C a s e l:15-cv-01270-CRC D ocu m en t 77 Filed 06/07/16 P a g e 1 of 110 l IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA 1 2 X 3 FBME BANK LTD, CA No: 4 1:15-cv-01270-CRC Plaintiff, Washington, D.C. Friday, June 3, 2016 1:37 p.m. 5 vs. 6 JACOB J. LEW, et al., 7 Defendants. 8 X 9 10 11 TRANSCRIPT OF MOTIONS HEARING HELD BEFORE THE HONORABLE CHRISTOPHER R. COOPER UNITED STATES DISTRICT JUDGE 12 APPEARANCES: 13 For the Plaintiff: DEREK L. SHAFFER, ESQ. JONATHAN G. COOPER, ESQ. LAUREN H. DICKIE, ESQ. CAROLYN HART, ESQ. QUINN EMANUEL URQUHART & SULLIVAN, LLP 777 6th Street, NW Suite 1100 Washington, DC 20001 (202) 538-8123 For the Defendant: LYNN Y. LEE, ESQ. AMY E. POWELL, ESQ. U.S. DEPARTMENT OF JUSTICE Civil Division-Federal Programs Branch P.O. Box 883 Washington, DC 20044 (202) 305-0531 14 15 16 17 18 19 20 21 22 23 24 25 Court Reporter: Lisa A. Moreira, RDR, CRR Official Court Reporter U.S. Courthouse, Room 6718 333 Constitution Avenue, NW Washington, DC 20001 202-354-3187 Proceedings recorded by mechanical stenography; transcript produced by computer-aided transcription C a s e l:15-cv-01270-CRC D ocu m en t 77 1 THE COURTROOM DEPUTY: 2 Civil Case No. 15-1270, FBME Bank LTD versus Jacob Lew,, et al. 4 5 P a g e 2 of 110 P R O C E E D I N G S 2 3 Filed 06/07/16 Counsel, will you please come forward and identify yourselves for the record. MR. SHAFFER: 6 Good afternoon. Your Honor. For 7 plaintiffs, Derek Shaffer here from Quinn Emanuel, joined by 8 my colleagues, Jon G. Cooper, Lauren Dickie, Carolyn Hart. 9 10 MR. SPIVAKC: Spivack from Hogan Lovells with my colleague, Evans Rice. 11 THE COURT: 12 MS. LEE: How are you all? the government. 14 Powell, also from DOJ. 15 17 Good. Welcome back. Good afternoon, Your Honor; Lynn Lee for 13 16 Good afternoon, Your Honor; Peter And with me at counsel's table is Amy THE COURT: Ms. Lee. Ms. Powell. How are you all? Okay. I know we're on cross-motions for summary 18 judgment, but why don't we start with Mr. Shaffer. 19 going to take the laboring oar? 20 MR. SHAFFER: 21 THE COURT: Thank you, Your Honor. Okay. Are you I'm glad to. I'm obviously familiar with the 22 statutory background and procedural background so why don't 23 we jump right in. 24 MR. SHAFFER: 25 THE COURT: Absolutely, Your Honor. Before we start, I think the first Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 3 of 110 1 issue I'd like to discuss is the prejudicial error rule in 2 the APA. 3 What is the standard for deciding whether error is 4 prejudicial and requires vacating an informal rule, and who 5 bears the burden of showing that? You know, no rule-making is perfect, obviously. 6 MR. SHAFFER: 7 THE COURT: 8 MR. SHAFFER: 9 Thank you, Your Honor. Okay. Glad to begin there. Honor is versed in this issue, too. Obviously Your We've previously talked 10 about People's Mojahedin in Footnote 6, so to the extent 11 that the error we're talking about, Your Honor, is the 12 failure to disclose, we believe there is no harmless error 13 standard. 14 the case law says, and I believe that's what Your Honor 15 ruled the last time around in granting the preliminary 16 injunction. 17 have our answer to. 18 3 It is, per se, prejudicial. I think that's what So that's one type of error that I think we As to -- let us take a substantive error. Your 19 Honor -- say, arbitrary and capricious explanation or lack 20 thereof of the agency, I believe that is an incurable error. 21 One that necessitates vacatur. 22 Your Honor, is it's the flip side base to give the deference 23 an agency gets. 24 25 And the reason for that, The agency has wide latitude, as long as it explains itself, to offer an intelligent rationale for its Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 4 of 110 4 1 decision. 2 last time around, you won't be second-guessing the agency's 3 ultimate judgment. As long as you see that, Your Honor, as you said 4 But by the same token. Your Honor, if you look for 5 that reasoned, intelligent explanation as to the points that 6 are apparent from the record, if the agency has not 7 adequately explained itself, that is the cardinal sin under 8 the APA. 9 put it this way, Your Honor, there's nothing equivalent to That is a sin that necessitates vacatur. And to 10 an alternative ground for affirmance where you look at what 11 the agency has said and say, "Well, that doesn't really 12 adequately justify the agency's decision to make this 13 finding or to impose this sanction, but I, Judge Cooper, 14 looking at the record, can find alternative rationales that 15 the agency might have articulated." 16 That's not available to you in the APA context, 17 which is why we believe, if there's a substantive defect 18 here, it's necessarily a substantive defect that 19 necessitates vacatur, and for that proposition, Your Honor, 20 I'd commend to you the Butte case. 21 Butte County case that we cite when it comes to arbitrary 22 and capricious review under the APA. 23 I believe it is the Judge Randolph wrote it, and he explains why the 24 dissenting view in that case, which was although the agency 25 itself had not adequately, in the majority's view, explained Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 5 of 110 5 1 its rationale for decision, she looked at the decision that 2 the agency had not properly considered and said, "Well, I 3 don't really think that submission undercuts the agency's 4 ultimate decision here," and Judge Randolph's answer to 5 that was -- just to quote from the opinion at 613 6 190 — 7 of the Beckham Report" -- that's what the challenger put 8 in -- "and concludes that it does not undermine the evidence 9 the tribe submitted. F. 3d "Our dissenting colleague provides her own analysis We are not so sure, but that is not 10 the point. 11 the basis articulated by the agency itself." 12 mentioned none of the dissent's reasons for rejecting the 13 Beckham Report so those reasons are really not available as 14 the basis for the Court to uphold the agency's action. An agency's action must be upheld, if at all, on 15 And similarly. Your Honor -- 16 THE COURT: Hold on one second. The secretary I mean, you 17 have -- on the arbitrary and capricious issue, you said that 18 the rule is flawed because it did not adequately respond to 19 any number of comments that FBME made. 20 agree with you on some subset of those comments. 21 MR. SHAFFER: 22 THE COURT: Let's assume that I Okay. Is it your position that you win and 23 vacatur is required if I agree with you on any one; or must 24 I look at the record as a whole and make a determination as 25 to whether the agency would have reached the same decision Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 6 Page 6 of 110 1 regardless of whether it fully commented on or responded to 2 one of your comments? 3 4 MR. SHAFFER: but I'm going to take option number one. 5 THE COURT: 6 MR. SHAFFER: 7 THE COURT: 8 MR. SHAFFER: 9 Not to be disingenuous, Your Honor, Okay. And I believe that that's correct. And what's the authority for that? The authority for that is the District Hospital Partners case that we repeatedly cite, 786 10 F. 3d 46 from the D.C. Circuit in 2015. 11 there is that to avoid arbitrary and caprice, the agency 12 must examine the relevant data and articulate satisfactory 13 explanation for its action, including a rationale connection 14 between the facts found and the choice made. 15 one. 16 of the problem; and three, not offer an explanation for its 17 decision that runs counter to the evidence before it. 18 19 That's number Number two, not fail to consider an important aspect Now, Your Honor, I'm not submitting to you that there's no such thing as a de minimis error. 20 21 The basic standard THE COURT: The agency doesn't have to respond to every comment. 22 MR. SHAFFER: Absolutely correct, Your Honor. I'd 23 have to persuade you that there was something important in 24 this record that the agency didn't adequately explain itself 25 on. Something that was truly material to its decision from Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 7 of 110 7 the perspective of an intelligent reviewer. 2 So I have to do that much, Your Honor. But if I 3 do persuade you of that, and you look at that lack of 4 explanation from the agency or, you know, counter record 5 explanation from the agency and say, "Well, it still might 6 be available to the agency to reach the same conclusion 7 coming at things the right way," that still necessitates 8 vacatur. 9 Of course all Your Honor would do at the end of 10 this proceeding, even if I get everything I'm asking for, is 11 you would remand. 12 FinCen from going down the APA path correctly. 13 simply saying unless and until it does that, it hasn't 14 arrived at a valid rule. And in remanding, you're not foreclosing 15 THE COURT: 16 MR. SHAFFER: You're Okay. And that really is, I think, the 17 proposition that emerges from the D.C. Circuit's teachings 18 on this. 19 the flip side of the deference that the agency gets because. 20 Your Honor, you'd have to make some presumption. 21 were to look at the agency's explanation, and you find it 22 from the agency, and say, "Well, that actually doesn't work. 23 That doesn't grapple with an important aspect of the 24 problem. 25 conclusion from what the agency was offering in support of I mentioned the accounting, and I do believe it's That runs counter to the data. If you It's not a sound Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 8 of 110 1 that"; if you decide that, Your Honor, everything else is 2 left to the agency as to whether it would nonetheless reach 3 the same outcome. 4 You're not second-guessing or arriving at a 5 judgment of your own. 6 reasoning on its face, giving that a hard look. 7 You're simply looking at the agency's There's also the State Farm case from the U.S. 8 Supreme Court that if you're upholding the agency action, 9 your only basis for doing that is based on the rationale, 10 the explanation you have from the agency in the 11 administrative record, particularly in the final rule. 12 THE COURT: 13 MR. SHAFFER: 14 Okay. So that's my submission to Your Honor. 15 And while we're talking about the -- and of course 16 there are separate arguments in play, as I know Your Honor 17 knows, for consultation. 18 Your Honor. 19 the proposition there would not be a harmless error in this 20 case. 21 We've cited multiple precedents, I'll just give you three that I think stand for One is the California Wilderness Coalition case 22 from the Ninth Circuit. 23 2011 decision. 24 though there was evidence in the record, some evidence in 25 the record that there were some consultations, the agency -- It's at 631 F. 3d 1072. It's a And the failure to consult there, even Case l:15-cv-01270-CRC 1 Document 77 THE COURT: Filed 06/07/16 Page 9 of 110 The issue I want you to address on 2 consultation is the standing issue that the government 3 raised that I don't think you've had an opportunity to 4 respond to since we didn't have reply briefs. 5 their argument is that the purpose of the consultation 6 requirement is not to give notice or to protect the target, 7 but rather to assess the overall governmental effect of the 8 sanction, and the target doesn't have standing to challenge 9 that. You know, 10 Respond to that. 11 MR. SHAFFER: 12 That's -- is it fair to say that's the zone of Thank you. Your Honor. 13 interest argument essentially? 14 outside the zone of interest of these provisions. 15 9 Their argument that we're My first answer to that. Your Honor, is the zone 16 of interest threshold is a low threshold. 17 case for a party that actually has Article III injury and is 18 complaining of the action nonetheless doesn't fall within 19 the zone of interest of a statute. 