In case of forfeiture complaint against Iran-owned property in New York City under IEEPA,
Second Circuit remands because of the unresolved issues of knowledge of Iranian
ownership and money laundering
In
this case, the United States Court of Appeals for the Second Circuit reviews an
appeal from a summary judgment by the United States District Court for the
Southern District of New York. The district court forfeited various Claimants’
interests in multiple properties in the United States as proceeds traceable to
violations of the International Emergency Economic Powers Act (“IEEPA”) and
certain Iranian Transactions Regulations issued by the Department of the
Treasury, and thus forfeitable under 18 U.S.C. § 981(a)(1)(C), and as property
involved in money laundering transactions under 18 U.S.C. § 981(a)(1)(A). These
properties include a 36-story office building located at 650 Fifth Avenue in
Manhattan ("the Building"), real properties in Maryland, Texas,
California, Virginia, and New York, and several bank accounts, (collectively,
"Defendant Properties").
In
1973, the Shah of Iran, Mohammad Reza Pahlavi, incorporated the Pahlavi
Foundation as a New York not-for-profit corporation. In 1974, the Pahlavi
Foundation acquired property at 650 Fifth Avenue in New York City (“the
Property”). In 1975, at the Shah’s direction, Bank Melli, which is wholly owned
by the Iranian government, loaned the Pahlavi Foundation $42 million for the
construction of a 36-story office tower on the Property.
After
the 1979 Iranian Revolution, the new Iran’s Supreme Leader, Ayatollah Ruhollah
Khomeini, ordered the formation of the Bonyad Mostazafan, an entity charged
with managing property expropriated by the revolutionary government, including
that at 650 Fifth Avenue. In 1980 the Pahlavi Foundation was renamed the
Mostazafan Foundation of New York, while in 1992 it was renamed as the Alavi
Foundation.
In
addition to the Building, Alavi acquired seven real properties in the 1980s and
1990s, including two parcels of land in Rockville, Maryland, one property in
Houston, Texas, one property in Carmichael, California, two parcels of land in
Prince William County, Virginia, and one block of lots in Queens, New York
(collectively, “Alavi Real Properties”).
According
to Alavi’s bylaws, its Board controls the organization’s affairs and property
and appoints corporate officers and directors, while its President supervises
operations and reports to the Board. The President and the Board are
responsible for operational decisions such as charitable efforts, personnel
decisions, and program management.
Alavi
has always been a tax-exempt not-for-profit organization. However, due to Bank
Melli’s 1975 mortgages on the Property, the rental income from the Building was
taxable as debt-financed unrelated business income. In 1989, the 650 Fifth Ave.
Co. was created as a partnership, in order to relieve Alavi of certain tax
obligations, because Alavi’s tax obligation left insufficient funds for the
Foundation to pay off the Bank Melli debt. The same year the “Company in Jersey
Island” was formed as Assa Company Limited (“Assa Limited”), which wholly owned
the “other Company” incorporated in New York, Assa Corporation (together,
“Assa”). Assa was the vehicle by which Bank Melli carried out the series of
circular transactions that effectively relieved Alavi of its tax obligations
without surrendering Melli’s interests in Alavi income. Moreover, Assa
Corporation purchased a 35% share in the 650 Fifth Ave. Co. Partnership from
Alavi, and Alavi used the funds to pay off the Bank Melli mortgages. According
to the 1989 partnership agreement, Alavi contributed the Building to the newly
formed 650 Fifth Ave. Co., while Assa contributed $44.8 million in cash, which
Assa had received from Bank Melli and which Alavi returned to Bank Melli as
payment for its mortgage debt.
Alavi
later sold a further 5% of its interest to 650 Fifth Ave. Co. to Assa. That
way, Bank Melli owned 40% of the Building and received a commensurate share of
that Building’s substantial—and tax-free—rental income. Since the Partnership’s
founding and until commencement of the forfeiture proceedings, Alavi served as
650 Fifth Ave. Co.’s managing partner, administering the day-to-day affairs of
the Partnership, as well as the management of the Building.
