Authority and Process of Office of Foreign Assets Control to Release Frozen Charitable Funds

Introduction
I. Statutory Authority and Executive Order 13224
II. Terrorism Sanctions Regulations
III. Process for Unblocking Frozen Funds
IV. General Information on Frozen Funds
V. Examples

Introduction

The power of the federal government to release "blocked" assets seized from entities designated as Foreign Terrorist Organizations for Specially Designated Nationals derives from the same statutory framework as the power to freeze and seize assets. These statutes — International Emergency Economic Powers Act (IEEPA) as amended by the Patriot Act, and the Anti-Terrorism and Effective Death Penalty Act of 1996 — authorize the President to promulgate regulations governing implementation of these powers.

Regulations implementing the sanctions programs authorized by statute are found in the Code of Federal Regulations. (See Title 31 CFR Parts 501, 595 and 597.) The regulations give the Office of Foreign Assets Control (OFAC), an agency within Treasury, power to grant licenses authorizing otherwise prohibited transactions, including transfers of funds for charitable purposes.

Implementing regulations empower the Department of Treasury (Treasury) to allow transactions that would otherwise be blocked. General licenses specify conditions under which any party may enter into transactions with a designated entity or country subject to sanctions. These transactions include humanitarian assistance and religious activities. Specific licenses only apply to the party making the license application, and can be used to unblock frozen funds. In all cases OFAC maintains control over the licensee's activities through its reporting requirements and discretionary power to amend or cancel the license.

I. Statutory Authority and Executive Order 13224

Charities are among entities subject to asset seizure under Patriot Act amendments to IEEPA, which gives the President discretion to declare an emergency for "any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States." See 50 U.S.C. 1701 (2003).

Section 302 of the Anti-Terrorism and Effective Death Penalty Act of 1996 allows the Secretary of State to designate Foreign Terrorist Organizations (FTOs), and makes it a crime for U.S. persons to provide an FTO with material support. U.S. financial institutions are required to block funds of designated organizations and persons.

President Bush used these powers on Sept. 24, 2001, declaring an emergency with respect to the "grave acts of terrorism and threats of terrorism...and the continuing and immediate threat of further attacks on the United States . . . " granting the Treasury Department (among other powers) the ability to freeze the assets of all persons the Secretary of the Treasury determined ". .. to assist in, sponsor, or provide financial, material, or technological support for. . .such acts of (foreign) terrorism or those persons listed in the Annex to this order...or to be otherwise associated with those persons listed in the Annex to this order." Executive Order No. 13224, 66 Fed. Reg. 49079 (2001), at Sec. 1(d)(i), (ii). The Annex to the Order named 27 persons and organizations. Currently over 430 entities are listed, including six U.S. based charities.

The Dept. of State introduction to EO 13224 states its purpose is to provide "a means by which to disrupt the financial support network for terrorists and terrorist organizations...that commit, or pose a significant risk of committing, acts of terrorism...the Order authorizes the U.S. government to block the assets of individuals and entities that provide support, services, or assistance to, or otherwise associate with, terrorists and terrorist organizations designated under the Order, as well as their subsidiaries, front organizations, agents, and associates." (http://www.state.gov/s/ct/rls/fs/2002/16181.htm [1])

Under the statutes the Secretary of State, Secretary of Treasury and Attorney General consult and designate people and entities that they determine are "owned or controlled by, or act for or on behalf of" a listed person or entity, or provide them with material assistance, technological support or other services, or are "otherwise associated with" them. Once the designation is made OFAC takes action to block the assets. Notice of designation is published in the Federal Register, the person or entity is added to OFAC's list of Specially Designated Global Terrorists and the designation remains in effect until the EO lapses or is otherwise terminated. See 50 U.S.C. APP. 5(B), 22 U.S.C. 2370(A), 22 U.S.C. 6001

The threshold for asset seizure is low. Under the Patriot Act revisions to IEEPA, the Treasury Department can freeze an organization's assets pending an investigation into possible associations with a designated terrorist group. See Patriot Act at Section 106 (adding the words "block during the pendency of an investigation" after the word "investigate" in IEEPA, 50 U.S.C. 1702(a)(1)(B)( 2000)). 50 U.S.C. 1702 now reads in relevant part: "At the times and to the extent specified in section 202 [50 USCS 1701], the President may, under such regulations as he may prescribe, by means of instructions, licenses, or otherwise...block during the pendency of an investigation...any acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in, or exercising any right, power, or privilege with respect to. . . or 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. . ."