20 doubt, Your Honor, from reading the government's cases and 21 cases that articulate the zone of interest standard that if 22 an entity is the target of a particular regulation or law 23 and is adversely affected by it, it's essentially invariably 24 within the zone of interest. 25 It is the rare And it's clear beyond I think Your Honor answered this question when you Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 10 of 110 1 noted that we're outside the garden variety rule-making 2 context; that we have an extraordinary rule here which says 3 in its very title, as well as in its substance, this is a 4 sanction in the Fifth Special Measure directed against FBME 5 Bank. 6 constrains the agency's imposition of that sanction 7 singularly affects the entity that is targeted. 8 9 Everything in 311, Section 311, that governs and So just as we have standing under Section 311 to be citing the substantive analysis that the government must 10 follow and the procedure that goes into that and all the 11 requirements of the APA, you don't parse out separate 12 provisions of the statute once we're within the zone of 13 interest for it and then say, "Well, this particularly" — 14 "this particular violation of that very same statutory 15 provision is out of play because as to those words Congress 16 wasn't thinking about the target." 17 10 And I can cite multiple cases for that 18 proposition. Your Honor; that you look at the zone of 19 interest test in terms of the statute as a whole rather than 20 individual provisions. 21 Association. 22 "In considering whether the zone of interest test provides 23 or denies standing in these cases, we first observe that the 24 comptroller's argument focuses too narrowly on 12 USC 36 and 25 does not adequately place Section 36 in the overall context One is Clarke v. Securities Industry That's 479 US 388. Page 401 is the pinpoint. Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 11 Page 11 of 110 1 of the National Bank Act. 2 we are not limited to considering the statute under which 3 respondents sued, but may consider any provision that helps 4 us to understand Congress's overall purposes in the National 5 Bank Act." 6 consistent with the generosity, I think, of the zone of 7 interest test. 8 9 As data processing demonstrates, So looking even beyond the statutory provision And then Gross Rate Manufacturers Association vs. ERA. That's 693 F. 3d 169-186. This is from the D.C. 10 Circuit in 2012. 11 petitioner falls within the zone of interest to be protected 12 by a statute, we do not look at the specific provision said 13 to have been violated in complete isolation, but rather in 14 combination with other provisions to which it bears an 15 integral relationship." "Importantly, in determining whether a So, Your Honor, once we've all agreed — 16 as I 17 think the government's agreed to this point — 18 able to invoke the protections and provisions of 311, as 19 we've been doing since the very inception of this case, the 20 consultation requirements are part and parcel of those. 21 THE COURT: Okay. that we are The rule says, or at least the 22 first rule, I believe, says that the agency engaged in the 23 required consultations. 24 again? 25 MR. SHAFFER: Were they required to consult Absolutely yes, Your Honor. And Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 12 of 110 12 multiple reasons. 2 I just want to offer one last point, though, jus 3 on this zone of interest inquiry while we're talking about 4 it, which is I would question the premise. Your Honor, that 5 when it comes to consultations with the Attorney General, 6 with the Secretary of State, even with the chairman of the 7 Federal Reserve, their insight and their expertise is really 8 central to what FBME's complaining about here; that there 9 was trust placed in certain foreign regulators that was 10 excessive relative to the reputation and standing and 11 practice -- 12 THE COURT: But counsel, isn't the inquiry 13 designed to determine whether the national security will be 14 affected or the international financial system will be 15 affected? 16 determination regarding CBC, is it? 17 It's not to -- it's not to second-guess FinCen's MR. SHAFFER: I don't speak for Congress, but 18 Congress did say that this was about foreign policy 19 sensitivities, law enforcement sensitivities, and national 20 security. 21 that they're as well-positioned as the Attorney General's 22 office to say what stock do we place in law enforcement 23 information coming out of Cyprus. 24 from the Central Bank of Cyprus against that of the Bank of 25 Tanzania, which is pointing a finger of blame at the Central With all due respect for FinCen, I don't know How do we weigh input Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 13 of 110 13 Bank of Cyprus and expressing concerns about it. 2 As to the Secretary of State and as to the 3 chairman of the Federal Reserve, Your Honor, there is a 4 comment in the record from one of FBME's depositors, 5 Mr. Gusev. 6 record, but he makes the point that I think the matter of 7 the chairman of the Federal Reserve, that part of what's at 8 issue in this case, part of what's problematic is the 9 confidence that foreign investors place in the U.S. dollar, And I can get you the page in the administrative 10 because if FinCen is able to take actions like this based on 11 the processes and rationales in play, it is undermining the 12 confidence of those who count on U.S. dollars; and not just 13 the U.S. dollar itself obviously, the government, the rule 14 of law that's behind it. 15 And this case, in and of itself, combined with 16 others, as we've mentioned to Your Honor, is compromising 17 that sort of reliance upon the U.S. dollar for U.S. — 18 legitimate business people who are wondering what currency 19 to transact in overseas, and those are questions that I 20 think go to other officers as reflected in the statute. 21 22 THE COURT: into effect? 24 25 When is the final rule scheduled to go July 31st? MR. SHAFFER: 23 for Your Honor, I think that that is correct. THE COURT: And if the agency did not consult Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 14 of 110 14 1 properly, why couldn't they do so before the final rule goes 2 into effect to cure the deficiency? 3 vacatur of the rule? 4 MR. SHAFFER: Why would that require Well, Your Honor, I would cite you 5 to the Ninth Circuit case that I was just mentioning. 6 these cases the result has been vacatur because it's viewed 7 to be a substantive defect. 8 In If the rule that comes before Your Honor has not 9 complied with the statute, then Your Honor's calculus is 10 limited to Is that compliant with the governing statute? 11 And the answer reached in this case, I think, should be the 12 same as was reached by the Ninth Circuit in the case that I 13 was just mentioning, the CWC case, California Wilderness 14 Coalition, which we cite in our brief, and by this court, 15 the D.C. District Court, in the National Parks Conservation 16 Association case. 17 THE COURT: When the Ralls case was remanded -- 18 and you rely quite a bit on that case -- the district court 19 did not vacate the designation; is that right? 20 MR. SHAFFER: You're right, Your Honor. There was 21 a designation in effect at that point or a determination 22 that had been made as to the transaction in question, I 23 believe. 24 25 It had been prohibited. As Your Honor noted last time around -- and thanks to your preliminary injunction -- this rule has never taken Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 1 effect. 2 imposition of the Fifth Special Measure. Page 15 of 110 15 The status quo, as it stands, is there is no 3 And I have to note, Your Honor, last time around 4 the agency got a do-over. 5 indicated that there would be certain prejudices visited on 6 FBME Bank. 7 was hanging by a thread previously. Your Honor, we are now 8 facing liquidation proceedings in Cyprus. 9 mounting questions from the Bank of Tanzania. It got a do-over, and I had If anything, you know, FBME Bank, as much as it We're facing And everyone 10 is looking at FinCen's final rule and saying, "Well, it is 11 essentially a fait accompli." 12 to be dotted or Ts remaining to be crossed, but as difficult 13 as it's been for this bank to remain on life support, if the 14 result from this courtroom is that the rule continues on 15 subject to further proceedings on remand, I believe that 16 FinCen will essentially prevail and accomplish its purpose 17 through shear force of will, as has happened in case after 18 case after case after case involving 311 determinations. 19 We're the only challenger, Your Honor, that's been able to 20 stand to court. 21 not too many. 22 Maybe there are Is remaining To get one vacatur out of all of them is I would respectfully submit it's too few. As to whether there was an obligation to consult, 23 Your Honor, in connection with the remand, we understood the 24 remand, I think the way that FinCen was framing it and the 25 way Your Honor was characterizing it, as a do-over, and no Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 16 of 110 16 1 one could know, going into that remand, whether the result 2 of it would be, as Your Honor put it, the same rule, a 3 different rule, or no rule, which to us necessarily meant 4 that the agency would be engaging in the three levels of 5 deliberation. 6 and it would be taking meaningful and good faith account of 7 the comments that came in and revisiting its premises. 8 9 It wouldn't be remaining on a fixed course, And given all that. Your Honor, I just don't think there's any way to say that it was somehow relieved of its 10 consultation obligation because it had, prior to July 2014, 11 engaged in consultations. 12 July 2014 consultations, we don't know -- FinCen has not 13 said -- what officers were consulted, whether they were the 14 ones specified by statutes or their designees to whom the 15 authority had been specifically under regulation, as I 16 understand it. 17 don't know who they were. 18 I would note even as to the pre- Basically there would be a delegation. THE COURT: We Well, this issue sort of permeates a 19 number of your points, which is the presumption of 20 regularity that comes with agency rule-making, right? 21 if FinCen says, "We've engaged in the required 22 consultations," unless you can show me evidence that, you 23 know, for some reason they didn't consult with the AG, why 24 shouldn't I extend them the presumption of regularity? 25 MR. SHAFFER: And A few answers to that. Your Honor. Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 17 of 110 The first answer is I believe the requirement of 2 the APA is show, don't tell. 3 will every time say, "We've complied with the law 4 procedurally and substantively." 5 obligation and it's the Court's role to take a look at the 6 administrative record and look for the proof that should be 7 in that. 8 9 17 Show, don't tell. The agency It's the Court's And, again, the cases that I was just citing. Your Honor, all three of those cases — or two of them actually; 10 the case that was decided by the Ninth Circuit and the case 11 that was decided by the D.D.C. 12 agency not only claimed to have consulted, it pointed to 13 specific record indications that it had gone some way to 14 engage in consultations. 15 In both of those cases, the In the CWC case from the Ninth Circuit, it 16 specifically said, "Look, we notified the affected states of 17 what we were doing. 18 comment." 19 meaningful sense as the way Congress must have said and 20 therefore said that's insufficient. 21 We gave them the opportunity to The Court said that's not consultation in any In the National Parks Conservation Association 22 case, there, too -- I'm sorry, actually I'm confusing 23 myself, Your Honor. 