In
1995, President Clinton issued a series of Executive Orders pursuant to the
International Emergency Economic Powers Act (“IEEPA”), declaring the Government
of Iran a threat to national security and imposing broad financial sanctions.
The Treasury Department’s Office of Foreign Assets Control (“OFAC”) determined
that Bank Melli was owned or controlled by the Government of Iran, thus
subjecting it to limitations on the receipt of services from U.S. financial
institutions, except as authorized by an OFAC license. OFAC subsequently
promulgated a series of Iranian Transactions Regulations (“ITRs”) which
generally prohibited United States entities from conducting business with or
providing services to the “Government of Iran.” As United States entities,
Alavi and 650 Fifth Ave. Co. were subject to these orders and regulations and
prohibited thereby from conducting business with or providing services to Bank
Melli or any other instrumentality owned or controlled by, or acting on behalf
of, the Government of Iran. Bank Melli then formally divested its ownership of
Assa, while its Harter Holdings shares were acquired by two individuals, Davood
Shakeri and Fatemeh Aghamiri. Shakeri and Aghamiri indirectly held 100% of
Assa’s shares until 1999, when they directly acquired 100% of Assa’s 100
shares.
On
December 17, 2008, the United States filed a civil action in the Southern District
of New York seeking forfeiture of property owned by Assa and Bank Melli based
on violations of the IEEPA, 50 U.S.C. § 1701 et seq., and 18 U.S.C. §§ 1956,
1957, while the Treasury Department added Assa to the Specially Designated
Nationals (“SDN”) list based on its determination that Assa is a front company
for Bank Melli. Furthermore, that same day District Judge Holwell entered a
protective order for documents preservation by Alavi and 650 Fifth Ave. Co.,
and related to the books and records of the Fifth Avenue Company, the Pahlavi
Foundation, the Mostazafan Foundation, the Alavi Foundation, Assa Corporation,
Assa Company Ltd., and/or Bank Melli. And, the same day, the Government served
a grand jury subpoena on Alavi, seeking evidence of IEEPA violations and money
laundering.
The
subpoena was served on Alavi President Jahedi, who, as observed by the agents
of the Federal Bureau of Investigation (“FBI”), discarded the papers responsive
to the subpoena into a public trash bin. The FBI then sought, obtained, and
executed a criminal search warrant for the offices of Alavi and 650 Fifth Ave.
Co. The warrant did not identify the crimes for which agents were authorized to
search or seize the listed property, and did not place any temporal limit on
the property to be seized.
On
November 12, 2009, the Government filed an amended civil forfeiture complaint,
adding Alavi’s and 650 Fifth Ave. Co.’s properties as defendants-in-rem. The
Government sought forfeiture of all right, title, and interest of Alavi, 650
Fifth Ave. Co., Assa, and Bank Melli Iran, and all property traceable thereto;
the Building, including all improvements and attachments, and all property
traceable thereto; the Alavi Real Properties, with all improvements and
attachments thereon; and the contents of nine bank accounts, and all funds
traceable thereto.
Since
its commencement this forfeiture action generated numerous decisions by the
District Court. On May 28, 2014, at Alavi’s and 650 Fifth Ave. Co.’s request,
the District Court entered final judgment as to the Government’s claims of
forfeiture against these Claimants’ properties. Alavi and 650 Fifth Ave. Co.
appealed.
The
United States Court of Appeals for the Second Circuit vacates the judgment and
remands for further proceedings consistent with its order. In a de novo review,
the Court first addressed the Government’s forfeiture claim under IEEPA theory
of forfeiture.
“In
civil forfeiture proceedings, the Government bears the burden of showing by a
preponderance of the evidence that the property at issue is subject to
forfeiture. 18 U.S.C. § 983(c); accord United States v. Sum of $185,336.07
United States Currency, 731 F.3d 189, 196 (2d Cir. 2013). To carry this burden
it must show that the property is more likely than not forfeitable. See United
States v. Funds in the Amount of One Hundred Thousand One Hundred and Twenty
Dollars ($100,120.00), 730 F.3d 711, 716 n.5 (7th Cir. 2013) (explaining in
civil forfeiture action that preponderance standard requires showing that
property is more likely than not subject to forfeiture); cf. United States v.
