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Using Frozen Assets to Aid Libyans

Author: Stuart Levey
May 11, 2011

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The Obama administration says it will seek to seize some of the Libyan assets frozen by the recently imposed sanctions to use for humanitarian assistance or to benefit Libyan rebels. That might seem like a straightforward, sensible thing to do--after all, more than $34 billion of Libyan assets have been frozen by the United States and more than $50 billion have been frozen worldwide. But while it is relatively common to freeze assets, it is rare for frozen assets to be confiscated and then reallocated. While it can be done, confiscation poses several complications.

Under the International Emergency Economic Powers Act (IEEPA), Congress has empowered the president to take certain steps if he determines that a situation poses an "unusual and extraordinary threat" to the national security, foreign policy, or economy of the United States. This statutory authority has been used to impose most of the financial sanctions the United States maintains against various countries, terrorist organizations, and proliferators of weapons of mass destruction.

On February 25, 2011, President Obama signed an executive order (PDF) declaring such an emergency with respect to Libya, finding that the Qaddafi government's use of violence against unarmed civilians--and the risk that Libyan state assets would be misappropriated--undermined Libya's security and stability, constituting an "unusual and extraordinary threat to the national security and foreign policy of the United States." The president ordered a freeze on "all property and interests in property" of the government of Libya, its agencies, instrumentalities, controlled entities, and the Central Bank of Libya in the United States or otherwise in the custody or control of U.S. persons. (The order also blocked the assets of certain individuals.)

When assets are frozen under IEEPA's emergency authority, their ownership does not change. Treasury regulations require such assets to be held in the name of the original owner and blocked cash to be held in an interest-bearing account. Indeed, the fact that the sanctioned party continues to own the assets--even though they are forbidden to use them during the presidentially declared emergency--has been central to the courts' approval of these kinds of actions.

IEEPA also gives the president an even more extraordinary power: When the United States "is engaged in armed hostilities or has been attacked by a foreign country or foreign nationals," the president can confiscate the property of any person, organization or country that he determines to be responsible for those attacks or engaged in those hostilities. He is then authorized to use those assets in any way he determines to be in the interest of the United States.

This power has been used rarely. President George W. Bush did use it during the Iraq war, issuing an executive order (PDF) on March 20, 2003, confiscating certain Iraqi government property. He also expressed the intention to use that property "to assist the Iraqi people and to assist in the reconstruction of Iraq." This order applied the approximately $1.7 billion frozen by sanctions on Iraq to the reconstruction effort. That action was aggressive, but consistent with the will of the international community. Just two months later, the UN Security Council obliged all member states to freeze all assets of the former government of Iraq and to transfer them to the Development Fund for Iraq.

If the United States is perceived as being more willing to confiscate assets than other countries are, or if the United States confiscates another country's assets in less than extreme circumstances, that may become a factor weighed by central banks and sovereign wealth funds in determining where to invest.

The Obama administration reportedly does not intend to utilize the confiscation authority granted to the president in IEEPA, but will instead seek a separate statute from Congress to confiscate some of the blocked Libyan assets. While IEEPA's "armed hostilities" standard is probably met here, and great deference is normally given to presidential determinations of this sort, a separate statute is legally safer, as it would resolve any potential questions about IEEPA's applicability. A stand-alone statute also has a policy advantage: The administration may want to avoid setting a precedent of using the IEEPA confiscation provision so that they are not pressured to use it in other, less compelling, circumstances.

Confiscation might not yield as much money as some might hope. The State Department said last week (WashPost) that the administration would seek to confiscate only a small portion (approximately $150 million of the $34 billion) of the frozen Libyan assets. This may well be because only a tiny fraction of that money is readily available to be both confiscated and transferred. The executive order blocks all property and "interests in property" of Libya in the United States or in the custody or control of U.S. persons. The phrase "interests in property" is intentionally broad. Thus, even if only an interest in an asset is in the custody or control of a U.S. person, freezing that interest makes it impossible for the Qaddafi regime to liquidate or transfer it.

On the other hand, confiscated property can only be transferred and used if the entire asset can be reached or if the blocked interest can be monetized. While there may be some assets in cash or other liquid form held entirely in U.S. financial institutions that can easily be confiscated and transferred, most of the $34 billion is probably made up of complicated property interests, including ownership interests in non-publicly traded companies or real estate. Even if these interests are confiscated by the United States, they probably cannot be monetized and transferred quickly, if ever. Similarly, some assets blocked by U.S. financial institutions may be held in a foreign subsidiary or branch, raising conflict of laws issues over the proper treatment of the frozen assets. Such assets are not likely to be reached by a confiscation action by the United States alone.

The administration must also consider the implications of confiscation on the attractiveness of the United States for future investment. If the United States is perceived as being more willing to confiscate assets than other countries are, or if the United States confiscates another country's assets in less than extreme circumstances, that may become a factor weighed by central banks and sovereign wealth funds in determining where to invest.

In Iraq, the United States acted in concert with the international community. So far, the United Nations has not imposed a similar obligation for Libya, although UNSCR 1970 does express the intention that "assets frozen pursuant to [the Resolution] shall at a later stage be made available to and for the benefit of the people" of Libya, and UNSCR 1973 expressed the "determination" to make that happen "as soon as possible."

These provisions allow the United States to argue that confiscation is consistent with the will of the international community. It would undoubtedly be preferable, however, if other countries--especially other financial centers--acted with the United States. Unfortunately, other countries may lack the legal power to confiscate assets, especially in the absence of the type of explicit UN mandate that existed for Iraq. Even with that mandate for Iraq, many countries faced legal complications in transferring assets. Not surprisingly, some allies are already claiming that legal obstacles may preclude the confiscation of frozen Libyan assets in their countries.

Another challenge countries face in Libya, in contrast to Iraq, is the lack of a universally recognized entity to receive money. While some countries (France and Qatar, for example) have recognized the Transitional National Council (TNC) as the legitimate government of Libya, most countries, including the United States and the UK, have not. If the TNC were universally deemed to be the legitimate government of Libya, at least in theory a simple unfreezing of Libyan government assets, rather than formal confiscation, would be all that is needed.

There are also significant practical questions about how to spend any transferred money and what controls to put in place to ensure that it is used only as intended. The United States and other countries have responded to these concerns by pursuing the creation of a trust fund, subject to multilateral oversight, that can accept donations as well as any frozen funds that are confiscated and redirected. Even if it turns out to be difficult to confiscate and transfer frozen assets, the trust fund could begin to provide needed aid in short order, particularly if countries make good on the pledges already made: Qatar has pledged $400 million, and Kuwait has pledged $180 million to the effort.

While the option of confiscating frozen Libyan assets is available to the United States, the complications surrounding confiscation make it unlikely that frozen assets will satisfy the short-term financial demands the United States and our allies face in Libya, especially without a UN command to transfer assets to a specific entity representing the Libyan people.

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