When does a sanction become a seizure? Lessons from the KindHearts case

While researching case law for our Tornado Cash challenge I came across a very interesting holding, KindHearts v. Geithner, that deals with the intersection of the Office of Foreign Assets Control’s (OFAC) sanctions authority and the Fourth Amendment. There are several reasons why this case is not directly relevant to our current court challenge: it’s only a district court ruling (Northern District of Ohio), it’s in a different federal circuit (the Sixth and our lawsuit is in the Eleventh), and it concerns Fourth Amendment issues while our lawsuit focuses on statutory arguments. Nonetheless, there are some general ramifications from the KindHearts case that go beyond our Tornado Cash challenge that merit discussion, particularly that Americans may have firmer ground to challenge an OFAC blocked property order and possibly (as I’ll get to at the end) to challenge some other areas of overbearing financial regulation as well. And that includes persons with funds trapped in Tornado Cash smart contracts.

In brief, KindHearts was a U.S. based charity that was sending aid to Palestine. Allegedly, according to OFAC, that aid was being directed to terrorist cells. OFAC seized the KindHearts bank accounts and other assets while investigating that terrorism connection (note before any actual finding of criminality) and even prevented KindHearts from using frozen funds to pay attorney’s fees to defend themselves against these allegations. OFAC also didn’t provide any advance notice of the freeze to KindHearts nor made any specific allegations of wrongdoing. All of that makes it obviously very difficult for an innocent party (if they are innocent, and I certainly don’t know, but in our system that is the presumption) to defend themselves. For these reasons, and to unfreeze their assets, KindHearts sued OFAC.

So far, none of this is extraordinary. There are several such lawsuits. But the KindHearts case is interesting for a few reasons: (1) it’s a U.S. entity being sanctioned, (2) KindHearts argued that the block was a Fourth Amendment search and seizure violation rather than a Fifth Amendment taking without compensation, and (3) the judge largely sided with KindHearts, and in so doing stood up to the executive branch on a matter of national security and foreign policy (an area where the executive usually gets a lot of deference from the courts).

U.S. entities being sanctioned. There’s a somewhat obvious and depressing reason why there are very few cases testing the constitutionality of our sanctions regime: most would-be challengers are non-U.S. persons who do not get the protections of our Constitution. It’s a sad reality that much of the legality of our sanctions regime is predicated on the notion that it’s ok for the U.S. government to do things to foreign people that they would not be allowed to do to U.S. persons. Here, KindHearts was a legally incorporated U.S. charity, and, as such, should have the benefit of the protections of the U.S. Constitution.

Fourth Amendment and Sanctions. Most constitutional challenges to sanctions allege that the blocking of property is a taking without fair compensation under the Fifth Amendment (e.g. when the government uses eminent domain to take your land for a highway). The government counters these Fifth Amendment arguments by showing that there is no actual taking in the case of OFAC-blocked property because (a) the block is temporary, (b) there’s a process to obtain a license to reclaim the blocked property, and (c) takings jurisprudence generally allows such temporary or partial deprivations of property rights without the need to offer compensation. KindHearts, however, alleges that the block was a Fourth Amendment seizure (e.g. when the police take your property during a criminal investigation) rather than a Fifth Amendment taking. This Fourth Amendment claim is a big deal because if blocking property qualifies as a Fourth Amendment seizure, then such seizures would generally be unreasonable (and unconstitutional) unless the government first proves to a neutral magistrate that they have probable cause that justifies the issuance of a warrant that particularly describes the things to be seized. That’s a high bar.

Typically, OFAC does not get warrants before issuing sanctions, nor do they typically share their evidence of probable cause with a judge, nor do they typically describe the property to be blocked with the level of particularity judges expect in a warrant. People and entities become subject to sanctions during or after a classified investigation, and from that point on any and all property that benefits them is blocked by financial institutions. If OFAC had to get warrants for its blocks, the sanctions regime would need to be run very differently than it is today.

One of the most surprising things about the KindHearts case is that apparently this is the first time in the half-century history of sanctions that someone has made the argument that a block is a Fourth Amendment seizure. The government argued that this lack of a previous challenge was evidence that the Fourth Amendment doesn’t even apply in the context of sanctions, as Judge Carr wrote in his order:

The government argues that the Supreme Court historically has never applied the Fourth Amendment to imposition of economic sanctions under the [Trading with the Enemy Act] TWEA or the [International Emergency Economic Powers Act] IEEPA. Therefore, the government contends, I should not do so in this case. … For support, the government cites several cases in which the Supreme Court, in the government’s view, has consistently not subjected blocking actions to Fourth Amendment. … The government accurately depicts these cases and describes their results. What is missing, though, is acknowledgment that in those cases none of the government’s adversaries asserted a Fourth Amendment interest.

Maybe I’m biased because I like to make Fourth Amendment arguments all the time, but I can’t help but be a bit stunned that in the reasonably long history of OFAC blocks no lawyer until this case has ever stood up and said, “your Honor, blocking property is the same as seizing it and therefore requires a warrant and probable cause!” This could be because of my earlier point: most sanctions are applied to non-U.S. persons who don’t get the benefit of making these arguments in court. Ever since 9/11 and the PATRIOT Act, OFAC has been bolder in applying sanctions, including against U.S.-based organizations, so these constitutional issues are only now starting to be sorted out. For that at least maybe we can be grateful.