24 Circuit where the Court was reversing a summary judgment in 25 favor of the agency where it actually found some evidence It's the Campanale case from the First Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 18 of 110 1 that there had been consultations, but said it needed to 2 take its own independent look at the record. 3 looked at the administrative record it did not find 4 sufficient evidence of the consultations happening. 18 And when it 5 So that's my point number one, Your Honor. 6 THE COURT: 7 MR. SHAFFER: Okay. My second point is, with all due 8 respect to the United States government, I'm sure you read 9 their brief the same way I do. Your Honor. In the four-page 10 section that's devoted to the consultation requirement under 11 the heading "FinCen Engaged in the Required Consultations," 12 the first three and a half pages of that do not say anything 13 about FinCen having actually consulted with anyone as part 14 of the remand. 15 That, to me, is quite conspicuous, Your Honor. 16 The government isn't telling Your Honor that they've done 17 anything subsequent to the remand in the way of 18 consultations. 19 we point out that the only indication, the only reference, 20 even the agency's assertion of consultation is to the 21 pre-July 2014 consultation. 22 the government, and a pretty clean one, that they have not 23 undertaken the requisite consultations. 24 25 All they do is they cite to our brief where I take that as a concession by In particular, Your Honor, they haven't done that with respect to deciding on the Fifth Special Measure, and Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 19 of 110 19 1 as Your Honor put a sharp point on the question for the 2 remand, specifically whether there should be a prohibition, 3 as FinCen said there should be, as opposed to the imposition 4 of conditions pursuant to the Fifth Special Measure. 5 determination. Your Honor, requires its own separate set of 6 consultations with the Attorney General, the Secretary of 7 State, the chairman of the Federal Reserve. 8 in the statute. 9 That That's explicit And you may recall, Your Honor, you basically 10 changed FinCen's premises for how it would evaluate that 11 going into the remand. 12 at this as though it's a prohibition or not. 13 mistakenly believed that it couldn't do anything short of 14 the prohibition. 15 has to decide between conditions versus prohibition, 16 something that FinCen had never thought about previously. 17 So at the very least. Your Honor, it's clear as You indicated the agency had looked It essentially You pointed out that actually the agency 18 can be that that consultation needed to happen, and I think 19 it is all but as clear as it can be -- you don't have the 20 explicit concession by the government, but I think you've 21 still got the pretty plain concession by the government that 22 that consultation -- no such consultation happened in 23 connection with the remand. 24 25 THE COURT: Okay. Move on to the notice issues or the due process issues, whichever you want to take up first. Case l:15-cv-01270-CRC Document 77 1 MR. SHAFFER: 2 THE COURT: Filed 06/07/16 Page 20 of 110 Fair enough. Your Honor. And Mr. Shaffer, I know you're 3 zealous, but let's slow down just a little bit for the 4 benefit of the court reporter. 5 6 20 MR. SHAFFER: Of course. Your Honor. I've told her she can take me into custody if I continue to -- 7 THE COURT: 8 MR. SHAFFER: 9 I She'll do it, too. I don't doubt she will. do want to return to the arbitrary and 10 capricious point at some point. Your Honor, so I will simply 11 bracket that for the moment. 12 As to the notice point, Your Honor, I think we can 13 decide this case and arrive at vacatur now using the same 14 rationale, the same holding, that you laid down last time 15 around in granting the preliminary injunction. 16 As Your Honor put it, the touchstone for whether 17 the agency has complied with its procedural obligation, you 18 said that, "The touchstone remains whether the agency 19 disclosed enough to allow the parties to comment 20 meaningfully and contest the basis on which an agency 21 reached the result that it did." 22 preliminary injunction memorandum at Page 15. 23 That's from your We respectfully submit that FinCen again violated 24 that cardinal rule and again denied FBME fair opportunity to 25 rejoin in its comments. In its remand notice. Your Honor, Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 21 of 110 1 which we pointed the Court to -- it's three pages -- it 2 doesn't stand out for its substance. 3 there was no intervening allegation that was on its mind as 4 a material basis for sanction, and it certainly did not 5 disclose any specifics. 6 to what you had noted about the first set of notices, the 7 July 2014 notices. FinCen suggested that And that's in contrast, Your Honor, 8 Although we think that there wasn't all the 9 substance we would want there to be and all the bases 10 spelled out for the whole laundry list of allegations that 11 FinCen said were of concern. Your Honor did look at those 12 and conclude FinCen really couldn't have done any better in 13 order to summarize the conclusions it was deriving from its 14 black box of secret evidence. 15 21 This time around, Your Honor, there was nothing 16 like that. 17 that has occurred subsequent to the July 2014 notices that's 18 of particular concern to us as a basis for 311 sanction or 19 as suggesting that we need to impose the Fifth Special 20 Measure and, even beyond that, a prohibition under the Fifth 21 Special Measure. 22 23 24 25 The agency didn't even say there's something It was blank. THE COURT: It talked about certain conduct in late 2014. MR. SHAFFER: Your Honor, there was -- the agency -- I think Your Honor's referring to an allegation Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 22 of 110 22 1 about how, in 2015, there was an alleged Hezbollah 2 associate, an alleged Hezbollah associate, who was 3 banking -- who was -- a company that that individual managed 4 was banking with the bank in Tanzania. 5 FinCen pursuant to an unredaction of its initial memo in 6 support of the First Final Rule, which was -- That was released by 7 THE COURT: 8 MR. SHAFFER: 9 The notice didn't say that that was of any Okay. -- essentially negated. 10 particular importance to FinCen. 11 suggest that FinCen would then wind up citing that 12 allegation five different times as a central basis to what 13 became the Second Final Rule. 14 It certainly didn't The other allegation that Your Honor might be 15 referring to is this bombshell allegation that as of late 16 2014 supposedly FBME employees were trying to obscure 17 information in Cyprus. 18 dropped on us in the Second Final Rule. 19 previewing of that in the notice. 20 of anything that would clue us into that. 21 FinCen explains how it arrived at that allegation, which is 22 a central basis. Your Honor -- I'd say it's the number one 23 basis for the sanction that FinCen has arrived at -- 24 everything it's citing to is redacted. 25 citing to is in the black box. Your Honor, that allegation was There was no There was no unredacting And now, when Everything it's There was no public or FBME- Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 23 of 110 specific foreshadowing of that allegation. 2 So in our view, that repeated expressed reliance 3 on new, altogether undisclosed allegations following a 4 notice that disclosed nothing, that, Your Honor, is totally 5 irreconcilable with what Your Honor laid down as the rules 6 for the remand. 7 Process -- 8 9 10 And I'd cite the same Association of Data THE COURT: Now, the initial notice — correct me if I'm wrong -- had a general statement about efforts to evade the Cypriot authorities, correct? 11 MR. SHAFFER: Your Honor, it did have that about 12 general, I'd say, unease or tense relations between the 13 Central Bank of Cyprus and -- 14 THE COURT: 15 I think it said that the bank took active steps to evade actions by the Central Bank of — 16 MR. SHAFFER: Your Honor, we did everything we 17 could to respond to that allegation, and I believe we did 18 so decisively. 19 Honor -- 20 But here's what I want to emphasize, Your THE COURT: Why didn't that put you on notice in 21 the second rule-making, regardless of the specific time 22 period, that basically obstruction was on the table? 23 23 MR. SHAFFER: Your Honor, we try to litigate hard, 24 us at Quinn Emanuel and our friends at Hogan. 25 invisible waterfront is tough enough. To cover an Case l:15-cv-01270-CRC Document 77 1 THE COURT: 2 MR. SHAFFER: Filed 06/07/16 Page 24 of 110 24 I understand. If someone doesn't tell me that 3 there's a specific concern that subsequent -- that's going 4 to become the most damning allegation against the bank 5 because it's not just you were doing this previously, as 6 FinCen emphasizes, this is even after we notified you of 7 AML concerns. 8 still -- you still return to this sort of obstruction. 9 That is a uniquely damaging allegation. Your Even after we gave you grave caution, you 10 Honor, that we would have recognized as such, and if someone 11 says, "Even though we're not going to tell you what our 12 basis is, who this is coming from, we're not going to give 13 you anything more than in late 2014 some FBME employees were 14 engaged in a cover-up," Your Honor, we would have launched 15 an internal investigation into that. 16 every question we could ask, just as we did through Ernst & 17 Young to address the allegations the last time around. 18 we also, Your Honor, would have been looking at what was the 19 Central Bank of Cyprus, which, as you know, we have our own 20 concerns and misgivings about that are reflected in the 21 record, that are joined by others, Your Honor, third parties 22 who are not part of this litigation. 23 looking at what was CBC doing or what were other regulators 24 doing in Cyprus that might explain how they would 25 mischaracterize things in this way and what motivations they We would have asked And We would have been Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 25 of 110 might bring to this. 2 We just didn't have that opportunity to make that 3 record on this, as I said, bombshell allegation about 4 supposed obstruction in late 2014. And, Your Honor, I think this is an easy one for 5 6 you — 7 in the sense that if you look at the notice, the remand 8 notice, it is a complete blank. 9 allegation or any other allegation, intervening allegation not that there's a lot that's easy about this case — It doesn't suggest this 10 subsequent to the initial notices that would be basis for 11 imposing the Fifth Special Measure. 12 just doesn't set the table for notice and comment that's 13 essential in any rule making, but essential in this 14 extraordinary rule making whereas you've noted, Your Honor, 15 we're outside the garden variety context. 16 that's basically fighting for its life with very grave 17 stakes, and those remain the stakes today. 18 25 And that. Your Honor, We've got a bank Now, that's true. Your Honor, for what we think 19 was just unclassified information, that you know was 20 unclassified because FinCen says -- I'm pointing to the 21 number one on the list, but there's allegation after 22 allegation like this that FinCen spells out in clear, 23 express terms in the Second Final Rule that weren't 24 previewed by anything that we had or adequately previewed by 25 anything that we had prior to it. Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 26 of 110 26 But I want to turn to another category. Your 2 Honor, which is unclassified-but-protected information that 3 FinCen is continuing to withhold. 