Mar

14

The Meaning Of “Of”


Posted by at 5:25 pm on March 14, 2011
Category: OFACSanctions

Chinhoyi Satellite ViewAccording to an article in The Herald, the state-controlled newspaper of Zimbabwe, the Office of Foreign Assets Control (“OFAC”) refused to unblock $30,000 that a U.K. couple wired to purchase land in Chinhoyi Municipality, Zimbabwe, and that was blocked by HSBC. The funds were blocked by HSBC because they were wired to an account that the municipality maintained at the ZB Bank, a bank which has been designated by OFAC under the Zimbabwe sanctions program.

A letter from an OFAC official explained the agency’s decision not to unblock the funds by saying that U.S. financial institutions are required to “block all wire transfers in which a sanctions target has an interest and that come within the institution’s possession or control, even if the institution is an intermediary and an underlying transaction does not otherwise involve a person subject to US jurisdiction.” Section 541.201 of the Zimbabwe sanctions does require the blocking of “property or interests in property of” designated entities that come within the control of U.S. financial institutions or their overseas branches. And section 541.308 of the Zimbabwe sanctions regulations defines property broadly enough to include wire transfers of funds.

But that hardly ends the inquiry. The wire transfer can only be blocked if it is the “property or [an interest] in property of” the intermediary financial institution, in this case, ZB Bank, Ltd. Nothing in OFAC’s regulations anywhere defines “property of.” And it stretches any conceivable meaning of that term to say that the funds being wired were the property of the bank rather than the property of the U.K. couple and/or Chinhoyi municipality. If that’s not clear on its face, consider this: if I had a judgment against ZB Bank (leaving aside the blocking issue), could I get a court anywhere in the world to allow me to levy on the wire transfer in this case? Of course not.

OFAC might be free to promulgate a regulation blocking funds that are about to come into the possession or control of a blocked person or entity, which it hasn’t done here or anywhere else. But the agency is not free to say that words such as “property of” mean something that those words simply don’t mean or to say that bank accounts are “property of” the bank. And once OFAC engages in such behavior, is the agency any better than the tin-pot dictator that the U.S. seeks to sanction?

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9 Comments:


Clif — This is an OFAC position of very hoary standing. Does an SDN bank have any “interest” in funds (which are property) moving through the bank? I have to think it does. I assume there is some payment for the services of the bank, and the bank would have possession of the funds. OFAC’s Zimbabwe sanctions program is aimed at preventing U.S. persons (HSBC in the U.S.) from doing business with SDNs. Whether OFAC acted reasonably in refusing to unblock the funds is a legitimate but much tougher question, and only OFAC (and possibly the State Department) understand that outcome and the facts on which it/they acted. In many cases, unblocking comes only after reconsideration is requested, often with further exonerating facts.

Comment by Ex-OFAC on March 15th, 2011 @ 9:09 am

@Ex-OFAC: “Having an interest in” and “property of” are two separate concepts in my view, and the regulations talk only about “property of” the blocked person. I understand that OFAC has taken this position for a while, but OFAC has, for understandable reasons, been loathe to make this strained interpretation of its own regulations clear. This was a good opportunity to talk about the issue because the text of the letter was released. If OFAC wants to take this position, it should amend its regulations to make this clear to the public. It would be easy enough for the agency to do.

Comment by Clif Burns on March 15th, 2011 @ 10:54 am

I disagree, Clif. OFAC is blocking the “interests in property of” the target. “Of” refers to the interest itself belong to the target, not the underlying property, which you could variously argue belongs to the remitter or beneficiary at any given time, depending on when title passes.

Where you see casuistry, I see well-settled principles.

Of course, full disclosure is in order. I spent my first year and change at OFAC handling hundreds of blocked funds license applications, and I actually came up with the specific clause you cite, which is boilerplate in wire transfer denial letters and has been since at least late 1996, when I got into the game.

Comment by John Pisa-Relli on March 16th, 2011 @ 3:21 pm

@John. If the wired funds aren’t the property of the SDN bank, as you admit, they also can’t be called an “interest in the property of” the bank because there is not “property of” the bank here for the “interest” to relate to. Are the wired funds an interest in assets, say, its land, buildings and non-depositor cash on hand owned by the bank?

