Court Places Limits on DOJ’s Asset Forfeiture Powers

The D.C. Circuit recently handed a significant victory to anyone with assets in the U.S. – especially anyone under investigation in another country for violation of that country’s laws. As reported on the Blog of Legal Times, the D.C. Circuit issued a decision on July 16 holding that the Department of Justice could not seize the assets of two funds pending Brazil’s investigation of the funds’ owners, Daniel and Veronica Dantas.

Brazilian banker Daniel Dantas and his sister, Veronica, are under investigation in Brazil for scheming to defraud the Brazilian financial system, engage in insider trading, and launder the proceeds of their crimes. In 2008, while the investigation was underway, the Government of Brazil formally requested that the U.S. Government seize the funds’ assets located in Connecticut and New York. The DOJ responded by filing applications for restraining orders with the D.C. Circuit. The DOJ requested the restraining orders based on a section of the Patriot Act that authorizes federal district courts to issue restraining orders to “preserve the availability of property subject to a foreign forfeiture or confiscation judgment.” 28 U.S.C. 2467(d)(3).

Twice, the district court denied DOJ’s requests on grounds that the provision does not permit seizure of assets before a foreign government issues a final order compelling payment of money representing the proceeds of a crime or the forfeiture of property traceable to the crime. Because the Brazilian authorities had not completed their investigation of the Dantases, no forfeiture or confiscation judgment had yet been entered. Thus, the district court held, the statute did not authorize seizure. Under the district court’s interpretation, the provision does not authorize the indefinite seizure of U.S. funds based on a possibility they might be subject to future confiscation by a foreign government.

On appeal, DOJ argued for an expansive interpretation of the statute based on the statutory scheme, legislative history and policy considerations. In its well-reasoned decision, the D.C. Circuit rejected DOJ’s arguments, explaining that the statute contemplates a two-stage process. The first stage involves a confiscation or forfeiture judgment against a person; the second judgment specifically identifies the property to be confiscated. Given this context, the provision authorizes seizure of funds in the U.S. to preserve property subject to a foreign forfeiture or confiscation judgment, but only after the foreign government has issued a judgment against the person, i.e., the first stage judgment. In such cases, property in the U.S. may be seized pending an investigation and judgment with respect to the property to be seized, i.e., the second stage judgment.

Cases of this type are relatively rare. The D.C. Circuit noted there have been, on average, about one a year. Nonetheless, the decision is important for the definite limit it places on the U.S. Government’s power to seize assets—a power that over the last decade has expanded considerably and often with seemingly little standing in its way.

Civil Forfeiture: More Safeguards Needed to Protect the Innocent

Civil forfeiture is a legal fiction premised on two notions: that (i) property bears guilt when put to unlawful use; and (ii) monarchs are the creator’s appointed representatives on the earth. In such a world, it would make sense for guilty property to be seized and returned to the monarch. In the monarch’s hands, stained property can be washed clean and repurposed for noble use. But that is not real life.

In real life, it is not so simple. Significant challenges have been made to the procedures that local and state governments use in seizing property. See, e.g., Alvarez v. Smith, 130 S. Ct. 576 (2009), which involved a challenge to the warrantless seizure of cash and automobiles purportedly used to facilitate a drug crime. The U.S. Court of Appeals for the 7th Circuit had held that the Illinois statutory procedures “show insufficient concern for the due process right of the plaintiffs,” but the U.S. Supreme Court dismissed the case as moot.

Recently, columnist John Stossel argued in the Boston Herald that civil forfeiture is “government grand theft auto” because in most states, police and prosecutors are allowed to keep for their own use all or most of the property that they seize.

Civil forfeiture can be a useful and needed tool for law enforcement. For example, it gives law enforcement officers authority to seize an unattended rental truck based on a showing of probable cause that the truck was being used to ship products used to manufacture methamphetamine. Without civil forfeiture, officers could not stop the operation unless they could apprehend the owner or driver.

Civil forfeiture permits officers to seize the truck. Then, the Government must (i) provide notice to the interested parties (the owner and driver, for example); (ii) file a civil forfeiture proceeding; or (iii) obtain an indictment alleging that the property is subject to forfeiture. Anyone who has an interest in the property may contest forfeiture. As a practical matter, this procedural safeguard only protects the truck’s owner if the owner knows of the proceeding, the owner can afford an attorney, and the value of the truck exceeds the cost of preventing forfeiture. Ultimately, the Government must prove the property is subject to forfeiture by a preponderance of the evidence. The owner must prove the “innocent owner defense.”

Although the Civil Asset Forfeiture Reform Act (CAFRA), passed in 2000, did much to curb the abuse of forfeiture proceedings, the Act did not go far enough. Interested parties must be given ready access to the system through informal proceedings and/or court-appointed representation. And most importantly, the Government’s financial interest in forfeiture must be addressed. Until we destroy the perverse incentives of civil forfeiture, federal and local law enforcement agencies tasked with serving the public will be tempted to profit from them through the seizure and forfeiture of valuable property, including from innocent owners. Such cases turn the old superstition on its head.

Not so Fast Kentucky

When the Commonwealth of Kentucky petitioned the Franklin Circuit County Court to seize www.fulltiltpoker.com, Pocket Kings Limited, asked a U.K Chancery Court to injoin FTP’s registrar, Safenames Limited, from complying with the Kentucky trial court order.  In an order dated October 22, 2009, the Chancery Court granted Pocket King’s request and declared that Safenames shall not comply with any present or future seizure order from the Commonwealth of Kentucky.  See Safenames-Judgment.  The Court also ordered the Commonwealth of Kentucky to pay Pocket Kings for legal fees incurred in bringing the petition. See Safenames Signed Order.

Kentucky Supreme Court Considers Poker

On October 22, 2009, the Supreme Court of Kentucky heard oral arguments in the above referenced case. The case originated when the Commonwealth of Kentucky filed civil seizure and forfeiture proceedings against 141 domain names – virtually all of which offered or involved internet gaming. The Commonwealth contended that domain names constitute gambling devices under state law and as such were subject to seizure under state law. The trial court granted the Commonwealth’s request to seize the sites and scheduled a forfeiture hearing.  The 141 sites, lead by both iMega and the Interactive Gaming Council, halted the forfeiture proceeding by filing a Writ of Prohibition with the Kentucky Court of Appeals.  The Court of Appeals, in a 2-1 ruling, held that a domain name was not a gambling device subject to seizure under Kentucky law.  The Commonwealth appealed to the Supreme Court.  The seven justices hearing the case raised questions that cut across issues beyond the narrow ruling of the Court of Appeals, including the propriety of the Commonwealth’s actions, the nature of jurisdiction over domain names registered outside of Kentucky and the legality of internet gaming.  The Commonwealth appeared unprepared for questions from the Court involving a recent Supreme Court of Arizona case which held (not surprisingly) that in rem jurisdiction requires the presence of the res in the state before jurisdiction will issue.  In its holding, the Arizona court reversed a prior Court of Appeals ruling to the contrary – a Court of Appeals case that the Commonwealth had relied on at every stage of the Kentucky proceedings. Despite the Supplemental Authority filing alerting the Court and the Commonwealth to the Arizona Supreme Court case, counsel for the Commonwealth stated he had neither seen the filing nor been made aware of the critical reversal by the Arizona Court.  The Kentucky Supreme Court is expected to rule on this issue of first impression in the next few months.