4 separately, Your Honor, so I want to bracket those, if I 5 could. We'll talk about the SARs 6 But we've tried from before the remand, and we 7 expressed concern before the remand that this very issue 8 might continue to vex the administrative proceedings, and 9 the issue is. Your Honor, outside the category of classified 10 information, even outside the category of SARs that FinCen 11 contends -- and I think Your Honor tends to agree -- are 12 protected by the Bank Secrecy Act. 13 that's in the black box that FinCen would argue although 14 it's unclassified it's nonetheless protected? 15 know the answer to that, Your Honor, but my suspicion is 16 that there is some unspecified category of information 17 that's in the black box. 18 it. 19 government's last brief, in its summary judgment opposition, 20 it refers to a category of information where they say it is 21 statutorily protected. 22 23 24 25 We don't know why. Is there anything else I can't see it. I still don't We've never seen They've only grown because in the In their first summary judgment brief, they referred to BSA-protected information, and when they now -THE COURT: I thought we resolved this issue, and I thought the government made a representation that when Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 27 of 110 1 they say "unclassified information that's statutorily 2 protected," they're referring to SARs only. 3 case? MR. SHAFFER: 4 27 Is that not the Your Honor, I just don't have the 5 confidence or the certitude I would like to have about that 6 because, again, the terminology changed in the last brief 7 from "BSA-protected" to "statutorily protected." 8 also had indications from FinCen prior to the remand that 9 there would be some unspecified remainders that were not And we 10 SARs and potentially covered by the Bank Secrecy Act that we 11 potentially wouldn't be seeing. 12 So I'm saying, if there is any such category, Your 13 Honor, it only adds to our concerns. 14 And to briefly touch on — 15 THE COURT: 16 But the basis for your suspicion is the nomenclature used by the government in their brief. 17 MR. SHAFFER: Correct, Your Honor. And also we 18 have asked this question, I think, just to make sure we 19 know. 20 specifics. 21 in terms of the arguments here, is there any category of 22 unclassified-but-protected information that is not SARs? 23 We don't have a privilege log. We understand that. We don't have the We're trying to understand, There's the SARs information, Your Honor, which 24 we'll talk about, perhaps, in a moment, and finally there's 25 the black box of classified information, which, as we've Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 28 of 110 1 noted -- and I know Your Honor's thought about this argument 2 previously -- we haven't had any accommodations that would 3 enable us to better understand and engage whatever may be in 4 that black box. 5 So that's one set of procedural concerns. I put 6 them under the heading of "Lack of Notice/Withholding of 7 Information." 8 9 10 11 The other concern we have that I characterize as a squarely procedural concern is due process, Your Honor. The absence of a hearing and a neutral decision-maker. And I respectfully submit, Your Honor, that we can 12 win on other grounds here. 13 don't believe, when consultation was required. 14 clear withholding of information that we think is within the 15 teeth of your prior holding. 16 substantive explanation doesn't make sense under the black 17 letter law of arbitrary and capricious review. 18 There was no consultation, we There was a We think that the agency's If you don't agree with that. Your Honor -- and 19 that's all statutory so I think that's where you're likely 20 to go first. 21 believe you should vacate this under the United States 22 Constitution because the circumstances that you are looking 23 at in this case combine into a perfect storm of due process 24 deprivation, one that I don't believe the D.C. Circuit or 25 this Court has yet confronted, although I think that the But if you don't agree with that, then we Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 29 of 110 1 governing precedence on this support the view. 2 Now, I first have to convince you -- 3 THE COURT: 29 If you're correct that your client has 4 due process and is entitled to a hearing before a neutral 5 arbiter, doesn't that mean that the statute itself is 6 unconstitutional because it provides for informal notice and 7 comment rule-making, which does not carry with it a right to 8 a hearing before a neutral magistrate? 9 MR. SHAFFER: I wouldn't try to talk you out of 10 that holding, Your Honor, but I don't think you need to so 11 hold in order to give me the vacatur. 12 THE COURT: 13 MR. SHAFFER: Why not? The Withrow case from the Supreme 14 Court that we cite and the Concrete Pipe case that follows 15 it both stand for the proposition that there are specific 16 circumstances in which the denial of a neutral decision­ 17 maker or a fair proceeding may violate due process. 18 what are the circumstances, Your Honor? 19 quote, if I could, the Withrow case on this, because there 20 they were looking at an instance where a doctor had gone 21 before the same board that had decided to bring a proceeding 22 against him and complained it is inherently unconstitutional 23 for the same board that pursued the enforcement action to 24 also decide it, and the Supreme Court said that is not a 25 categorical violation of due process. And Well, let me just Case l:15-cv-01270-CRC 1 Document 77 THE COURT: Filed 06/07/16 Page 30 of 110 30 But that's an adjudicatory proceeding. 2 This is a rule-making. 3 MR. SHAFFER: It's not a garden variety rule- 4 making, as Your Honor has said. 5 distinction, the Londoner versus Bi-Metallic distinction 6 between when we have an adjudicatory proceeding and when we 7 have a rule-making. 8 jurisprudence from the U.S. Supreme Court and the D.C. 9 Circuit that says in certain sorts of circumstances where an There's still the classic There's still all the due process 10 individual or an entity faces a particularly consequential 11 denial, that is one that implicates due process, Your Honor. 12 I don't believe, for instance, the United States government 13 could get around Goldberg by saying we're going to deny 14 someone welfare benefits by doing that via a rule. 15 wouldn't take due process out of play in that sort of a fact 16 pattern. 17 that. There's something inherently adjudicatory about I think we have that here. 18 That I'm not saying that 19 the statute necessarily violates due process because what 20 Withrow contemplates is essentially an as-applied due 21 process challenge. 22 35. 23 based on the evidence derived from nonadversarial processes 24 as a practical or legal matter foreclosed fair and effective 25 consideration at a subsequent adversary hearing leading to Let me quote, if I could, from 421 U.S. The pinpoint is 58. "If the initial view of the facts Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 31 of 110 31 1 ultimate decision, a substantial due process question would 2 be raised." 3 It continues: "That the combination of 4 investigative and adjudicative functions does not, without 5 more, constitute a due process violation does not preclude a 6 court from determining from the special facts and 7 circumstances present in the case before it that the risk of 8 unfairness is intolerably high." And then in Concrete Pipe, Your Honor, the Supreme 9 10 Court took what was, the government argues, a dictum. 11 would say it's limiting the scope of the holding. 12 Concrete Pipe that clearly becomes a holding because there 13 the Supreme Court's looking at the ERISA statute that 14 contemplated that a trustee, who always wants to get more 15 money into the fund rather than less, the trustee would make 16 an initial determination, potentially at the expense of the 17 employer. 18 standard, Your Honor, spelled out by the statute was to show 19 that it is an unreasonable determination by the trustee or 20 that it was clearly erroneous. 21 the opinion saying, "Look, if that statute meant what it 22 literally says, we recognize, we assume, that there could be 23 a bias on the part of the trustee. 24 25 I But in The employer could then challenge that, but the And Justice Rehnquist writes We recognize that." So you have the Withrow problem where you're not getting a fair contest in the first instance, and if we said Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 32 of 110 1 it is that high of a hurdle for a challenger to overcome, 2 that would -- they say in terms, that would violate due 3 process. 4 constitutional avoidance in the statutory construction to 5 basically say it's just preponderance of the evidence. 6 That's all it was in that case. So the only way out is to use the rule of 7 And -- 8 THE COURT: 9 How do you square all that with the terrorist designations cases -- 10 MR. SHAFFER: 11 THE COURT: Your Honor --- where, you know, it has been held 12 not to violate due process to deny, target, an adversarial 13 hearing? MR. SHAFFER: 14 15 I don't know of a precedent that so holds that. Your Honor. 16 THE COURT: 17 MR. SHAFFER: When it comes to -- Those procedures are not available. They're not available. Your Honor. 18 The question has not presented itself, and specifically I 19 would quote Your Honor to the People v. Mojahedln [sic] 20 case. 21 many installments of the case. 22 and it specifically talks about the use, potentially, of 23 secret evidence. 24 25 32 I call it Roman numeral II. I think there have been We do cite it in our brief, And what it basically says, Your Honor, is that in all of the cases where the D.C. Circuit has looked at the Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 33 of 110 33 1 determinations that were made -- it's 613 F. 3d 220 — 2 Court goes out of its way to note, however, that none of the 3 AEDPA cases decide whether an administrative decision 4 relying critically on classified material would comport with 5 due process because in none of the classified record -- in 6 none was the classified record essential to uphold an FTO 7 designation. 8 D.C. Circuit's decision in the Chemical Waste Management 9 case, which the government cites to you but I would the And that. Your Honor, is of a piece with the 10 recommend that you read -- it's at 873 F. 2d 1477 -- because 11 in that case, Your Honor, the D.C. Circuit took very 12 seriously the notion of an as-applied Withrow challenge. 13 looked at a facial challenge to EPA's statute that -- or I 14 think it was a regulation, Your Honor -- that permitted the 15 EPA not to use a neutral demission-maker. 16 Circuit said is, "Well, that's not inherently 17 unconstitutional. 18 succeeds." 19 It And what the D.C. We can't say that the facial challenge But it did specifically leave room for an as- 20 applied attack per Withrow, and it expressly supposes that 21 the absence of formal safeguards could prove troublesome in 22 a case that involves both high financial stakes to the 23 operator and either substantive issues that would benefit 24 greatly from development through trial-type procedures or a 25 presiding officer with actual bias. Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 34 of 110 34 And the last one I'll give you. Your Honor, is the 2 Rafeedie v. INS case. 3 F. Supp. 13. 4 was looking at the unique and troubling circumstances 5 surrounding a permanent resident alien who had been denied 6 certain protections as part of an effort to have him 7 deported, and it looked at what he was confronting in terms 8 of secret evidence, the lack of recourse and fairness that 9 had been afforded to him, and said, "We're not going to This is from the D.D.C. in 1992, 795 And there specifically a judge of this court 10 decide what exactly process he may be due, but we are 11 holding that the treatment that he's received violates due 12 process." And so let me just say this. Your Honor, about the 13 14 circumstances we have for our as-applied challenge. 15 have critical allegations that are disclosed only after the 16 fact, as we've been discussing. 