and probable cause requirements apply to blocks pending investigation.

Nevertheless, after a thorough discussion of the origin, nature and developments of the Fourth amendment, Judge Carr rejected the Government's position, according to which the freezing of KindHearts organization does not constitute a seizure, or that there is no need for a warrant and probable cause in order to apply such blocks pending investigation, even when taking into consideration national security interests. "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".

Judge Carr referred to previous relevant rulings of Federal Courts regarding OFAC freezing of assets of designated organizations. According to Judge Carr, there were two main reasons that these rulings did not refer to the question of the Fourth Amendment - the petitioners did not raise such a claim and the seat of the designated organization wasn't within the US, thus depriving them form Fourth Amendment protections.

The judgment goes on to determine whether OFAC’s provisional designation of KindHearts as a SDGT stand under the due process clause of the Fifth Amendment. Judge Carr rejected the contentions regarding apparent invalidity for want of an explicit description of process. He did, however, conclude that the defendants' actions regarding the blocking order failed to provide the two fundamental requirements of due process: meaningful notice and opportunity to be heard. Judge Carr stressed that while OFAC did give KindHearts a notification of its block pending investigation and of its provisional designation, it did not include a statement explaining how those exhibits related to its charges against KindHearts, or how those documents were relevant.

It should be noted that since both sides did not raise such claims and in view of the paucity of information in the case file, Judge Carr decided to refrain from addressing the question of whether or not, despite OFAC unconstitutional actions, the due process violation was harmless to KindHearts. Still, Judge Carr accepted a claim made by the Government that since OFAC hasn't taken any final agency action by designating KindHearts an SGDT, the organization's claim that OFAC has not provided due process with regard to such status was not ripe for judicial review. Consequently, he ruled that with regard to a final designation of KindHearts as SDGT, the due process challenge of the organization was not ripe.

Judge Carr concluded by scheduling a hearing in 21 September, 2009 in order to find ways to resolve unconstitutional flaws of the KindHearts' assets freeze.

Conclusions

This decision illustrates some of the tensions which confront democratic states attempting to tackle the challenge of terrorist funding. Terrorist funding constitutes the life line of terror groups, and there are strong policy considerations that support more flexibility in identifying and moving quickly against suspected funders, including "charity groups". Indeed, in the specific case of Hamas, it was already established in US court decisions that Islamic charities have been an important source of funding for Hamas terror operations.[6] At the same time, basic human rights norms and constitutional and administrative law principles seek to curb the power of the executive to harm property interests without due process. Hence, one is left with a classic dilemma between national security and individual liberty, a dilemma which Judge Carr ultimately resolved in favor of the latter interest. This may be explained, in part, in the procedural failures that OFAC's conduct revealed, which undermines KindHearts ability to obtain effective ex post review of its case.

Still, it should be noted, that despite the fact that this decision referred to parts of the designation process as unconstitutional, Judge Carr did not reject the constitutionality of the whole designation process (he only identified violations of the Fourth and Fifth Amendment in parts of the process, which could perhaps still be remedied). Moreover, this decision can still be challenged to the USA Supreme Court. However, for the time being, it is unclear whether the Treasury Department is planning to appeal the decision.[7]