Standing up to the executive branch. Judge Carr ultimately finds that blocking property under a sanction is, indeed, a Fourth Amendment seizure of property. That means the reasonableness requirements of the Fourth Amendment are in play. The government goes on to argue that the seizure can nonetheless be warrantless and still reasonable given the long history of judge-made exceptions to the warrant requirement in other contexts. Judge Carr rightfully disagrees:

The intrusion in this case is far different in time and scope than those [warrantless searches] upheld as “reasonable” in the cases the government cites. For example, in upholding a police officer’s authority to order a driver out of his car at a traffic stop, the Supreme Court noted that the intrusion on the driver’s liberty “can only be described as de minimis” and as “at most a mere inconvenience.”

Similarly, in U.S. v. Conley the Sixth Circuit held that collection of DNA from a parolee did not violate the Fourth Amendment. The court in Conley relied on a parolee’s “sharply reduced expectation of privacy” and the “minimal intrusion required in taking a blood sample.”

The duration of the intrusion on private interests here is far more extensive than the ”mere inconvenience,” or the “minimal intrusion” in Conley. OFAC froze all of KindHearts’ assets in February, 2006, and they have remained frozen ever since. A block affects “all property” in the control of a target entity, presently, and in the future. A block can thus last indefinitely.

Unlike the probationer in Knights and the parolee in Conley, KindHearts’ expectation of privacy was not diminished. The intrusion here — seizing all of KindHearts assets for an indefinite period of time — is a far more substantial intrusion on private interests than those upheld as “reasonable” in those cases.

Judge Carr ultimately finds that the seizure was unreasonable without a warrant. That’s a big deal as we’ll discuss later on in this post. But let’s look first at how this case actually ended.

Judge Carr eventually does throw OFAC a bone in his order. KindHearts wanted an immediate end to the block, but, given the plenary constitutional authority of the executive branch to conduct foreign affairs, Judge Carr ends up holding that this otherwise unconstitutional warrantless seizure can be cured by an after-the-fact showing of probable cause by the government. Carr even allows the government to provide this showing in secret to the court and to KindHearts’ lawyer so that the allegations can be rebutted and judged without otherwise publicly revealing sensitive or classified information.

This is where the story of the case ends. It appears that OFAC was not interested in providing evidence in that probable cause hearing. OFAC chose, instead, to settle with KindHearts on terms favorable to the charity, thus ending the litigation. In 2012 OFAC removed KindHearts from the SDN list and paid its attorneys fees. Neither side admitted to any wrongdoing.

That’s too bad in a way. If, as Judge Carr held, OFAC blocking orders require a showing of probable cause and a warrant, sanctions law will need to change drastically and the very real civil liberties of Americans with blocked property could be vindicated. By settling the case OFAC precluded the possibility of an appeal, and, eventually, a possible ruling on this matter by the Supreme Court. Given the increasingly aggressive manner by which the Treasury Department and OFAC have been wielding their sanctions power, including wielding it against Americans who have no connection with any foreign or sanctioned person as in our Tornado Cash lawsuit, it seems likely that someone other than KindHearts will end up making these arguments before the Supreme Court. We’ll just have to wait.

Collateral Consequences of this Fourth Amendment Analysis of Sanctions Law

First and most importantly, any U.S. person who has funds frozen in Tornado Cash smart contracts because of OFAC’s sanctions should look at the KindHearts order. You may have Fourth Amendment standing to challenge the sanction as a warrantless seizure of your property.

Second and more academically, we’ve lately been watching various efforts by the Administration and by Congress to expand the use of the “Special Measures” provisions of the Bank Secrecy Act (BSA) against allegedly illicit transactions. These special measures are, generally speaking, a parallel sanctions regime run by FinCEN rather than by OFAC (each an independent division of Treasury) and under authority from the BSA rather than IEEPA. Special measures, like sanctions, can be used to freeze or block transactions at banks if they are related to certain persons or activities that are deemed a “primary money laundering concern.” Unlike sanctions, these designations typically require a public rulemaking to implement; that’s not quite typical due process or a warrant requirement, but it is at least some sort of public procedural safeguard against the abuse of these powerful tools to screen and block financial dealings. Recently, in the limited context of special measures related to Russian money laundering in the wake of the Ukrainian invasion, Congress saw fit to remove that notice and comment safeguard, effectively giving the Treasury an unchecked power to order financial institutions to block these transactions. Another bill in Congress would remove those safeguards for prohibitions of transactions involving fentanyl or “illicit opioid trafficking.”

I bring up the special measures provisions because they are yet another example of the creeping expansion of unchecked executive branch control over financial transactions, including potentially control over Americans’ transactions irrespective of any showing of probable cause or reasonable suspicion that they’ve been involved in a crime. If Judge Carr’s order is based on sound law (and I think it is), then the same approach could be used to challenge the unconstitutional usage of special measures. Like OFAC sanctions, special measures can and often are imposed without any showing of probable cause, without a warrant, and in secret accompanied by a gag-order for the financial institution made to implement a particular special measure prohibition. Just as in the KindHearts case, this unchecked investigative authority is simply irreconcilable with our Fourth Amendment rights.