17 for feedback. 18 obtain guidance that are coming from FBME and are getting 19 blanked by FinCen, and I point Your Honor to Ms. Peters's 20 declaration for that proposition. 21 well. 22 You You have repeated requests You have questions. You have efforts to It walks through it quite You have reams. Your Honor, hundreds of pages of 23 documentary submissions from FBME that the agency rejects 24 only at the last saying essentially those are not worth the 25 paper they're printed on. That's just documentation. We Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 35 of 110 35 can't tell that that translates to anything real. 2 You have secret evidence that's being critically 3 relied upon here, Your Honor. It's treated as dispositive 4 by the agency in its Second Final Rule. 5 reliance that's being placed on a foreign regulator that 6 we've identified as having a strong pecuniary interest, 7 stated bias, and a lawless corrupt approach. 8 that's corroborated by the record, including by third 9 parties, and you have privileged materials from our side of You have pivotal Again, all 10 this case, the lawyers in this case that were concededly 11 received and reviewed by FinCen. 12 All of that. Your Honor, goes into this 13 proceeding, and we come out of it without having had either 14 a live hearing, where we could, in the language of the 15 Supreme Court in Goldberg, in the language of the Supreme 16 Court in Mathews v. Eldridge, and as this Court adopted — 17 I'm sorry, the D.C. Circuit referred to it in Gray Panthers. 18 We didn't have the opportunity to mold our arguments based 19 on what was important to the decision-maker. 20 been guessing what is it that FinCen has been looking at? 21 What could we do to persuade it? 22 only at the last. We've always And we find out each time We didn't have any neutral who was coming fresh to 23 24 this case. We didn't have the chance to call our own 25 witnesses and say and have people present under oath all the Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 36 of 110 1 AML improvements that had happened, have real-time video 2 feeds demonstrating here's what's happening in Cyprus, 3 here's what's happening in Tanzania. 4 opportunity to confront our central accusers from the 5 Central Bank of Cyprus. 6 And, Your Honor, if you — 7 THE COURT: We didn't have the And just so I'm clear, your position 8 is that you would be entitled to all of those protections 9 only if you were entitled to due process as a threshold 10 36 matter. 11 MR. SHAFFER: 12 THE COURT: 13 MR. SHAFFER: Yes, Your Honor. So address the threshold issue. And I just want to emphasize, Your 14 Honor, that's not an argument that every entity challenging 15 a terrorist designation has. 16 THE COURT: 17 MR. SHAFFER: Understood. And they're also looking at 18 exigencies and justifications from the government in denying 19 procedures that I don't think obtain here. 20 distinctions even before I proceed onward. 21 So there are As to whether or not FBME Bank is entitled to due 22 process, I can make all sorts of interesting arguments to 23 Your Honor — 24 arguments — 25 for the jurisprudence from the Supreme Court in the context and the government has some interesting about how the Court might harmonize due process Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 37 of 110 37 1 of personal jurisdiction with due process jurisprudence in 2 the context of cases like this. 3 Your Honor, because you have, from the D.C. Circuit and the 4 NCRI opinion written by Judge Sentelle, a clear statement 5 that reads as follows -- this is 251 F. 3d 192 -- "A foreign 6 organization that acquires or holds property in this country 7 may invoke the protections of the Constitution when that 8 property is placed in jeopardy by government intervention. 9 That is not to say that the government cannot interfere with It's pretty easy, this one. 10 that and many other rights of foreign organizations present 11 in the United States." 12 THE COURT: 13 MR. SHAFFER: Okay. "It is only to say that it does" — 14 "that when it does, it is subject to the due process 15 clause," and that includes, according to the opinion, 16 predeprivation notice. 17 THE COURT: Let me stop you there. What about the 18 final rule prevents the bank from withdrawing money from its 19 escrow account in North Carolina? 20 MR. SHAFFER: Your Honor, that's -- there are two 21 aspects of the prohibition that was reflected in the Second 22 Final Rule as in the prior one. 23 prohibition. 24 behalf of FBME Bank. 25 terms of the fund is an escrow account held for or on behalf One is the direct No bank can essentially hold funds for or on This is what we're talking about in Case l:15-cv-01270-CRC 1 of FBME. 2 account itself. Document 77 Filed 06/07/16 Page 38 of 110 That's actually written into the face of the That's if the -- 3 THE COURT: 4 MR. SHAFFER: Who owns the account? It's the Lawyers -- and I always 5 mess up the acronym on this, Your Honor. 6 bearing lawyers trust account. 7 Carolina law -- and this is how the Supreme Court looked at 8 this question in the case that we cite on how you determine 9 whether property -- 10 THE COURT: 11 MR. SHAFFER: 12 IOLTA? The interestWhich, under North And FBME is the beneficiary? It is the client of the lawyer, which is to say it's its property. 13 THE COURT: So what would prevent FBME from 14 directing the lawyers to liquidate that account the day 15 after the rule takes effect and to transfer the funds -- 16 write them a check or transfer the funds by wire to Cyprus? 17 MR. SHAFFER: The other side of this, Your Honor, 18 is the indirect prohibition, which basically says that for 19 any U.S. financial institution covered by the rule -- and 20 it's by design and by definition a very broad rule -- they 21 cannot send funds to any correspondent account that they 22 have any reason to believe would be servicing FBME or 23 permitting access to FBME. 24 25 38 So this domino effect, Your Honor, goes around the world. It's the same thing that we were discussing in the Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 39 of 110 39 1 context of the preliminary injunction; that basically the 2 effect of the final rule, even as an interim measure, has 3 been that FBME is cut off from all of its U.S. dollars all 4 over the world because no bank wants to have the exposure to 5 FinCen or to U.S. banks that would cut off that bank. 6 THE COURT: 7 MR. SHAFFER: Give them cash. But, Your Honor, what cash would it 8 be? 9 somewhere in the chain would be paying monies to FBME Bank, If it is foreseen or foreseeable that some bank 10 they are in violation of FinCen's rule, at least from the 11 perspective of the banks that actually implement this. 12 has been the practical effect. 13 effect of it. 14 Honor -- and I would point to another aspect of the record 15 that demonstrates this. That I think that is the designed If you look at the language on this. Your When CBC sent FBME Bank the September 2015 letter 16 17 that's been talked about and FBME Bank put in its response 18 to this, you'll see in our brief that one of the points that 19 FBME Bank made is that the Central Bank of Cyprus, through 20 its special administrator, was trying to get funds that it 21 could use to pay off debts of FBME Bank. 22 did that. Your Honor? 23 setting up a dummy account at the Central Bank of Cyprus 24 that designedly disclosed — 25 identity. You know how they What they ultimately resorted to was designedly disguised the actual Those funds were then wired from a bank in Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 40 of 110 1 England. 2 fact that this was, in fact, going to FBME in any shape, 3 size, or form, it filed a suspicious activity report and 4 demanded return of the money. 5 40 As soon as the bank in England got wind of the Now, because that was the Central Bank of Cyprus 6 doing that. Your Honor, they were able to get away with it, 7 Your Honor, and they were willing to try to get away with 8 it. 9 not something we would contemplate doing, and I think anyone That's not something that is available to us. That's 10 in this chain, whether it's the lawyer, the lawyer's bank, 11 or the downstream bank, they are instructed by this final 12 rule that the money can't travel. 13 THE COURT: So your position is that any foreign 14 bank that's the subject of a FinCen notice can obtain due 15 process without any physical presence in the United States 16 by depositing $100 in a checking account in a U.S. bank. 17 MR. SHAFFER: $100 might be too small. I do note 18 that the NCRA [sic] case refers to a small bank account. 19 doesn't tell us how much is in there. 20 Your Honor, it's de minimis. 21 wrestle hard with that one because if it's $290,000 plus, I 22 think any U.S. citizen or anyone else would recognize that's 23 an amount of money that's not de minimis. 24 of money that the due process clause cares about. 25 It If it's de minimis, I don't think you have to That's an amount And, Your Honor, I emphasize, it's not like FBME Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 41 of 110 1 Bank was doing this in anticipation of a 311 sanction. 2 Perhaps if there was some gamesmanship afoot, it might be 3 different. 4 Your Honor, this is organically what it is. There are liens, too, that FBME Bank holds on this 5 property. 6 FBME Bank will never be able to collect on the liens, which 7 are only meant to pay off proceeds in U.S. dollars. 8 9 Those are going to be rendered worthless because And I would note, Your Honor, the government, last time around and this time around, has not said, "Oh, here's 10 a mechanism through which you can take your dollars and, 11 consistent with our law and our rules and the way banks do 12 business, you can get this money to FBME." 13 is, well, essentially, we're not trying to do that or that 14 may be -- or they're saying that we haven't adequately 15 established with certitude that that is what's going to 16 happen. 17 language of the final rule, the practical realities that 18 we've been looking at for more than a year now all confirm 19 that what I'm saying is true, and the government doesn't 20 have anything to contradict it. 21 41 All they've said I believe that the affidavits that we put in, the I'll also note that the language of NCRI is not 22 when property is going to be destroyed or when property is 23 going to be confiscated. 24 reading is when that property is placed in jeopardy by 25 government intervention. The language of it that I was And I don't think there's any Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 42 of 110 1 doubt. Your Honor, that's what we have because FBME has not 2 been able to move forward with its transactions from this 3 account even though the lawyer, according to the 4 declaration, has tried to get them out, even though they've 5 wanted to proceed on these liens the way the initial 6 transaction contemplated. 7 42 Everything has been stymied. And the last one that I'll cite on this 8 proposition, Your Honor, that due process attaches, is Judge 9 Moss's decision in U.S. v. Sum of -- I'll round it up to $78 10 million [sic], 128 F. Supp. 3d 350. 11 "The government cites no case holding that a foreign 12 national with funds on deposit in a U.S. bank is not 13 entitled to due process before the government may seize 14 those funds. 15 located in U.S. bank accounts, the Court concludes that AIB 16 is entitled to due process protections in this action." 17 And Judge Moss wrote, Because the property at issue here was money I acknowledge, Your Honor, if you don't buy the 18 fact that there's something happening to the North Carolina 19 property and money, you might distinguish that case, but I 20 don't know what there is in the record that distinguishes 21 our circumstances from those of the case that was before 22 Judge Moss because that money is basically gone from FBME if 23 the final rule does take effect. 