Diegelmann v. Yellin

1

AXEL DIEGELMANN, et al., Plaintiffs, v. JANET YELLEN, et al., Defendants.

Civil Action No. 24-1090 (JEB)

United States District Court, District of Columbia

November 25, 2024

MEMORANDUM OPINION

JAMES E. BOASBERG CHIEF JUDGE

The United States believes that Plaintiffs Axel and Fritz Diegelmann, as well as several corporate entities they own and control, have operated in the metals and mining sector of the Russian Federation. Pursuant to an executive order deeming such conduct sanctionable, Defendant Office of Foreign Assets Control thus placed them on its Special Designated Nationals and Blocked Persons List in 2024. Displeased with those designations, Plaintiffs initiated this suit against OFAC and its Director, Bradley T. Smith, as well as the Department of the Treasury and its Secretary, Janet Yellen. Plaintiffs contend that the Government acted unlawfully by designating them and that the designations were arbitrary and capricious under the Administrative Procedure Act. They have now filed a Motion for Summary Judgment. Defendants oppose that Motion and have added a Motion to Dismiss Plaintiffs' Complaint or, in the alternative, a Cross-Motion for Summary Judgment. Having conducted an in camera review of the classified administrative record the Court concludes that OFAC's designations were both lawful and supported by substantial evidence. It thus will grant the Government's Cross-Motion and deny Plaintiffs'.

I. Background

A. Statutory Scheme

Since our nation's infancy, many of its leaders have viewed economic sanctions as “the most likely means of obtaining our objects without war.” James Madison, “Political Observations,” National Archives (Apr. 20, 1795). In 1977, amidst the Cold War, Congress passed the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701 et seq., which grants the President broad discretion to impose economic sanctions on foreign entities and individuals in the event of an “unusual and extraordinary threat.” See Fulmen Co. v. OFAC, 547 F.Supp.3d 13, 17 (D.D.C. 2020) (citing 50 U.S.C. § 1701). The President may declare such a national emergency when that threat “originates in substantial part in a foreign state.” Holy Land Found. for Relief & Dev. v. Ashcroft, 333 F.3d 156, 159 (D.C. Cir. 2003).

In 2021, invoking IEEPA, President Biden issued Executive Order 14024, “declaring] a national emergency to deal with” the threat posed by “harmful foreign activities of the Government of the Russian Federation.” E.O. 14024, 86 Fed.Reg. 20,249, 20,249 (Apr. 19, 2021). The Order authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to formally designate persons determined “to operate or have operated in . . . any . . . sector of the Russian Federation economy” in order to “block[]” those persons' “property and interests in property” in the United States. See id., § 1(a)(i).

The Executive Order also authorizes the Secretary of the Treasury to “take such actions, including the promulgation of rules and regulations[,] . . . as may be necessary to carry out the purposes of [Executive Order 14024].” Id. at 20,252, § 8. The Secretary has delegated that implementation authority to OFAC. See 31 C.F.R. § 587.802. Using that authority, OFAC determined in February 2023 “that section 1(a)(i) of E.O. 14024 shall apply to the metals and mining sector of the Russian Federation economy.” Off. of Foreign Assets Control, Determination Pursuant to Section 1(a)(i) of Executive Order 14024 (Feb. 24, 2023), https://perma.cc/F37A-QS5P. As a result, “[a]ny person determined . . . to operate or have operated in this sector shall be subject to sanctions pursuant to section (1)(a)(i).” Id.

When OFAC designates persons under executive orders like Executive Order 14024, they are added to the Specially Designated Nationals and Blocked Persons List (SDN List), and “all their assets in the United States or under the control of any person who is in the United States are ‘blocked,' or effectively frozen.” Zevallos v. Obama, 793 F.3d 106, 110 (D.C. Cir. 2015) (cleaned up). A designee then may seek “administrative reconsideration” of his designation and request to be removed. See 31 C.F.R. § 501.807. “A request for reconsideration - also sometimes called a delisting request - may include arguments or evidence rebutting Treasury's ‘basis . . . for the designation.'” Zevallos, 793 F.3d at 110 (quoting 31 C.F.R. § 501.807). OFAC reviews these requests and then “provide[s] a written decision” to the blocked person. 31 C.F.R. § 501.807(b)(3). “A designated person can request delisting as many times as he likes.” Zevallos, 793 F.3d at 110. Beyond this administrative process, a designee may pursue several opportunities for judicial review. Generally, “[i]f OFAC denies a request for reconsideration, the blocked person may challenge that determination under the APA” in federal court. See Sulemane v. Mnuchin, 2019 WL 77428, at *2 (D.D.C. Jan. 2, 2019) (citing caselaw). In some instances, however, parties challenge the agency's designation in court while the administrative process is pending. See, e.g., Fares v. Smith, 901 F.3d 315, 317, 320 (D.C. Cir. 2018); Al Haramain Islamic Found., Inc. v. U.S. Dep't of Treasury, 686 F.3d 965, 974 (9th Cir. 2012); Zevallos, 793 F.3d at 111.

