Review of Legislative History Shows Treasury's Position on Frozen Charitable Funds Without Basis

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Date: 
June 15, 2011
Author: 
Sahar Aziz, Senior Legal Advisor to the Charity and Security Network

Representatives of the U.S. nonprofit sector have been seeking release of frozen charitable funds for charitable purposes since 2006 when 20 organizations sent a letter to the Department of Treasury asking for release of the funds for charitable purposes. Specific procedures based on current Treasury regulations were proposed. However, Treasury rejected the request, and continues to resist releasing the funds, based on a claim that Congress intended the funds to be held in case victims of terrorism file suit against the shut down charities. Since that has only happened in one case, the rest of the funds remain frozen indefinitely. The Charity and Security Network undertook research of the Congressional Record and the law and found no evidence to support Treasury's position. This memo describes the outcome of that research in detail.

Summary of Terrorism Risk Insurance Act, Congressional Intent and Legislative History

The U.S. Department of Treasury (Treasury) has frozen indefinitely the charitable donations of well-intentioned American donors. Members of the Charity and Security Network (CSN) have requested that Treasury release and redirect charitable donations towards the intended charitable purposes. The Department of Treasury has rejected all requests to transfer the charitable donations to another U.S. charity or charities that will use the funds in a manner consistent with the stated mission of the organization and donors’ intent.[1] Instead, innocent donors’ contributions have languished in frozen accounts and innocent beneficiaries do without vital services.

Treasury refuses to recognize the distinction between charitable assets and terrorist assets. It also refuses to release the charitable assets based on its misguided belief that the Terrorism Risk Insurance Act of 2002 (TRIA) prohibits it from releasing any funds frozen pursuant to terrorism sanctions under the International Emergency Economic Powers Act (IEEPA).

In response to CSN’s request to meet to discuss a proposal to resolve the issue, Chip Poncy, Director of the Office of Strategic Policy for Terrorist Financing and Financial Crimes sent a letter dated April 26, 2010 saying, “[i]n the absence of clear Congressional direction to redirect blocked assets to charitable purposes or return them to donors, we are guided by the general intent underlying TRIA.”  This intent, according to Poncy, is that Congress seeks to preserve a charity’s frozen assets for execution or attachment to satisfy a judgment obtained against a terrorist party.

Based on the following analysis, the Charity and Security Network disputes the legal soundness of Poncy’s claim, which is uncorroborated by fact or law. CSN calls on Treasury to release the charitable donations for charitable purposes. Anything short of this is arguably an unlawful government seizure.[2]

Treasury admits that the charitable donations are not forfeited to the government absent a formal forfeiture procedure. Moreover, Treasury has not pursued forfeiture of the charitable assets, some of which have been frozen for nearly a decade.[3] Treasury also has not identified any applicable judgments by victims of terrorism or any pending litigation which would impact the frozen funds other than litigation against the Holy Land Foundation. Nor can Treasury provide a definite time period for which it is authorized to continue to freeze the funds.

This indefinite blocking of charitable funds disregards the philanthropic and nonprofit principles mandating charitable funds be used exclusively for charitable purposes. When a charity recognized by the Internal Revenue Service (IRS) as tax-exempt under Sec. 501(c)(3) of the tax code is dissolved or becomes defunct IRS regulations require that all assets be transferred for charitable purposes.[4]

As a result, charitable funds from donors who lawfully intended their money to serve needy beneficiaries are inappropriately and arguably unlawfully frozen indefinitely.

QUESTIONS PRESENTED

1.Whether Section 201(a) of the Terrorism Risk Insurance Act of 2002 implicates frozen funds of U.S. charities under investigation or designated as terrorist organizations when there are no judgments or pending litigation by victims of terrorism.

2.Whether the frozen funds of U.S. charities should be held indefinitely by the United States Government in anticipation of a judgment at an unknown time and from an unknown party.