24 process does attach. Your Honor. 25 So we think that due And then we're in the middle of the due process Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 43 of 110 43 1 storm that I was talking about, and I think the fact that it 2 is as clearly open to consider an as-applied due process 3 challenge, and we have the extraordinary combination of 4 facts that we do here on top of those that would normally 5 attend a 311 proceeding, that, I think. Your Honor, means 6 that due process requires more than FBME Bank has obtained. 7 And if the decision were otherwise. Your Honor, it would be, 8 I humbly submit, a very damaging blow to due process and due 9 process jurisprudence for everyone because it would mean the 10 government has set up this procedure for any U.S. entity or 11 any U.S. citizen, and they would have nothing to complain 12 about unless the statute gave them some additional 13 protection. 14 The cases I was just referring to from the D.C. 15 Circuit, and I'd also mentioned the Gray Panthers case, 16 those are ones. Your Honor -- and also, as I was mentioning, 17 the Concrete Pipe case, the statute did not specify that 18 there was some additional protection required. 19 simply said the statute doesn't foreclose that additional 20 protection. 21 We think due process requires it. The Court We're going to 22 require that there be something more, a live hearing, a 23 neutral decision-maker, or something even that's left to the 24 government's discretion, but it has to be better than what 25 was afforded here. Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 44 of 110 And I would note, Your Honor, there's nothing that 2 prevents FinCen from convening a hearing. 3 That is at their discretion. 4 has that option, and so it's not like 311 forecloses that. 5 It's just that it doesn't say explicitly that a hearing 6 needs to be held in these circumstances. THE COURT: 7 8 They can do that. Any U.S. governmental agency Address the SARs issue briefly, and then move to the motion to supplement the record. MR. SHAFFER: 9 10 I'm sorry, as to the question of the disclosure or -- 11 THE COURT: Not so much the disclosure. I 12 think -- I'm sure you disagree with me, but the Court has 13 ruled on that. 14 regarding the inadequacy of the SARs as a basis for the 15 rule. 16 44 More so FinCen's response to your comment MR. SHAFFER: And I'm just going to take one two- 17 minute stab at visiting the other and then get to the 18 substance. 19 THE COURT: No problem. 20 MR. SHAFFER: And it's this, Your Honor. Last 21 time around you were explicit that due process was not 22 something that you were confronting, so your decision last 23 time was purely based on the statutes, and now, for the 24 reasons we've just discussed, I would submit that due 25 process is in play. Once due process is in play, I think Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 45 of 110 45 1 that the States Marine Lines case, which is an old one from 2 the D.C. Circuit, but it is still good law at 376 F. 2d 230, 3 squarely says -- squarely holds it violates due process to 4 withhold secret evidence that is being relied upon that 5 comes from third parties. 6 protect secrecy of third parties and keep them anonymous, 7 but that's not good enough reason to deny a respondent an 8 opportunity to see that evidence and defend itself with the 9 benefit of that evidence. Yes, there may be reasons to 10 And that was also — 11 THE COURT: While we're on this point, address the 12 issue that, look it, the government was not relying on 13 individual SARs. 14 information that they extracted from the however many there 15 are, and that they disclosed, in the description of the so- 16 called topologies, that they laid out in the rule the 17 implications that they drew from the SARs. 18 words, you knew, the bank knew, that there were concerns 19 with shell companies, there were concerns with high-volume 20 churn accounts, and you were given an opportunity to respond 21 not to any individual SAR, which wasn't the basis for their 22 conclusions, but to these general conclusions that they drew 23 from them. 24 25 They were relying on the aggregate MR. SHAFFER: going. And so, in other I understand where Your Honor's The last case is Abourezk, the D.C. Circuit case Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 46 of 110 46 1 from 1986 that points out just how extraordinary departure 2 it is to allow the agency to rely upon evidence submitted ex 3 parte in camera when a statute doesn't specifically provide 4 for that, and we respectfully submit the Bank Secrecy Act 5 does not. 6 But to take Your Honor's premise, your premise 7 last time around, and I think it's the one you suggested 8 this time around, it's look, we will have the opportunity to 9 meet FinCen's evidence by commenting on aggregate data; that 10 FinCen's case is an aggregate data case, and we can respond 11 to it as such, and that's good enough to make our case and 12 force the agency to answer it. 13 And if that premise is correct, Your Honor, then I 14 win substantively under the arbitrary and capricious 15 standard of the Administrative Procedures Act because I 16 respectfully submit you will not see a worse analysis of 17 data, a more underexplained analysis of data, than what you 18 have in the FinCen here. 19 20 21 THE COURT: Because they codify or benchmark the conclusions that they make. MR. SHAFFER: So the points we made were these. 22 Your Honor. 23 for a period of years, 2006 to 2013, and then 2013 and 2014. 24 Your Honor, that doesn't tell you anything because, of 25 course, with any bank you're not going to have a perfect All we know is what the aggregate numbers were Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 47 of 110 47 1 SARs rate. 2 SARs reports over a period of years, that might look a 3 little bit fishy. 4 and SARS are, of course, designed not just to detect illicit 5 transactions, but to have some prophylaxis built into them. 6 So just looking at a SARs number, unless you know the total 7 aggregate transactions that that's a percentage of, doesn't 8 tell you anything. Presumably if FinCen saw that there were zero Any bank is going to have imperfections, FinCen never said, "Here's what the percentage 9 10 is." 11 transactions in all currencies. 12 dollars." We did. We said, "Here's the total number of bank Here are the ones in U.S. 13 We pointed out to the agency that their use of the 14 aggregated SARs analysis was unprecedented, was sui generis. 15 This is not a use that we can ever see FinCen or anyone else 16 having made or a court ever having accepted, as Your Honor 17 said. 18 expect the baseline percentage rate to be for a healthy bank 19 that's not a primary money laundering concern? 20 point of comparison? 21 a standard or an average or a target. 22 from some other bank that you can measure FBME against? 23 We said there's no baseline. What would you, FinCen, What is the Never mind whether it's a baseline or What are you seeing We pointed to known confounding variables. Your 24 Honor, that would explain why there was an increase in the 25 SARs percentage for the year 2013-2014 specifically. We Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 48 of 110 1 noted that, number one, there was a financial crisis in 2 Cyprus, as elsewhere, but in Cyprus that resulted in capital 3 controls that basically put daily and weekly limits on what 4 foreign investors could withdraw, and so predictably people 5 in Cyprus were withdrawing up to those limits on a daily or 6 weekly basis, and that, to other banks, could look like 7 structuring activity even though it had nothing to do with 8 AML. 9 coming out of Cyprus. It was just the reality of what banks were doing 10 We also pointed out that FinCen had lowered, by 11 design and on the form, the SARs threshold for the number of 12 transactions that would fall within it. 13 all banks around the world to have seen an uptick in the 14 incident of SARs. 15 So you would expect And we also noted to them that Cyprus, for 16 whatever reason, whether it's disconnects in terms of 17 regulations or the nature of transactions or how other banks 18 view activity coming out of Cyprus, we cited in Footnote I 19 think it's 131 of our comment to a news report that talked 20 about a Deloitte & Touche report that said there are high 21 SARs rates for all international banks in Cyprus. 22 would submit that FBME is one of the best banks in Cyprus, 23 if you actually look apples to apples at FBME as compared to 24 others. 25 And I All of that was in the record. Your Honor. All of Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 49 of 110 49 1 that went in to FinCen. 2 saying that none of it, none of that, was answered by FinCen 3 in the Second Final Rule or even in the briefing before Your 4 Honor. 5 agency. 6 even the government's lawyers don't answer any of that at 7 all. 8 understand SARs. 9 it, and it's part of other things that we were looking at." 10 I take no liberty. Your Honor, in And it, of course, has to be coming up from the It couldn't come from the government's lawyers, but All they say is, "We're FinCen. We know SARs. We So you can trust us to make good use of Well, Your Honor, if FinCen is so well-versed in 11 SARs -- and I don't doubt that it is — 12 what is the baseline SARs rate. 13 this period of time around the world? 14 for other banks around the world in 2013 and 2014? 15 there higher incidents of SARs reports coming out of Cyprus? 16 They have all that information at their surely they know What is the average during Was there an uptick Are 17 fingertips, Your Honor, so why haven't they offered that any 18 place in the administrative record? 19 they're not saying because they fear that transparency, they 20 fear that accountability, or they are keeping themselves 21 willfully blind because they don't like the answers that 22 they're going to get. 23 public and other onlookers and FBME Bank and this Court 24 deserve to have answers to that very important question 25 coming from the agency, and unless there are those answers, Either they know it and But either way. Your Honor, the Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 50 of 110 50 1 we submit that one of the arbitrary and capricious standards 2 laid down by District Hospital -- this is the D.C. Circuit 3 786 F. 3d, Page 56 and 57 -- has not been met. 4 The agency needed to examine the relevant data and 5 articulate the satisfactory explanation for its action, 6 including a rational connection between the facts found and 7 the choice made. 8 as they use this SARs aggregate analysis as incriminating 9 FBME Bank to explain why isn't it exculpatory. And they didn't explain. Your Honor, even When you 10 look at this in a context, not just in a vacuum, does FBME 11 Bank look like a great bank, a good bank, a so-so bank, a 12 poor bank, or a terrible bank and a bank of primary money 13 laundering concern? 14 record. 15 That explanation is not there in the There aren't even the kernels of it. The only other thing that FinCen said is, "Well, 16 we're overstating the reliance they placed on the SARs." 17 Your Honor, you will see throughout the Second Final Rule 18 FinCen refers to the volume of transactions that are of 19 concern. 20 they have that's not just an anecdotal account. 21 That's the SARs analysis. That's the only thing Each time they refer to the volume, they're 22 referring to the SARs, but I'll point you specifically to 23 FinCen's analysis of the third statutory factor, a critical 24 statutory factor that we say they didn't properly handle in 25 any event -- and I rely upon my briefing for that -- but Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 51 of 110 51 1 when they talk about the number of legitimate transactions 2 that stand to be stamped out by imposition of the Fifth 3 Special Measure — 4 '89 — 5 SARs analysis. 