Litigation versus the Treasury in a post ‘Chevron deference’ doctrine world

February 2025  |  SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2025 Issue

The 1984 Supreme Court decision in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. established a significant precedent regarding judicial review of administrative agency actions. That case resulted in the ‘Chevron deference’ doctrine, which involved courts taking two steps in determining how they should treat agency actions.

Specifically, over the last 40 years, when reviewing agency actions, courts were required to determine whether the statute was ambiguous or clear regarding the issue at hand. If clear, courts followed the express intent of Congress. If ambiguous, they would defer to the agency’s interpretation provided it is reasonable.

For the financial services sector, whose robust financial crimes and reporting obligations are set and enforced by the US Department of the Treasury, and for individuals attempting to bring claims against the Treasury related to the same, the Chevron deference implications were austere.

First, the mechanism for challenging the Treasury’s authority is the Administrative Procedure Act (APA), for which there is a particularly high bar for a court to pass in invalidating agency actions. Specifically, plaintiffs must show that the Treasury acted in an arbitrary and capricious manner, abused its discretion or otherwise acted not in accordance with the law. This is a high bar considering the Treasury’s actions – e.g., a sanctions designation or million- or billion-dollar penalties – can be an effective financial death sentence to the target.

Second, under the Chevron deference doctrine, courts were required to defer to the agency in its decision making and its interpretations of its own rules and regulations. This made it difficult for plaintiffs to bring successful claims, given the cloak of national security and foreign policy deference afforded to the Treasury. Indeed, there have been few successful cases brought against the Treasury’s Office of Foreign Assets Control (OFAC), particularly with respect to OFAC’s sanctions determinations.

In June 2024, in Loper Bright Enterprises v. Raimondo and Relentless, Inc v. Department of Commerce, the Supreme Court overturned the Chevron decision, holding that under the APA, courts must exercise independent judgment in determining the meaning of statutory provisions. To be sure, judges can still consider agency guidance and interpretation in reaching their own conclusion regarding the meaning of ambiguous statutes but are no longer required to accept the agency’s interpretation.

The end of the Chevron deference was welcomed by many who see government agencies as acting outside of their authority or often infringing on constitutionally protected rights. Conversely, proponents of Chevron deference fear that ending required deference to agencies (which are often seen as the experts in their respective fields) will result in chaos. For the financial sector and individuals attempting to bring claims against OFAC or the Financial Crimes Enforcement Network (FinCEN), the dissolution of the Chevron deference was necessary.

Although the end of the Chevron deference does not facially remedy broader issues like the high bar under the APA to challenging the Treasury’s extreme actions, such as identifying specially designated nationals (SDN), it does open the door to broader questions about OFAC and FinCEN’s authority and their respective underlying rules and standards.

Ultimately, the end of the Chevron deference paves the way for the exploration of much-needed checks and balances on government agencies to ensure there is no exploitation of financial institutions (FIs) or their customers, and that fundamental constitutional rights are protected.

Deputisation of FIs

After the terror attacks on 11 September 2001, Congress passed the USA PATRIOT Act on 26 October 2001. The Act amended the Bank Secrecy Act (BSA) and put in place robust measures for FIs to have a ‘risk-based’, anti-money laundering (AML)/countering the financing of terrorism (CFT) programme. This included classifying customers based on their risk for financial crimes and reporting suspicious activity to FinCEN, the bureau that administers and enforces AML/CFT regulations under the BSA, among other things.

Counterterrorism executive orders were issued even faster, including Executive Order (EO) 13224 of 23 September 2001, which designated several persons as terrorists and provided the authority for additional designations, including but not limited to the authority to designate persons that provide ‘material support’ for any designated person, or to be ‘otherwise associated’ with a designated person. OFAC regulations promulgating the EO followed suit thereafter.

Since then, the US government has heavily relied on FIs to detect and deter financial crimes. Indeed, Treasury officials have informally referred to US FIs as being ‘deputised’ as the front line of compliance for the US government.

The cost to FIs is not just in establishing compliance infrastructure, but the regulations can be ambiguous and vague or otherwise hard to implement, and sanctions and AML penalties are hefty – often ranging into the hundreds of millions or billions of dollars. For example, OFAC and FinCEN both expect FIs to implement a ‘risk-based’ compliance programme, but there is ambiguity and a lack of formal direction regarding what is required under the law.

The BSA requires a ‘risk-based’ programme for customer identification but does publish a risk-rating matrix that must be followed, or an objective or mathematic formula to follow when conducting a risk assessment. Even more interesting, OFAC regulations do not contain a compliance programme requirement at all, but OFAC “strongly encourages” a risk-based sanctions programme, and would consider such in issuing an enforcement action. Importantly, there is little guidance or oversight on how monetary penalties should be applied when violations are found (unlike criminal sentencing guidelines).

The cost to FIs also comes in the form of lawsuits from unhappy customers claiming unfair treatment and violations of privacy and transparency regarding their accounts. Indeed, FIs are a business focused on both compliance and customer service; they do not seek to serve as an informant to government. In short, the banks are between a rock and a hard place when it comes to BSA, AML and OFAC compliance.

Without checks and balances over the Treasury (including OFAC and FinCEN) layered with the Chevron deference provided to the agencies, the risks from extortion to infringement on constitutionally protected rights run high.

Even other US government actors and law enforcement agencies have reportedly exploited these unchecked Treasury powers at the expense of US citizens. Specifically, on 6 December 2024, the US House of Representatives Committee on the Judiciary and the Select Subcommittee on the Weaponization of the Federal Government published an Interim Staff Report: ‘Financial Surveillance in the United States: How the Federal Government Weaponized the Bank Secrecy Act to Spy on Americans’.