BRIEF ANSWER

The Terrorism Risk Insurance Act of 2002 (TRIA) does not require frozen charitable funds be held indefinitely until a judgment is presented from an unidentified victim of terrorism. To resolve the issue, Treasury has an obligation, as the possessor of charitable assets, to pursue a change in policy, agency regulation, and/or an executive decision to release charitable funds consistent with charitable purposes as defined by Section 501(c)(3) of the Internal Revenue Code.

ANALYSIS

I.TRIA Was Passed to Protect the Insurance Industry from Collapse After the September 11th Terrorist Attacks

The Terrorism Risk Insurance Act of 2002 (TRIA) was originally passed in 2002 as a provisional measure to allow the insurance industry to develop its own solutions and products to insure against future acts of terrorism. TRIA was set to expire on December 31, 2005, but has now been extended to December 31, 2014 under the Terrorism Risk Insurance Program Reauthorization Act.[5]

TRIA was intended to protect the insurance industry from extraordinary financial risks imposed by acts of terrorism.[6] TRIA also sought to prevent insurers from systematically denying notices of claims in connection with the losses caused by the September 11th attacks. Towards that end, TRIA created the Federal Terrorism Insurance Program, which now administers a system of shared public and private compensation for insured losses to protect consumers and create a transitional period for private insurance markets to stabilize.

In-depth research of Congressional Reports and legislative history in connection with TRIA reflects that, not surprisingly, most of the legislative history discusses the need for protecting the insurance and property insurance industry from collapse after the September 11th attacks, as well as any future terrorist attacks of that magnitude. While there is a passing reference to preservation of frozen assets of terrorists to pay judgments obtained by victims of terrorism, the issue of holding charitable assets in the absence of a judgment or pending litigation is not addressed in TRIA.

II. Pertinent Provisions of TRIA Highlight Preserving Frozen Assets for Satisfaction of Issued Judgments, Not Prospective Judgments

TRIA “imposes no obligation on the President to maintain [frozen] funds for future attachment.” [7]

TRIA Section 201(a) states in pertinent part:

(a)In general.--Notwithstanding any other provision of law, and except as provided in subsection (b) [of this note], in every case in which a person has obtained a judgment against a terrorist party on a claim based upon an act of terrorism, or for which a terrorist party is not immune under section 1605(a)(7) of title 28, United States Code, the blocked assets of that terrorist party (including the blocked assets of any agency or instrumentality of that terrorist party) shall be subject to execution or attachment in aid of execution in order to satisfy such judgment to the extent of any compensatory damages for which such terrorist party has been adjudged liable. [8]

TRIA defines “blocked assets” [9] as any asset seized or frozen by the United States under the Trading with the Enemy Act; [10] or Sections 202 or 203 of the International Emergency Economic Powers Act (IEEPA).[11]  Section 201(a) reflects that blocked assets of terrorists are available for satisfaction of judgments issued by a court of law. However, the statutory language applies only to existing judgments as opposed to allegations, charges, or prospective judgments.

This issue was squarely addressed in Smith v. Federal Reserve Bank of New York, [12] which involved victims of terrorism seeking to satisfy judgments against assets of the Republic of Iraq. The Second Circuit held:

“the language of section 201 cannot reasonably be read to mandate that terrorist assets be blocked in perpetuity. It states simply that blocked assets ‘shall be subject to execution or attachment in aid of execution.’ We believe that the plain meaning of that language is to give terrorist victims who actually receive favorable judgments a right to execute against assets that would otherwise be blocked. Thus, although the statute applies broadly to ‘every case in which a person has obtained a judgment,’ it confers no entitlement on victims who have not yet obtained judgments. Neither does it guarantee that any blocked assets will in fact be available when a particular victim seeks to execute on a judgment.” [13]

III. Charitable Assets Are Not Terrorist Assets Subject to a “Blocked Assets” Analysis

Notwithstanding the holding in Smith, there is a strong argument that charitable assets are not terrorist assets subject to the “blocked assets” analysis. Rather, charitable assets are held in trust prior to their dispensation for the intended charitable purpose. If the donated funds were to be used for nefarious purposes, then the trustees in charge have breached their fiduciary duty and corrective action is necessary to protect the charitable assets for charitable purposes.