6 of millions of dollars in transactions from 2006 to 2014, 7 and specifically to the $387 million figure for that year 8 2013 and 2014. 9 this is on 81 Federal Register 18488 and that all comes down in substance to the aggregated And FinCen specifically refers to hundreds So that's how they're saying that they've 10 satisfied the statutory factor, is with that aggregated SARs 11 data without answering any of the criticism that goes right 12 to the heart of it, Your Honor. 13 and capricious agency action, and I think Your Honor could 14 so hold under the black letter law of the APA. 15 submit, given the procedural deprivations, at the very least 16 the concerns that are at issue here, that should put more 17 pressure on the agency. 18 shot at this aggregated SARs analysis. 19 going to get. 20 That, to me, is arbitrary And I'd At least now we've taken our best That's all we're FinCen should at least have to explain itself. 21 Explain why its analysis is sound. 22 something that truly is incriminating in that data. 23 you're just not going to find that, I submit, in the 24 administrative record. 25 THE COURT: Okay. Explain why it finds And Move to the disputed materials Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 52 of 110 52 and the motion to supplement. 2 MR. SHAFFER: Could I talk about the CBC, Your 3 Honor? 4 capricious review that I'd like to press upon Your Honor. That's the only other point on arbitrary and 5 THE COURT: 6 MR. SHAFFER: Briefly. Okay. Your Honor, we think that 7 when it comes to the CBC, FinCen failed to consider an 8 important aspect of the problem. 9 upon input from CBC that's explicit throughout the Second It's relying centrally 10 Final Rule. 11 allegations of evasion and noncompliance in Cyprus, and that 12 is a recurring theme of the Second Final Rule. 13 It's especially explicit when it comes to And we think that given that we demonstrated 14 obvious overwhelming, well-documented, pecuniary interest 15 that CBC has, both in liquidating FBME Bank, following 16 FinCen's final rule, using that as its cover, if you will, 17 that's their argument in arbitration, that they don't bear 18 responsibility. 19 threaten to end FBME Bank. 20 of millions of dollars by virtue of that, and 21 correspondingly in the arbitration, where FBME shareholders 22 are seeking upwards of a billion dollars from Cyprus, the 23 central defense of CBC is, "We didn't do it. 24 it. 25 financial interest in trying to advance FinCen's imposition It's FinCen's final rule that it would They are going to seize hundreds Look at FinCen's final rule." FinCen's done So CBC has every Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 53 of 110 1 of the Fifth Special Measure, and that is reflected in our 2 submission and not answered by FinCen. 53 We've quoted CBC as a valid discrimination against 3 4 FBME as non-Cypriot-owned. We've cited third parties who 5 echo us in pointing to ulterior motives and animus that CBC 6 would have against FBME. 7 Mr. Demetriades, the former governor of the CBC who talks 8 about the toxic politics in Cyprus and why there are 9 political motivations for CBC to be going after FBME Bank I'd point there to 10 without any basis in terms of AML issue. 11 administrative record, 3198 and '200. 12 that's in the administrative record at 4442 from Tanzania's 13 statutory manager, Mr. Mafuru, who explicitly calls CBC out 14 for trying to go after FBME in order to advance Cyprus's 15 financial interest, recover money for itself at the expense 16 of depositors. 17 FBME that's based on this joint audit that it commissioned 18 PricewaterhouseCoopers to undertake. 19 that. 20 told FinCen in terms that they were directed by the CBC or 21 by authorities in Cyprus before they submitted the attorney- 22 client privileged materials that we were talking about to 23 FinCen, and that happened just days after FBME had brought 24 the suit. 25 That's at the We've quoted an email We've noted CBC's September 2015 letter to PwC has disavowed And of course we have former investigators who have So I would ask that FinCen at least provide an Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 54 of 110 54 1 explanation for its decision that -- and explain why its 2 decision does not run counter to the evidence before it, all 3 this evidence that I've talked about that undermines the 4 credibility and integrity of CBC. And when FinCen says, as 5 it does in the Federal Register, 81 Federal Register 18482, 6 that CBC independently identified many of the same concerns 7 that FinCen did, Your Honor, there's nothing independent 8 about what CBC has been doing, and I think that the 9 administrative record is completely one-sided about that. 10 CBC pounced to liquidate the bank as soon as 11 FinCen issued the First Final Rule. 12 directed FBME's former investigators before they went to 13 FinCen submitting the materials they did. 14 waited over a year to produce findings supposedly coming out 15 of the PwC audit. 16 did that right after FinCen decided to pursue a remand and 17 the day after FinCen told us they weren't possessing any 18 such report. 19 its attempts to liquidate FBME in the aftermath of FinCen's 20 remand notice. 21 It's the one that It's CBC that And CBC did that when, Your Honor? They wouldn't provide it. They And it's renewed We think, Your Honor, that this, too, is arbitrary 22 and capricious for FinCen not to have grappled with these 23 aspects of the record that should foreclose — 24 foreclose it from placing such extensive reliance on CBC, at 25 least FinCen should have to explain why it is placing such if they don't Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 55 of 110 55 1 stock in what CBC is saying in this very same case where it 2 has the pecuniary interest, where it has the animus, where 3 it is by no means a disinterested party whose good faith 4 could be counted upon. If there's a presumption of regularity when it 5 6 comes to foreign regulators. Your Honor, and I'm not denying 7 that there is, it should be rebuttable presumption, and 8 FBME, in this record, did enough to rebut it and to force 9 FinCen to answer with something other than what FinCen 10 offered. 11 report that I think is, I think by any fair reading, 12 unflattering to CBC, expresses explicit concern about 13 Cypriot supervisory authorities, and it's from 2011. 14 been superseded many times over. 15 this case or CBC's conduct toward FBME. 16 All it offered, Your Honor, was a 2011 MONEYVAL It's It has nothing to do with And of course, FinCen did rely upon regulators 17 around the world. Your Honor, as our authorities do, but not 18 every country follows the same principles of the APA and the 19 rule of law that the United States does. 20 corruption. 21 faith and misconduct running amuck abroad. 22 regulators piggyback atop foreign regulators in what they're 23 supposedly finding and determining, they should still have 24 to, under the APA, explain themselves. 25 that under circumstances that would, I think, discredit CBC, There may be There may be discrimination. There may be bad And before our Explain why it is Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 56 of 110 56 they place the stock that they do in it. 2 And if you don't buy all of that, Your Honor, I 3 just submit that's all the more reason why we should have 4 had a live hearing to get to the bottom of these sorts of 5 concerns and why FinCen, at the very least, should have been 6 consulting, as I said earlier, with the Attorney General, 7 the State Department, perhaps, as per the statute, the 8 chairman of the Federal Reserve to say, "What do other 9 sister officers within the United States government make of 10 these sorts of concerns specifically directed against Cyprus 11 relative to Tanzania and, you know, relative to law 12 enforcement and so forth?" 13 THE COURT: 14 MR. SHAFFER: Okay. And I think FinCen could have done 15 any number of other things. 16 PricewaterhouseCoopers. 17 followed up with them; checked with Tanzania; posed 18 questions to FBME; explained themselves about the SARs 19 baseline; consulted; as I said, agreed to a remand meeting 20 that we requested, or held a hearing. 21 do. Your Honor, what they could not do is what they did, 22 simply take CBC's word as basis to indict FBME in the most 23 damning terms and say nothing short of a prohibition under 24 the Fifth Special Measure would suffice. 25 THE COURT: They could have checked with They could have checked with CBC, Okay. What they could not Case l:15-cv-01270-CRC 1 Document 77 MR. SHAFFER: very indulgent on that point. 3 wanted me to turn to. 5 THE COURT: 57 You've been You had another point you The motion to supplement the record regarding the disputed materials. 6 MR. SHAFFER: 7 THE COURT: 8 MR. SHAFFER: 9 Page 57 of 110 Thank you, Your Honor. 2 4 Filed 06/07/16 it. Yes. Why don't you go first. Your Honor, I would say this about I don't think that there are factual disputes 10 surrounding -- or at this point I think you have enough to 11 decide what to do under the governing precedent of the D.C. 12 Circuit in the following sense. 13 are ones that FinCen received. 14 different intervals. The materials in question They received them at two The first time they received it was in August of 15 16 2015 as we were litigating this case, Your Honor. 17 having received the materials, they've reviewed the 18 materials. 19 towards this rule-making and, in fact, were, as I understand 20 it, disseminating them around FinCen to some degree. 21 haven't been able to find out specifics beyond what I just 22 said, but they were certainly receiving and reviewing 23 without telling us and doing this in the context of this 24 rule-making. 25 And They reviewed them specifically with an eye I The second set arrived in January of this year. Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 58 of 110 58 1 and FinCen sat on that set of materials for two weeks. 2 was styled a comment. 3 comment. 4 confidential business information that would -- that should 5 be redacted out before it was published as part of the 6 administrative record. 7 they had any basis to exclude it from the administrative 8 record because otherwise they saw it as part and parcel of 9 what they needed to be considering from the rule-making. 10 It FinCen said it was treating it as a They wrote to us asking us if we saw any They came to this Court asking if Now, when we expressed the grave concerns we did, 11 which was really the moment we learned from FinCen that it 12 had received these materials and had been sitting on them, 13 we came to a negotiated outcome essentially where the agency 14 agreed that it would not be relying upon the materials in 15 connection with this rule-making, nor would it be publishing 16 them. 17 because we have our obligations to our client and our own 18 ethical responsibilities, of course, and we wanted to do 19 everything necessary in order to preserve the privileges at 20 issue. 21 And that, of course, was critical to us, Your Honor, But I don't think there's any doubting. Your 22 Honor, that you can take judicial cognizance of the fact 23 that FinCen received and reviewed these materials, took 24 months before they first alerted us to the fact that they'd 25 been received. They then, as I said, were proposing to use Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 59 of 110 59 them as part of their administrative record -- 2 THE COURT: Just so I'm clear, your argument as to 3 why FinCen considered these materials in reaching the final 4 rule is based on. A, the timing of their receipt and, B, 5 that your position is that there is no other way that 6 certain materials could have or certain conclusions could 7 have wound up in the Second Final Rule but for the 8 consideration of this material? 