II. Terrorism Sanctions Regulations

Regulations implementing the sanctions programs authorized by statute are found in the Code of Federal Regulations. Title 31 CFR Part 595 contains rules on Terrorism Sanctions under IEEPA. These rules apply unless otherwise specified in 31 CFR Part 597, Foreign Terrorist Organization Sanctions Regulations. Both refer to 31 CFR Part 501, which provides a process that authorizes otherwise blocked transactions by giving OFAC power to grant two types of licenses:

• General license— authorizes otherwise prohibited transactions under appropriate terms and conditions. See 31 CFR 501.801(a).

• Specific license — authorizes successful applicant to engage in transactions otherwise prohibited and not authorized by a general license. See 31 CFR 501.801(b).

General Licenses

Currently there are six General licenses posted on the Treasury website, which mostly provide for certain transactions with the Palestinian Authority. (see http://www.treas.gov/offices/enforcement/ofac/programs/terror/terror.shtml#legal [2])

Specific Licenses

The specific license process must be used to authorize use of frozen funds and assets. Procedures for specific licenses are found it 31 CFR Subtitle B Regulations Relating to Money and Finance, Chapter V Office of Foreign Assets Control, Department of Treasury, Part 501 Reporting, Procedures and Penalties Regulations.

Treasury maintains tight control over implementation of transactions authorized by specific licenses. They are not transferable, and may be revoked or modified at the discretion of the Secretary of the Treasury. (Sec. 803) The license application process is exempt from the Administrative Procedure Act (Sec. 804) because it involves foreign affairs and OFAC's decision to grant or deny the license constitutes final agency action (Sec. 802). OFAC can require reports periodically and at any time, either before or after transactions are completed (Sec. 602)

III. Process for Unblocking Frozen Funds

To release frozen funds a designated organization must apply for a specific license from Treasury. The procedures are spelled out in Subpart E of Part 501. To unblock funds an applicant must use Form TD-F 90-22.54. (Sec. 501.801(b)(2)) The form is online at http://www.treasury.gov/offices/enforcement/ofac/legal/forms/license.pdf [3]. It asks for information detailing the date the funds were blocked, the financial institution holding them, and the proposed beneficiary and amount of the transfer.

Sec. 501.801(b)(3) requires the applicant to submit the names of all parties "concerned with or interested in" the proposed transaction, and "any further information as is deemed necessary". The applicant or "other party in interest" can provide additional information at any time before the decision is made. OFAC can arrange for an oral presentation of the application.

Denial of the application does not preclude a subsequent re-opening or filing of a new application. The applicant or "other party in interest" may request an explanation of the denial, by letter or in person. (Sec. 501.801(b)(4).)

Once approved a license authorizing transactions "has the effect of removing a prohibition or prohibitions contained in this part from the transaction, but only to the extent specifically stated by its terms." (Sec. 597.501(c)) It will not validate any transaction that occurs prior to the date of issuance, unless it specifically states otherwise. (Sec. 597.501 (a))

The OFAC Director retains the power to "exclude any person, property, or transaction from the operation of any license." (Sec. 501.597.502). In addition, OFAC can condition a license on reporting "in such form and at such times and places" as it wishes. (501.801(b)(5).) If OFAC believes a violation of part or license has occurred the regulations provide a process for enforcement, including a pre-penalty notice. Sec. 597.701-705.)

Once funds are transfer away from an FTO pursuant to a license, they are no longer considered funds of the FTO. (Sec. 597.403 (a)) In addition, Sec. 405 allows transactions "ordinarily incident to a licensed transaction and necessary to give effect thereto."

In instances where a charitable organization has not applied for a license Treasury can provide the organization with information about the specific license application process. For U.S. organizations whose governing body is no longer operational, Treasury can contact the Attorney Generals in the various states where the charities were organized to submit a license request on behalf of the defunct organizations. Under the Charitable Trust Doctrine in almost every state, the state Attorney General is the parens patriae for charitable assets maintained in their state, and the only party that would have standing to claim and redirect non-restricted assets donated to and still owned by a discontinued charity. In addition, Treasury should develop a process for identifying the legal representative of foreign organizations that are no longer operational.

IV. General Information on Frozen Funds

Foreign Terrorist Organizations Sanctions Regulations are found in 31 CFR Part 597. The designation process starts when the Secretary of State notifies Congress of intent to designate an organization as a foreign terrorist organization (FTO). (Sec. 597.201(a), pursuant to 8 U.S. C. 1189(a)). Prior to publication of the designation in the Federal Register, any U.S. financial institution that receives notice from Treasury shall block all financial transactions of any assets within their control, until further notice.