When a U.S. organization is designated as a supporter of terrorism, it automatically loses its tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. The organization is then likely to lose its charter under state law, forcing dissolution. Then, IRS regulations require that all assets be turned used for charitable purposes consistent with the requirements of Section 501(c)(3). [14]

There is nothing in TRIA to indicate it was intended to supersede these well established principles of tax law.

As a result, TRIA does not apply to charitable assets, but only terrorist assets. Nor does TRIA statutorily require that frozen funds of charities be held indefinitely by the U.S. government in anticipation of a prospective judgment at an unknown time and from an unknown party. Absent clear legal authority to hold the funds indefinitely, Treasury has an obligation to consider the interests of well-intentioned donors who collectively donated tens of millions of dollars to help needy beneficiaries, the needs of beneficiaries and the relevant provisions of tax law.

Freezing charitable assets indefinitely is not only bad public policy but unjustified law.

IV. The Absence of a Statute of Limitations Evinces TRIA’s Inapplicability to Frozen Charitable Funds

TRIA does not contain a statute of limitation provision limiting the time in which a party may file a claim against frozen assets.[15] In contrast, the Foreign Sovereign Immunities Act, which carves out an exception to foreign sovereign immunity whereby state assets are subject to satisfaction of judgments by victims of state sponsored terrorism, imposes a ten year statute of limitations. [16]

TRIA was not intended to provide a mechanism to indefinitely freeze charitable funds for prospective claimants. To that end, TRIA does not set forth a limitation of time under which a prospective claimant may seek to satisfy a judgment. Conversely, that foreign states accused of sponsoring terrorism may recover their assets after the passage of ten years while American donors’ charitable funds can languish in frozen accounts is telling. Treasury’s untenable reliance on TRIA to indefinitely hold charitable assets only proves the need for regulations to address treatment of the frozen charitable assets in a manner consistent with charitable mission and donor intent.

Specifically, Treasury must provide a lawful mechanism under which frozen charitable assets can be redirected to charitable purposes, after appeals related to designation are exhausted, and a statute of limitations expires.

V. Sparse Evidence of Congressional Intent to Preserve Assets for Victims of Terrorism

The sparse evidence of Congressional intent to preserve assets of non-state terrorist organizations to compensate victims of terrorism is clearly limited to satisfying civil judgments obtained by victims of terrorism. This leaves open the question of how long Treasury is permitted to control the frozen funds in the absence of judgments. Contrary to Poncy’s statements, TRIA’s legislative history fails to provide an answer.

Representative Mel Watt from North Carolina proposed the relevant amendment to TRIA. In the House debates on November 29, 2001, Representative Chris Cannon states the following intent behind supporting Mr. Watts’ amendment:

I rise today in support of the rule and the underlying legislation. The rule provides for the continued availability of insurance against terrorism risks, and addresses multiple insurance and liability issues arising out of the September 11 attacks.

This is a good rule that incorporates changes made by the Committee on Financial Services and the Committee on Ways and Means and the Committee on the Judiciary to the original bill. I would like to speak about some of those important provisions that fell within the Committee on the Judiciary jurisdiction.

First, by working with the gentleman from Ohio (Chairman Oxley) and the gentleman from Wisconsin (Chairman Sensenbrenner), we were able to expand language in the original bill dealing with the use of frozen terrorist assets to compensate victims of terrorism.

This change to language offered by the gentleman from North Carolina (Mr. Watt) brings the bill into line with an amendment I offered earlier, in earlier legislation, that was accepted by the Committee on the Judiciary this fall. It was also language that was approved by the House on suspension in the 106th Congress.

