A federal court recently upheld, in OKKO Business v. Lew, a decision by the Office of Foreign Assets Control (“OFAC”) to refuse to unblock funds sent by a Ukrainian company as an auction deposit for an auction conducted by a Belarusian company on OFAC’s List of Specially Designated Nationals and Blocked Persons. The court’s opinion, a thinly-disguised love note addressed to OFAC, endorsed OFAC’s overly broad interpretation of what constitutes an “interest in property” held by an SDN and leaves open the question of what, if any, limits can ever be placed on OFAC’s authority.
At issue was an auction deposit sent by OKKO Business, a filling station operator in Ukraine. OKKO sent a €200,000 bidder’s deposit in 2012 to UE Belarusian Oil Trading House, an entity that was designated as an SDN in 2008. The deposit was required to participate in an auction to be conducted by UEB. If the bidder lost the auction, the deposit would be returned to the bidder. If the bidder won the auction, the deposit would be returned to the bidder upon its execution of a sales contract with the seller. If the bidder won but refused to enter into such a contract the funds would be forwarded to the seller. There was no contingency under which UEB would ever be entitled to all or any part of the funds. Because the deposit transited a U.S. bank, the funds were blocked
OKKO sought unsuccesfully to unblock the funds, arguing that it did not know that UEB was sanctioned when it transferred the funds, that it had terminated the contract with UEB, and that it would not conduct further business with UEB. OFAC denied the request, stating simply that because UEB has an “interest” in the deposit, it was required to be blocked and that OFAC did not normally unblock funds in cases involving “commercial activity.”
Notwithstanding the difficulty in determining what “interest” UEB could be said in the deposit in this situation, the federal court ate up OFAC’s rationale with a spoon of extreme judicial deference stating that there was “no limit on the scope of interest” that could be blocked by OFAC. The court went on to state that it was completely irrelevant that UEB had no “legally enforceable ownership interest” in the auction deposit. Finally, the court bolstered it’s argument that UEB had an interest in the auction deposit because it was “not certain” that Okko would demand the funds back if it lost the auction. (Yeah, right, they are just going to walk away from €200,000; perhaps the district court judge had no idea of the value of the Euro and thought that €200,000 was worth something like $2.00.)
But if the SDN’s interest need not be a “legally enforceable” interest to be blockable, it’s hard to see where this stops. Consider this: an SDN hacks into an account, steals money and deposits it at a U.S. bank in its own name. The bank blocks its and, under the rationale of the court in this case, the victim of the hacking can’t get the funds back without OFAC’s permission because the hacker has an interest, even if not legally enforceable, in any account he controls. The only principle left in determining what is a blockable interest is that it is whatever OFAC says it is.