Once a U.S. financial institution becomes aware it has possession of funds of an FTO, or funds in which the FTO has an interest, it must retain possession of the funds and report their existence to Treasury. (Sec. 597.201(b)). The process for this action is described in 501.603. These requirements remain in effect until revocation of the designation, or until it lapses. (Sec. 597.201(d) and 8 U.S.C. 1189)

Once a designation is published in the Federal Register the above requirements are triggered. (Sec. 597.201(c)) After that time any transfer is null and void (Sec. 597.202(a)), unless authorized by a license "or other authorization" from the Director of OFAC. (Sec. 597.202(c))

Financial institution must hold frozen funds "in a blocked interest-bearing account which is in the name of the foreign terrorist organization". (Sec. 597.203 (a)) The blocked account must be located in the U.S., federally insured and earning interest at commercially reasonable rates, or with a broker registered with the SEC. The funds may not be invested in instruments "the maturity of which exceeds 180 days." (Sec. 597.202(b))

Sec. 501.603 requires those holding blocked property to file reports within 10 days after a blocking order, and then annually by Sept. 30 of each year, using TF 90-22.50. These reports are confidential. Financial institutions are also required to report rejected attempts to transfer blocked property. (Sec. 501.604) Sec. 504 (a) authorizes U.S. financial institutions holding blocked assets to debit the accounts for normal service charges owed them.

Any U.S. person participating in litigation or binding arbitration involving blocked assets must notify OFAC of the proceedings and provide them with copies of all pleadings. They must also notify the court of the restrictions on the blocked property. (Sec. 501.605)

Each year OFAC submits a Terrorist Assets Report to Congress. (2005 Report at http://www.treas.gov/offices/enforcement/ofac/reports/tar2005.pdf [4])

V. Examples

Specific License Criteria for Charitable Works

The Treasury Department has published guidelines on specific license applications for transactions with the Palestinian Authority, issued on a case-by-case basis. These guidelines provide a useful framework for any applicant seeking to unblock funds for charitable purposes. The guidelines are online at http://www.treas.gov/offices/enforcement/ofac/programs/terror/ns/pal_guide.pdf [5], and are as follows:

1. Assistance projects for critical food, health, or welfare aid that is distributed from Palestinian Authority-run facilities such as schools, hospitals and clinics.
2. In-kind donation of medicines, medical supplies and medical devices to hospitals, clinics or other health care facilities owned or operated by the Ministry of Health.
3. Donated medical services in the West Bank and Gaza involving the Ministry of Health.
4. Goods and services related to disease eradication.
5. Dealings with universities and other educational institutions in the West Bank and Gaza.
6. Goods and services relating to education, including teaching, in the West Bank and Gaza.
7. Provision to and receipt from the Palestinian Authority of informational materials.
8. Small-scale water projects in the West Bank and Gaza, for the benefit of municipalities not controlled by a Hamas mayor and/or a Hamas majority in the municipal council.

Treasury indicates that favorable treatment is more likely if the application meets these conditions:

1. a compelling case exists that there is no practical means to achieve the desired humanitarian goal outside of the proposed transactions with the Palestinian Authority;
2. the activities are designed to benefit directly persons in the West Bank and Gaza under circumstances in which, notwithstanding the practical need to involve the Palestinian Authority, the activities will not be subject to the control of the Palestinian Authority other than for routine administrative approvals;
3. the activities will not provide any significant material benefit, including technical advisory assistance, to the Palestinian Authority.

The U.S. Government also will look favorably on those projects and activities that provide humanitarian goods or services, and activities that will stimulate private-sector commerce.

General License Example

In December 2004 Treasury issued a general license that "enables U.S. persons to freely engage in most ordinary publishing activities with persons in Cuba, Iran and Sudan, while maintaining restrictions on certain interactions with the governments, government officials, and people acting on behalf of the governments of those countries." The purpose of the license is to allow publication by dissidents living within these countries, which are subject to sanctions under IEEPA.

The license authorizes U.S. persons to conduct business related to publication of books, magazines, journals and other printed publications. It lists specific transactions allowed, including payment of advances, editing and marketing. It also states that such transactions are not allowed with the governments of the three countries, and only expenses incident to publication are permissible.

See the Treasury announcement online at http://www.treas.gov/press/releases/js2152.htm. [6].