The provision in the bill today will allow equal access to the frozen assets of terrorists, terrorist organizations, and terrorist sponsor-states for American victims of international terrorism who obtain judgments against those terrorist parties.

In addition, the Committee on the Judiciary added important litigation management provisions to deal with the legal aftermath of a major terrorist attack. This is a commonsense recognition that major terrorist attacks are not garden variety tort cases, and that there is a compelling national interest in setting rules and limits for how lawsuits arising from such attacks proceed. Exposing American citizens and insurers to unlimited liability in multiple judicial forums for the terrible acts of madmen is a recipe for a financial crisis.

This Congress overwhelmingly recognized the same principle when we limited airline liability for the September 11 attacks and set them back on a sound financial footing. We need to do the same today for insurers, and equally important, to the insured.

I would like to thank again the gentleman from Ohio (Chairman Oxley), the gentleman from Wisconsin (Chairman Sensenbrenner), the gentleman from New York (Mr. Fossella), and the gentleman from North Carolina (Mr. Watt), for all their efforts on these issues.

I urge my colleagues to support the rule and the bill today. By providing partial Federal coverage for acts of terrorism, setting reasonable limits and procedures for lawsuits arising from such acts, and allowing victims to go directly after the frozen assets of terrorists and their sponsors, we can help our Nation and economy move forward. [17]

At most, Mr. Cannon’s statement in support of Mr. Watt’s amendment evinces Congressional intent to preserve assets of terrorist organizations for satisfaction of judgments in favor of victims of terrorism. On the other hand, much of the legislative history is couched in the context of overcoming state immunity invoked by states or agents thereof designated as terrorists. There is no specific mention of American charitable institutions much less of how to handle the frozen charitable asets.

VI. Case Law Points to TRIA’s Purpose to Overcome Foreign State Immunity, Not Indefinitely Freeze American Charitable Assets

Because TRIA created a new exclusion to foreign sovereign immunity for “blocked assets,”[18] most of the cases involving TRIA are filed against foreign states. [19] The primary legal issue is often whether TRIA trumps the Foreign Sovereign Immunities Act’s exception to sovereign immunity [20] or a treaty that grants nations immunity from private suits. This further evinces that TRIA was not intended to authorize indefinite freezing of charitable assets.

CONCLUSION

There is no evidence of Congressional intent to support the proposition that well-intended American charitable donations and assets of American charities can be held indefinitely by the U.S. government. Instead, TRIA applies to existing judgments, and only one exists. TRIA does not resolve the question of how long charitable assets should be frozen for payment to prospective judgments by unknown victims of terrorism. Nor does TRIA take into account competing public policy and legal mandates applicable to nonprofit organizations wherein unused charitable assets should be redirected towards charitable purposes. TRIA clearly does not state that charitable assets donated by American donors whose intent is to provide humanitarian aid to impoverished beneficiaries can be unilaterally redirected for other purposes.

There is an urgent need for legislative or regulatory measures to preserve donor intent and protect charitable funds from indefinite freezing. Treasury, as possessor of the frozen funds, has a fiduciary obligation to find a fair and equitable solution in collaboration with stakeholders in the American nonprofit sector.

 


[1] See OMB Watch, Collateral Damage: How the War on Terror Hurts Charities, Foundations, and the People They Serve 63-66 (2008) (documenting Treasury’s rejection of numerous requests by U.S.-based charities to transfer their assets to other nonprofits for charitable programs).

[2] See, e.g., 21 U.S.C. 853; 18 U.S.C. 981. 

[3] The assets of the Holy Land Foundation, Benevolence International, and Global Relief for Life and Development have been frozen since late 2001. See infra, note 25.

