Even terror-funding banks are entitled to fair treatment – D.C. judge

August 31, 2015

(Reuters) – Toward the end of a decision last week in which U.S. District Judge Christopher Cooper enjoined the U.S. Treasury Department from hitting Tanzania’s FBME Bank with the most severe sanction permitted under the Patriot Act, the judge acknowledged the terrible security threat from banks that fund terror organizations and international crime syndicates. “Eliminating that financing, and extricating it from the U.S. financial system, are of paramount importance to the government and the public,” Judge Cooper wrote.

Who could disagree? We all know the truism that terrorism and other international crimes require capital, so if the government can choke off financing for the world’s villains, it can presumably reduce worldwide violence. To that end, Congress gave the Treasury Department extraordinary power in the Patriot Act, including the authority to use the administrative rulemaking process to prohibit U.S. banks from engaging in transactions with foreign institutions that supposedly fund terrorism.

Under that process, Treasury is entitled to rely on classified information the targeted bank is barred from seeing. It is also allowed, under the Bank Secrecy Act, to refuse to show the targeted bank “suspicious activity” reports identifying potentially problematic transactions. Treasury, in other words, can freeze an international bank out of the U.S. financial system on an almost entirely secret record.

But in the American justice system, even defendants accused of the most repugnant crimes are supposed to have rights. That principle, of course, is tested with disturbing frequency, especially when it comes to defendants without the money to hire good lawyers. Poverty wasn’t a problem for FBME, which hired Quinn Emanuel Urquhart & Sullivan and Hogan Lovells to challenge Treasury sanctions. Nevertheless, Judge Cooper’s decision in the FBME case is a reminder that in U.S. courts, the government has to follow the rules – especially when it already enjoys a gigantic procedural head start.

According to Treasury, it has evidence proving that, among other activities, FBME permitted the chief of an international drug trafficking outfit to move money through shell corporate accounts; held an account that was a front for a U.S.-terror-listed Syrian organization involved in trafficking weapons of mass destruction; accepted hundreds of thousands of dollars from a financier for Lebanese Hezbollah; and otherwise engaged in dozens of transactions involving international crime figures and scamsters. In July, Treasury disclosed its finding in the Federal Register and announced a proposed rule to bar FBME from access to accounts with U.S financial institutions.

FBME attempted to challenge Treasury’s findings through the rulemaking process, but when it failed to change the department’s determination, it filed a suit claiming violations of the Administrative Procedures Act and its due process rights. It asked for a preliminary injunction to stop the proposed rule from taking effect on Aug. 28.

Judge Cooper reviewed the evidence underlying Treasury’s proposed rule and concluded that the government is likely to prevail in its characterization of FBME as “a primary money laundering concern,” subject to the Patriot Act’s most severe sanction for a financial institution.

The government’s route to the proposed rule, however, was flawed, according to the judge. Treasury relied on some public, nonclassified materials, such as news articles and blog commentary, to reach its determination that FBME facilitates money-laundering. Treasury was within its rights not to hand over to FBME the classified evidence and suspicious activity reports underlying its determination, according to Judge Cooper, but it should have disclosed the nonclassified materials that informed its decision.

“Given (the government’s) reliance on these non-classified, non-protected documents, its failure to publicly disclose them during the notice-and-comment period appears to constitute a procedural error under the APA,” the judge wrote. “Especially in light of the fact that FBME was not and could not have been privy to the classified and statutorily protected material on which (Treasury) relied, it was entitled at a minimum, it would seem, to view and comment on all of the non-classified, non-protected material.”

Cooper also said that given how rarely Treasury imposes the most severe sanction, the government should at least have considered placing restrictions on FBME’s transactions with U.S. banks rather than proposing an absolute prohibition. It may well be that, as the government argued, the outcome won’t change when Treasury corrects its mistakes, the judge said, but that’s not the point.

“The imposition of this special measure involves a quasi-adjudicative rulemaking process through which the agency may rely on classified information unavailable to the target of the rule,” he wrote. “Holding the agency to its full procedural obligations – even where the present record suggests that its ultimate decision was a proper exercise of its discretion – is critically important in a quasi-adjudicative rulemaking.”

In the U.S. legal system, in other words, there are not supposed to be Star Chambers. It sounds as though FBME has a lot to answer for in its banking record, but it is entitled to be judged under the rule of law – and to insist upon that standard.

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