B. Factual Background

Plaintiffs are Axel Diegelmann, his son Fritz Diegelmann, and three corporate entities they own and control: Rheingold Edelmetall AG, Rheingold Edelmetall GmbH, and Liemeta AG. See ECF No. 15-1 (Pl. MSJ) at 3-8. In February 2024, OFAC designated Rheingold Edelmetall AG for operating or having operated in the metals and mining sector of the Russian Federation economy. See ECF No. 25 (Joint Appendix) at 26. It designated Axel and Fritz Diegelmann for the same reason and because they were or had been leaders, officials, senior executive officers, or members of the board of directors of Rheingold Edelmetall AG. See id. at 3. OFAC also designated Rheingold Edelmetall GmbH and Liemeta AG for being owned or controlled by, or having acted or purported to act for or on behalf of, directly or indirectly, Rheingold Edelmetall AG and Axel Diegelmann, respectively. See id. at 26.

In its press release announcing those designations, OFAC explained that Plaintiffs “collaborated with Russia-based metals companies to disguise the origin of Russian precious metals”; “assisted Russian clients to launder funds by buying and selling precious metals for cash, illicitly circumventing international sanctions”; and “took steps to obfuscate the ownership of Russian clients and the beneficiaries of these transactions.” Id. at 86. Finally, the Government stated that Bernd Diegelmann - Axel's other son, who was then an employee of Rheingold Edelmetall AG - “arranged the sale of Russian precious stones in the UAE.” Id.

On April 16, 2024, Plaintiffs filed a delisting petition with OFAC, initiating an administrative process that appears to be ongoing. See Pl. MSJ at 9. The same day, they filed their Complaint in this court. Count I asserts that Defendants lack the authority under 31 C.F.R. § 589.325 to designate the Diegelmanns and their associated entities. See ECF No. 1 (Compl.), ¶¶ 64-68. Count II challenges the designations as arbitrary and capricious under the APA. See id., ¶¶ 69-72.

Plaintiffs have filed a Motion for Summary Judgment, while Defendants have filed an Opposition and Motion to Dismiss Plaintiffs' Complaint or, in the alternative, a Cross-Motion for Summary Judgment. See ECF No. 19 (Def. MSJ). The Government has provided Plaintiffs with the administrative record underlying its designations, though with all classified and privileged information redacted. See Pl. MSJ at 10-11. To better understand that record, the Court ordered the Government to submit that redacted material for in camera review. See ECF No. 23 (Notice of Classified Lodging). Having now completed that review, the Court is prepared to address the Motions.

II. Legal Standard

Although styled as Cross-Motions for Summary Judgment, the submissions in this case seek the Court's review of an administrative decision. The summary-judgment standard set forth in Rule 56, therefore, does not apply to the APA count because of the limited role of a court in reviewing the administrative record. See Sierra Club v. Mainella, 459 F.Supp.2d 76, 89-90 (D.D.C. 2006). “[W]hen a party seeks review of agency action under the APA, . . . the district judge sits as an appellate tribunal.” Rempfer v. Sharfstein, 583 F.3d 860, 865 (D.C. Cir. 2009) (quotation marks and citation omitted). The APA “sets forth the full extent of judicial authority to review executive agency action for procedural correctness.” FCC v. Fox Television Stations, Inc., 556 U.S. 502, 513 (2009). It requires courts to “hold unlawful and set aside agency action, findings, and conclusions” that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).

III. Analysis

The Government defends its decision to designate Plaintiffs as both lawful and supported by substantial evidence. The Court will first assess OFAC's legal authority to designate them before turning to the evidentiary basis for those designations.

A. Lawfulness of Designations

I. “Procuring”

The parties first dispute whether OFAC could lawfully designate Plaintiffs for operating in the Russian metals and mining sector, which is defined as “any act, process, or industry of extracting, at the surface or underground, ores coal, precious stones, or any other minerals or geological materials in the Russian Federation, or any act of procuring, processing, manufacturing, or refining such geological materials, or transporting them to, from, or within the Russian Federation.” 31 C.F.R. §...