[4] 26 CFR 1.501(c)(3)-1(b)(4) See also Chief Steward of the Ecumencial Temples & the Worldwide Peace Movement & His Successors v. Comm'r, 49 T.C.M. 640 (1985)

[5] See, e.g., Mortgage Bankers Association, Terrorism Risk Insurance Program Reauthorization Act of 2007, available at http://www.mbaa.org/IndustryResources/ResourceCenters/TerrorismRiskInsuranceProgramReauthorizationActof2007%28TRIPRA%29ImplementationCenter (highlighting the TRIA’s focus on providing relief to the insurance industry in responding to claims arising out of the September 11th attacks); The American Insurance Association, The Terrorism Risk Insurance Program Reauthorization Act of 2007: What the Law Means and How It Will Be Implemented (Feb. 20, 2008), available at http://www.aiadc.org/AIAdotNET/docHandler.aspx?DocID=311587 (providing further evidence that TRIA was more about protecting the insurance industry against significant liability in major terrorist attacks than directing assets of charities accused of terrorism to compensate victims of terrorism).

[6] Pub.L. 107-297, Title I, § 101(b), Nov. 26, 2002, 116 Stat. 2337 (hereinafter TRIA) (“Purpose–The purpose of this title is to establish a temporary Federal program that provides for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism, in order to (1) protect consumers by addressing market disruptions and ensure the continued widespread availability and affordability of property and casualty insurance for terrorism risk; and (2) allow for a transitional period for the private markets to stabilize, resume pricing of such insurance, and build capacity to absorb any future losses, while preserving State insurance regulation and consumer protections.”) (emphasis added).

[7]  Smith v. Federal Reserve Bank of New York, 346 F.3d 264, 271 (2d Cir. 2003).

[8] TRIA at Title II, § 201(a) (emphasis added).

[9] Id. at Title II, § 201(d)(1)(2).

[10] See Trading with the Enemy Act, 50 U.S.C. App. 5(b) (1917) (permitting President during time of war to nullify, void, prevent or prohibit withdrawal or use of property in which any foreign country or national thereof has any interest) (emphasis added).

[11] See International Emergency Economic Powers Act, 50 U.S.C. §§ 1701, 1702 (1977) (permitting President, during time of unusual and extraordinary threat which has its source in whole or substantial part outside the United States for which President has declared national emergency to investigate, regulate or prohibit inter alia transactions in foreign exchange or credits or payments involving foreign country and to block, nullify or void any acquisition, holding, transfer or use or property in which any foreign country or national thereof has any interest) (emphasis added).

[12]  346 F.3d 264 (2d Cir. 2003).

[13] Smith, 346 F.3d at 271 (emphasis added).

[14] 26 CFR 1.501(c)(3)-1(b)(4)

[15] Section 107(a)(1) tangentially touches upon the issue, stating “If the Secretary makes a determination pursuant to § 102 [of the Act] that an act of terrorism has occurred, there shall exist a Federal cause of action for property damage, personal injury or death arising out of or resulting from such act of terrorism ….” Id. at Title I, § 107(a)(1).

[16]  Foreign Sovereign Immunities Act, 28 USC § 1605A(b)(2), where claimants have 10 years from the date on which the cause of action arose to file a claim.

[17] Terrorism Risk Insurance Act, Congressional Record – House, 107th Congress, 1st Session, 147 Cong. Rec. H 8572, 8576 (Nov. 29, 2001) (emphasis added).

[18] See TRIA, Title II, § 201(d); Foreign Sovereign Immunity Act, 28 U.S.C. § 1610(f)(1)(A).

[19]  See, e.g., Weininger v. Castro, 462 F.Supp.2d 457 (S.D.N.Y. 2006); Weinstein v. Islamic Republic of Iran, 624 F.Supp.2d 272 (E.D.N.Y. 2009); In re Islamic Republic of Iran Terrorism Litigation, 659 F. Supp.2d 31, 55 (D.D.C. 2009) (“subsequent legal enactments have expanded the number of cases with judgments against Iran that are eligible for payments from the United States Treasury”).

[20] 28 U.S.C. § 1605A (providing an exception to foreign sovereign immunity for states found to have sponsored or engaged in terrorism).