Last Friday, the U.S. Court of Appeals for the D.C. Circuit issued a decision in Zevallos v. Obama et al., No. 14-5059, __ F.3d __ (D.C. Cir. 2015), affirming the  Office of Foreign Assets Control’s (OFAC[’]s) broad discretion to deny petitions for removal or “de-listing” from its List of Specially Designated Nationals (SDN List).

Fernando Zevallos, a Peruvian national, is a convicted drug trafficker and former low-cost airline magnate, who is currently serving a twenty-year prison sentence for narcotics trafficking in Peru.  In 2004, OFAC  designated Mr. Zevallos pursuant to the Foreign Narcotics Kingpin Designation Act (Kingpin Act). Mr. Zevallos petitioned OFAC for removal from the SDN List at least three times between 2004 and 2013.  In rejecting Mr. Zevallos’ request, OFAC relied on media reports regarding his continued narcotics trafficking activity during his incarceration, in addition to information contained in as his federal indictment in Miami.  Mr. Zevallos subsequently brought suit in federal district court in Washington, D.C. claiming that OFAC’s use of “unverified open source materials” such as media reports was improper.  The district court rejected this claim and Mr. Zevallos appealed.

Before the D.C. Circuit, Mr. Zevallos reiterated his challenge to OFAC’s reliance on media reports but also argued that the appellate court should review OFAC’s denial of his request de novobecause OFAC’s decision-making with respect to the SDN List was not entitled to deference under the Administrative Procedure Act (APA).   The D.C. Circuit affirmed the district court and rejected Mr. Zevallos’ request for de novo review:

Zevallos asks us to take the extraordinary and rare step of reviewing Treasury’s determination de novo instead of under the APA’s arbitrary and capricious standard . . .  We will not do so . . . These proceedings were not severely defective. [OFAC’s] fact-finding procedures were adequate, and Zevallos had ample opportunity to make his case to agency officials.

Zevallos v. Obama et al., No. 14-5059, __ F.3d __ (D.C. Cir. 2015), Slip Decision at 9.

Reason to Believe

OFAC frames this arbitrary and capricious standard in the affirmative, and describes its evidentiary burden as a “reason to believe.” In practice however, the agency considers litigation risk in all of its decisions, and requires evidentiary support that far exceed this minimal standard. It is therefore very difficult to challenge OFAC based on sufficiency of the evidence arguments.  The administrative record OFAC presents in support of its decisions during judicial review will typically far exceed the APA standard.

Successful Removals

This raises an obvious question: if the SDN List is truly meant to be dynamic, as opposed to a life sentence, how does one successfully petition for removal? The first is a demonstration that the administrative record (in OFAC parlance, the evidentiary) supporting the designation contains erroneous facts. This argument is the least likely to succeed, as evidentiaries far exceed the “reason to believe” standard, and contain corroborated information that is reviewed by the Departments of State and Justice prior to the OFAC Director’s signature on the Blocking Memorandum which effectuates the designation.

Successful petitions tend to demonstrate that the designee no longer meets the criteria for designation. Typically, OFAC expects an acknowledgment of the prior status or activity that led to the designation, and an assurance that the activity or status has permanently ceased. OFAC has firmly established that inactivity due to incarceration is not sufficient for removal, as this is not deliberative cessation and the designee is likely to resume the offending behavior.

Probable Regulatory Changes

The current regulation governing the removal petition process is found in 31 C.F.R. 501.807.  Pursuant to this regulation, a designee may submit a written petition to the OFAC Director, who will provide a final written determination in response. The designee may meet with OFAC in person at the agency’s discretion, but the process is generally limited to written submissions. The current regulation does not establish any other procedural rules that govern the petition process.

We expect OFAC to amend its regulations to establish a more transparent and robust petition process in the near future. Increased scrutiny of its current process and recent high litigation risk designations necessitate this regulatory change. At a minimum, these changes will likely establish a schedule of responses, and a date by which a non-determination may serve as an exhaustion of administrative remedies.

We will continue to monitor OFAC penalty announcements, judicial challenges to designations, as well as regulatory changes and publish updates as new developments arise.