Coppola, 671 F.3d 220, 250 (2d Cir. 2012) (stating that ‘preponderance finding
satisfied if fact’s existence was `more likely than not’ (quoting United States
v. Hertular, 562 F.3d 433, 447 (2d Cir. 2009)). Upon such a showing, the burden
then shifts to the claimant to show a triable issue as to whether it was an
‘innocent owner’—i.e., that the claimant had no knowledge of the predicate
illegal activity. See United States v. Funds Held in the Name or for the
Benefit of Wetterer, 210 F.3d 96, 104 (2d Cir. 2000).”
“The
Government’s first civil forfeiture claim arises under the IEEPA, a federal
statute that empowers the President of the United States to employ economic
sanctions and other measures to deal with threats to this nation’s security,
foreign policy, or economy, which have their source ‘in whole or substantial
part outside the United States,’ and for which he has declared a national
emergency. 50 U.S.C. §§ 1701-1702. The relevant civil forfeiture statute
states:
(a)(1)
The following property is subject to forfeiture to the United States: . . .
(C)
Any property, real or personal, which constitutes or is derived from proceeds
traceable to . . . any offense constituting “specified unlawful activity” (as
defined in section 1956(c)(7) of this title), or a conspiracy to commit such
offense.”
“18
U.S.C. § 981(a)(1)(C). Section 1956(c)(7) defines ‘specified unlawful activity’
to include offenses under “section 206 (relating to penalties) of the
International Emergency Economic Powers Act.” Id. § 1956(c)(7)(D). Section 206
of the IEEPA makes it ‘unlawful for a person to violate, attempt to violate,
conspire to violate, or cause a violation of any license, order, regulation, or
prohibition issued under this chapter,’ 50 U.S.C. § 1705(a), and provides for
both civil and criminal penalties, see id. § 1705(b). […]The orders,
regulations, and prohibitions referenced in section 206 are set forth in
several Executive Orders and related ITRs promulgated by OFAC. This chain of
interlocking statutes can thus be summarized as follows: property that
‘constitutes or is derived from proceeds traceable to’ violations of executive
orders and ITRs promulgated pursuant to the IEEPA is subject to forfeiture. See
18 U.S.C. § 981(a)(1)(C); id. § 1956(c)(7)(D); 50 U.S.C. § 1705.”
“In
1995, President Clinton, acting pursuant to his authority under the IEEPA,
issued two executive orders relevant to the present action. Executive Order
12,957 found that ‘the actions and policies of the Government of Iran
constitute an unusual and extraordinary threat to the national security,
foreign policy, and economy of the United States,’ and declared ‘a national
emergency to deal with that threat.’ Exec. Order No. 12,957, 60 Fed. Reg. 14615,
14615 (Mar. 15, 1995). Executive Order 12,959 imposed broad financial sanctions
on Iran, including a prohibition on ‘the exportation from the United States to
Iran, the Government of Iran, or to any entity owned or controlled by the
Government of Iran, or the financing of such exportation, of any goods,
technology . . . or services.’ Exec. Order No. 12,959, 60 Fed. Reg. 24757,
24757 (May 6, 1995).” Accordingly, in September 1995, OFAC promulgated the five
ITRs that the Government alleges Alavi and 650 Fifth Ave. Co violated in this
case, thereby rendering the Defendant Properties forfeitable under 18 U.S.C. §
981(a)(1)(C) as proceeds traceable to IEEPA violations.
“[…]
OFAC has [also] defined the ‘Government of Iran’ to include ‘[a]ny person owned
or controlled, directly or indirectly’ by ‘[t]he state and the Government of
Iran, as well as any political subdivision, agency, or instrumentality
thereof.’ Id. § 560.304. OFAC has further stated that the ‘term entity owned or
controlled by the Government of Iran includes any corporation, partnership,
association, or other entity in which the Government of Iran owns a 50 percent
or greater interest or a controlling interest, and any entity which is
otherwise controlled by that government.’ Id. § 560.313 (2012). It is
undisputed that Bank Melli, a bank owned by the Iranian government, is the
‘Government of Iran’ under the ITRs. See id.; see also Implementation of
Executive Order No. 12959 with Respect to Iran, 60 Fed. Reg. 40881-02, 40883
(Aug. 10, 1995) (determining Bank Melli ‘to be owned or controlled by the
Government of Iran’).”