Comment by Clif Burns on March 16th, 2011 @ 5:42 pm

Again, I disagree. You can have a legally cognizable “interest” in someone else’s property. I can cite authority and commentary. The Clearing House Association’s amicus brief in the Jaldhi case is especially helpful in explaining recognized distinctions involving property interests related to EFTs. But Dames and Consarc I probably serve as better statements of OFAC’s recognized ability to define “property” and “interests in property” as they see fit. Methinks you’re having preposition trouble, as the notion of a property “interest” should not be conflated with the notion of the “property” itself. Again, it’s the “interest,” however fleeting or ephemeral, of the SDN bank that is at issue, not the “of property” part, which merely relates back to identify what kind of interest.

Comment by John Pisa-Relli on March 16th, 2011 @ 5:58 pm

To add a further point, I think you confuse the issue by adding “the” in front of “property” where it doesn’t exist in the rules. The term “interests in property” simply means “interests,” otherwise the clause “property or interests in property” would be repetitive and meaningless. Put another way, you could say that OFAC blocking requirements apply to property of an SDN or interests an SDN has in someone else’s property (whether by virtue of a claim, reversionary right, lien, etc.). The interest, however remote or indirect, provides an arguable basis upon which to trigger blocking. No sacred cows here, but this is fundamental OFAC stuff that has withstood challenge time and again.

Comment by John Pisa-Relli on March 16th, 2011 @ 6:06 pm

Clif: I believe that under UK styled banking law, the funds become the property of the bank, but they create a corresponding obligation on the part of the bank to pay to the account holders upon demand.

Of course, such laws evolved when banks dealt in coin and paper (by which I mean not just currency but commercial paper). Electronic transfers complicate things conceptially a tad: Can an electron or a bit of information actually be property? I’ll have ask the angels at the next pin dance.

Comment by Mike Deal on March 16th, 2011 @ 7:36 pm

@John Dames and Consarc I and II unambiguously deal with blocking property that was the property in which the blocked entity had a claim of some kind to clear title to all of the blocked property, so I don’t see that dicta about the broad powers of OFAC extends to a conclusion that it is as broad as you are asserting it to be here. The ZB bank has no conceivable claim under which the amounts in the account would ever become the property of the bank.

Comment by Clif Burns on March 17th, 2011 @ 10:01 am

@Clif It is settled that “ownership” and “interests” in property are mutually exclusive. It is also settled that under UCC 4A, when not preempted by IEEPA, neither the originator nor the benficiary “own” a midstream EFT, even if they might hold potential claims against the originating bank or the beneficiary bank, respectively for failed EFTs. Midstream, the banks have at any given time a possessory or beneficial interest in money they are instructed to debit or credit. And inasmuch as the goal of sanctions includes depriving/controlling access to targeted banks, I cannot envision any federal court narrowing the concept of “interests in property” in a manner you seem to advocate, given the abundant authority upholding judicial deference to OFAC’s authority under IEEPA. I cannot say I’ve fully briefed the case law out there, and it’s been a while since the issue has been anything more than an academic exercise to me, but I would bet good, unblocked money that OFAC would prevail, and handily.

In any case, what I mean to assert principally is that the standard OFAC regulatory language “property or interests in property of [a sanctions target]” is not unusual or controversial in my opinion, as it is intended to identify two discrete categories of assets subject to blocking: (1) property owned by the target in the legal sense of holding title; and (2) interests that a target has in property of someone else short of ownership (including admittedly undefined “beneficial interests” per GRF line of reasoning, not just legal claims).

I’m agnostic whether the blocked assets in this case merit release from a policy perspective. But having dealt with scads of ARBIFT and Arab Turkish Bank cases back in the day, this is all pretty vanilla to me.

Thanks, as usual, for providing an opportunity for thought-provoking discussion.

Comment by John Pisa-Relli on March 17th, 2011 @ 2:34 pm