The report stated that the “FBI has manipulated the Suspicious Activity Report (SAR) filing process to treat financial institutions as de facto arms of law enforcement, issuing ‘requests,’ without legal process, that amount to demands for information related to certain persons or activities it considers ‘suspicious’”.

The report goes on to explain how “[t]housands of law enforcement officials have warrantless access to Americans’ financial information through a vast and searchable system” in which SARs are filed. It also states that the “FBI has turned this framework on its head and contravened the Fourth Amendment’s requirements of particularity and probable cause”.

Moreover, the report recommends enhancements to Americans’ financial privacy through BSA amendments (e.g., by increasing the currency transaction report threshold from $10,000 to $60,000, reforming the SAR filing process to mandate, after a set period, notice to the customer that a SAR has been filed, and creating a private right of action for Americans and FIs harmed by illicit government activity) and calls for restoring the Fourth Amendment protections to Americans’ financial records.

Constitutional issues in rulemaking

Although AML, CFT and sanctions regulations are undoubtedly important in protecting national security, there is little oversight or controls to ensure that OFAC, FinCEN or even Congress are appropriately promulgating the rules in a constitutional manner, or that the underlying statutes are constitutional in the first instance.

The effects can be seen in the ongoing litigation regarding the Corporate Transparency Act (CTA) for which FinCEN just implemented rules. Specifically, there is a disagreement as to whether Congress has the power to enact the CTA even though Congress has the power to regulate commerce, foreign affairs and further national security interests.

There is a strong argument that the ability to regulate business formation is the purview of states and that the CTA crosses that line. The litigation at the state level – first in Alabama and now in Texas – has resulted in utter chaos, with half the country having filed beneficial owner reports to FinCEN, and the other holding off pending final word.

Given the high bar under the APA to overturn agency decision paired with the Chevron deference, the US government has flexed its authority under the guise of national security, resulting in potential infringements to constitutionally protected rights, not only at the expense of FIs, but also at the expense of individuals who are designated or otherwise unjustly stifled by their actions.

For example, a defendant charged with providing material support to a foreign terrorist organisation may not challenge the designation, and courts have held that “a defendant’s inability to challenge the designation does not offend due process; nor does it constitute an unconstitutional delegation of legislative authority”.

Historically, courts have not been shy about stating that they broadly defer to OFAC and FinCEN regarding their statutory interpretation. For this reason, cases against either agency are rare. However, post-Chevron deference, there has already been some movement in the courts related to challenging OFAC’s authority.

Significantly, in the Tornado Cash case, the Fifth Circuit Court of Appeal concluded that OFAC overstepped its authority in sanctioning Tornado Cash and “blocking” smart contracts under the International Emergency Economic Powers Act (IEEPA). By way of background, in late 2022, OFAC sanctioned Tornado Cash, a software protocol that facilitates anonymous transactions by obfuscating the origins and destinations of digital asset transfers.

OFAC added Tornado Cash to the SDN List and imposed an across-the-board prohibition against any dealings with Tornado Cash ‘property’, which OFAC defined to include open-source computer code known as ‘smart contracts’. Six Tornado Cash users sued OFAC under three theories claiming that OFAC lacked the authority to designate Tornado Cash as an SDN. Of relevance here, the district court sided with OFAC and granted its motion for summary judgment. On appeal, the Fifth Circuit considered the Loper Bright ruling and agreed with plaintiffs that the district court erred in providing heightened deference to OFAC’s interpretation of the statutory term ‘property’ and in finding that the immutable smart contracts met that definition.

The court analysed the ‘ordinary’ and ‘plain’ meaning of the term ‘property’ and concluded that “property has a plain meaning: it is capable of being owned”. The court ultimately concluded that immutable smart contracts are not property because they are not capable of being owned.

This case is significant as it now means that OFAC’s activities – whether designations, civil penalties, licensing determinations or otherwise – are open for review under the APA without the judicially constructed Chevron deference.

The importance of challenges

The ability to challenge the government, including the Treasury’s, determinations – whether sanctions designations or enforcement actions – is an essential component of checks and balances on US government agency authority.

The imbalance that had accrued under the Chevron deference model is reflected in the 2001 ‘Judicial Review Commission for Foreign Asset Control Report’. The commission was established as a result of the Foreign Narcotics Kingpin Designation Act, signed into law in 1999, to determine whether judicial review was necessary over an agency that exercised broad discretion under the Chevron deference.

The report ultimately reviewed the impact of US economic sanctions programmes on US citizens and businesses and the relief available to US persons adversely affected by the administration and enforcement of such programmes. The final report published 12 recommendations, which included ‘Recommendation Two’ that called for the enactment of legislation to establish a system of administrative review with respect to OFAC’s actions under its sanctions programmes. Despite that recommendation, no such legislation was passed into law and OFAC continued to operate with broad Chevron deference.

The erosion of the Chevron deference is more essential than ever to address the draconian implications sanctions and AML/CFT regulations can have on US citizens generally and on the financial sector, specifically. The Treasury will not police itself, and it is through continued litigation that the change will likely occur in the foreseeable future. Litigation against the Treasury will ultimately level the playing field and it is long overdue and welcomed.

 

Cari Stinebower is chair and Dainia Jabaji is of counsel at Winston & Strawn LLP. Ms Stinebower can be contacted on +1 (202) 282 5788 or by email: cstinebower@winston.com. Ms Jabaji can be contacted on +1 (202) 282 5035 or by email: djabaji@winston.com.

© Financier Worldwide

BY

Cari Stinebower and Dainia Jabaji

Winston & Strawn LLP

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