“For
the Government to succeed on summary judgment on its forfeiture claim against
the Defendant Properties as proceeds of IEEPA violations under the civil
forfeiture statute, 18 U.S.C. § 981(a)(1)(C), it must show there is no triable
issue that the Defendant Properties (1) either ‘constitute[] . . . proceeds’ or
are ‘derived from proceeds’ that are (2) traceable to (3) a violation or a
conspiracy to violate the relevant Executive Orders and implementing ITRs. Id.
§ 981(a)(1)(C).”
The
Government argued that the Defendant Properties are forfeitable under IEEPA as
proceeds traceable to Alavi’s provision of services to its 650 Fifth Ave. Co.
partner Assa, which violates the ITRs because Assa is a front for Bank Melli,
which is an instrumentality of the Government of Iran. The Court did not agree,
and concluded:
“[…]
To demonstrate a violation of any one of the implementing ITRs on this theory,
and hence to satisfy step three of the civil forfeiture statute, the Government
had to show that no triable issue exists as to whether (1) Assa was owned or
controlled by the Government of Iran after 1995, see 31 C.F.R. § 560.304; see
also id. §§ 560.203, 560.204, 560.206, 560.207, 560.208; and (2) Alavi provided
services to Assa after 1995 knowing it was so owned or controlled. For the
reasons set forth herein, we conclude that the Government carried its burden as
to the first requirement, but that triable issues of fact as to the second preclude
an award of summary judgment in its favor. Therefore, because we identify
material questions of disputed fact at the third step of analysis as to
Claimants’ mens rea, we vacate the summary judgment award forfeiting their
interests in the Defendant Properties and remand for further proceedings.”
The
Court then turns to address the money laundering theory of forfeiture.
“[…]
In relevant part, the civil forfeiture statute states:
(a)(1)
The following property is subject to forfeiture to the United States:
(A)
Any property, real or personal, involved in a transaction or attempted
transaction in violation of section 1956, 1957 or 1960 of this title, or any
property traceable to such property.
18
U.S.C. § 981(a)(1)(A). To show that the property was ‘involved in’ such a
transaction, the Government has the burden of proving that ‘there was a
substantial connection between the property and the offense.’ Id. § 983(c)(3).
[…]”
“Knowledge
of unlawful activity—or intent to carry out an unlawful activity—is an element
of every one of the three money laundering offenses. To secure summary judgment
based on promotion or concealment money laundering, the Government must show,
inter alia, that there is no genuine dispute that the Claimants knew that
‘property involved in a financial transaction represents the proceeds of some
form of unlawful activity.’ Id. § 1956(a)(1). To secure summary judgment based
on international money laundering, the Government must show, inter alia, no
genuine dispute that the Claimants either (1) intended to promote the carrying
on of a specified unlawful activity, or (2) knew that the funds being
transferred were proceeds of specified unlawful activity. Id. § 1956(a)(2);
accord United States v. Ness, 565 F.3d 73, 77 (2d Cir. 2009).”
The
Government alleged that the Claimants engaged in proscribed money laundering by
committing IEEPA violations. The Court, however, concluded that […] “whether
Claimants violated the IEEPA depends on the disputed question of Claimant
Alavi’s knowledge of Bank Melli’s post-1995 control of Assa, which gives rise
to a triable issue as to its culpable intent in providing services to Assa
pursuant to their partnership in 650 Fifth Ave. Co. These material issues
preclude determining Claimants’ involvement in money laundering violations as a
matter of law and, thus, require us to vacate the award of summary judgment on
this claim for forfeiture and to remand the case for further proceedings.”
The
Court vacates the District Court’s summary judgment and remands the case for
further proceedings consistent with its opinion.
Citation: In Re 650 Fifth
Ave. and Related Properties, 830 F.3d 66 (2nd Cir. 2016).
Legal Commentary by Attorney Terik Hashmi,
www.TerikHashmiattorney.com.