9 MR. SHAFFER: To be fair. Your Honor, I can't 10 quite say the second because, of course, I don't know what's 11 in the black box. 12 THE COURT: 13 MR. SHAFFER: Okay. And so there may be things in the 14 black box that support certain things that FinCen said in 15 the Second Final Rule, so I can't say that just the way Your 16 Honor did. Let me try and say it a different way. 17 I can't know whether these materials somehow 18 influenced FinCen en route to that conclusion, whether 19 because they corroborated something that was in the black 20 box, whether because something that was in the black box had 21 traveled from the same former investigators who were 22 violating attorney-client privilege, or whether because 23 decision-makers at FinCen who were contributing to the 24 Second Final Rule, to the memo, to the premises, took a 25 certain view of FBME based upon what they'd seen in the Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 1 materials. 2 knowing what happened within the agency. 3 Page 60 of 110 60 I can't unring the bell, especially without THE COURT: Fine. So what I'm inclined to do is 4 to grant your motion to supplement the record to the extent 5 that you're asking the Court to consider extrajudicial or 6 extra-record material that is necessary to avoid frustration 7 of judicial review of the rule. 8 9 10 MR. SHAFFER: Your Honor. That's a perfectly fair outcome. I was going to suggest -- THE COURT: I think we've sort of stumbled over 11 the nomenclature a little bit because if you're adding 12 something to the record, then it's an implicit finding that 13 the agency considered it, but in order to determine whether 14 the agency may have considered it, I need to consider that 15 information. 16 MR. SHAFFER: Just two points on that. Your Honor. 17 I think the standard is "might have influenced the agency's 18 decision," and we think it does fall under that heading 19 because it might have influenced the agency's decision, but 20 I -- and I don't want to get tripped up in nomenclature 21 either. Your Honor. 22 or -- just as Your Honor described it or part of the 23 administrative record, what matters to us is that Your Honor 24 be able to take cognizance of it so that you can adjudicate 25 the concerns that exist at this point in time about what may I think whether it's judicial notice Case l:15-cv-01270-CRC 1 have — Document 77 Filed 06/07/16 Page 61 of 110 61 the possible taint on FinCen's Second Final Rule. 2 And my last point on that -- 3 THE COURT: Now, the materials have been submitted 4 in connection with your request for the Court to resolve the 5 initial dispute, which I refrained from doing. 6 adopt the material as part of the summary judgment record 7 here, or do you need to or do I need to have you refile it? 8 Is it the same material? 9 MR. SHAFFER: 10 Your Honor. 11 could. Can I simply It's the same material, I believe, I'm going to confer with my colleagues, if I 12 THE COURT: 13 MR. SHAFFER: Okay. But my tentative answer to Your 14 Honor is that that would get you to the correct place from 15 our perspective. 16 THE COURT: 17 MR. SHAFFER: Okay. I think that that is substantively 18 the right outcome, and I think that the nomenclature should 19 not matter. 20 that these were materials that should not have been relied 21 upon. 22 and as to that I would simply cite Your Honor to the D.C. 23 Circuit cases that we've cited: 24 Traffic Controllers case, the Home Box Office case, the 25 Sangamon Valley Television Corporation case where concerns I think that we do agree with the government The question is whether there was any taint to them, the Professional Air Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 62 of 110 1 about whether there was improper influence on an agency's 2 proceedings necessitated that there at least be an 3 evidentiary hearing. In the Sangamon case there was a vacatur that 4 5 preceded it. 6 case, the D.C. Circuit essentially pressed pause and said, 7 "We're going to send it back to the evidentiary hearing 8 before we do anything else." 9 Office case. Your Honor. 10 In the Professional Air Traffic Controllers And then there's the Home Box And I think without that evidentiary hearing, I 11 think it is exceptionally difficult — 12 how we would ever get to the bottom of whether there was an 13 impermissible taint and whether the attorney-client 14 privileged materials colored improperly decisions and 15 impressions of FinCen. 16 THE COURT: 17 Ms. Powell. 18 MS. LEE: 19 Okay. I honestly don't know I understand. Ms. Lee. I wanted to let you know Ms. Powell will be -- 20 THE COURT: 21 MS. LEE: Come on up. Your Honor, I just wanted to let you 22 know that Ms. Powell will be handling the issues to do with 23 what we've been calling the disputed materials, the motion 24 to supplement and the taint issue. 25 62 THE COURT: That's fine. Case l:15-cv-01270-CRC Document 77 1 MS. LEE: 2 THE COURT: 3 MS. LEE: 4 Filed 06/07/16 Page 63 of 110 63 I'll be handling -However you want to divide it. So I'll be -- I don't know if you wanted to address that first or just go into the main meat. 5 THE COURT: You're in the driver's seat. 6 MS. LEE: 7 I wanted to start by just emphasizing a couple of Okay. Well, I will go ahead and start. 8 points which I'm sure the Court is already well aware. 9 is that FinCen has completely complied with the Court's 10 remand order. The order — 11 THE COURT: 12 MS. LEE: 13 THE COURT: 14 MS. LEE: 15 THE COURT: 16 One Did you consult again? Yes, we did, and -Did it consult again? Yes. And where is that reflected in the second rule? MS. LEE: 17 So it's actually in the second rule. 18 uses somewhat of the similar phrasing. 19 18488, Section 6, "Imposition of Special Measure," and it 20 says, "Following the required consultations and the 21 consideration of all relevant" -- 22 23 THE COURT: It's at 81 Fed. Reg. I'm sorry, give me that page number again. 24 MS. LEE: 25 THE COURT: It This is 81 Fed. Reg. at 18488. And I'm sorry, there's a lot of text Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 64 of 110 on this. 2 MS. LEE: Yes. No, it's at Section 6. I realize 3 this might -- this might actually be a referral to the 4 earlier consultations, but I do — 5 like to add that -- 6 THE COURT: 7 MS. LEE: 8 THE COURT: 9 MS. LEE: 10 THE COURT: 12 MS. LEE: Wait, wait, wait, wait. Sorry. Is it in the Second Final Rule? It is in -- so consultations are Where are they mentioned? So at — if you look at 81 Fed. Reg. at 18488. 14 THE COURT: 15 MS. LEE: 16 I can say and I'd also mentioned in the Second Final Rule. 11 13 I'm with you. Under Section 6, "Imposition of Special Measure." 17 THE COURT: 18 MS. LEE: Yes. The first paragraph. 19 "Following the required" — 20 "Following the required consultations..." 21 64 It says, about halfway down it says Looking at that I'm saying that it might be a 22 little ambiguous whether that's a referral to the first time 23 it was asked versus the second time, but -- 24 THE COURT: 25 MS. LEE: I would agree with you. But I do want to confirm that FinCen did Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 65 of 110 65 1 undertake the required consultations. 2 Your Honor wants confirmation of that, we're happy to submit 3 a declaration to that effect. 4 We -- to the extent As to, you know, the other points that were 5 brought up, I mean, we'd first like to reiterate the 6 arguments made in our brief that this issue isn't even 7 really properly before the Court. 8 any point during the administrative process by plaintiff, 9 and as Your Honor -- 10 THE COURT: 11 12 13 14 It was never raised at How could they raise it before the Second Final Rule was issued? MS. LEE: Well, I think -- it was noticed in the original -THE COURT: And they raised it because the Second 15 Final Rule didn't say we reconsulted, and, therefore, they 16 were not on notice that it was an issue before then. 17 MS. LEE: Right? But I would say the first time there was 18 also -- I think a lot of their issue is it seems to be there 19 was no documentation of the consultation. 20 THE COURT: That's a separate issue. I'm not 21 going to make them -- I'm not going to make you give them 22 the documentation, but if -- 23 MS. LEE: Well, as I said, we're happy to submit 24 a -- I mean, I think, again, because of the deliberative -- 25 well, first let me back up. Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 66 of 110 And the other problem is that they're not in the 2 zone of interest, as you were discussing with opposing 3 counsel, which I think you've gone through and highlighted 4 the problems with that; that it really clearly doesn't -- 5 these were not -- that part of the statute does not 6 contemplate the bank's interest. 7 to do with the U.S. banking community and other -- 8 9 THE COURT: It's like other interests Well, this issue has not been joined in the brief because, as I said — or in the briefing 10 because there was no reply brief, but Mr. Shaffer cited a 11 number of cases where at least, according to him, the test 12 is whether the rule-making as a whole affects the interest, 13 not simply that particular provision. 14 MS. LEE: Is that not the case? Well, again, Your Honor, since we didn't 15 have the benefit of the reply, I'd probably have to go back 16 and look at these cases. 17 entity that really, again, is not within the known zone of 18 interest -THE COURT: 19 20 66 But it seems perverse to have an Because had the consultation taken place — 21 MS. LEE: 22 THE COURT: Yes. — and the Secretary of State said, 23 you know, "Hold on, this would affect the national 24 security," the rule doesn't go into effect, and FinCen's 25 interests are not affected. Why isn't that within the zone Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 67 of 110 1 of injury if the outcome of the consultation, if it's 2 positive, could affect the bank's interests? I mean, I haven't read the cases either, but just 3 4 as a logical proposition, that makes sense to me. MS. LEE: 5 6 Right? I can also table that and maybe, if Your Honor wants -THE COURT: 7 8 67 We'll look at the cases, and if we need more briefing, we'll request it. MS. LEE: 9 Okay? Again, I think proceeding to the main 10 point, yes, the consultations were done again, and we can 11 verify that in a declaration. 12 provide a lot of these document -- we wouldn't be able to 13 provide any of the documentation or a lot of the specific 14 details because they are deliberative, but I'm sure we could 15 confirm that they were done. Again, we wouldn't be able to And, again, just given the presumption of 16 17 regularity that the agency is accorded, I think that Your 18 Honor would have to accept that they were done. THE COURT: 19 20 Well, if you'd like to submit a declaration, you should do that. 21 MS. LEE: 22 THE COURT: Okay. And I'm sure that the plaintiffs will 23 have an opportunity to tell me why that's not sufficient 24 under APA notice and comment procedures, and we'll take it 25 up. But you're certainly free to submit any declaration Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 68 of 110 that you see fit. 2 MS. LEE: 3 THE COURT: 4 MS. LEE: Certainly, Your Honor. Okay. So as I said, we did comply with the 5 Court's -- and the Court's order was geared towards making 6 available all of the unclassified and nonprotected 7 information, and despite plaintiffs' -- which I'll get to. 8 Despite plaintiffs' attempts to cast doubt on this, there 9 really is no doubt that we did that. 10 We also -- 11 THE COURT: 12 MS. LEE: 14 THE COURT: So on that point. You're just talking about the SARs; is that right? MS. LEE: 16 17 Well, when you say "protected," you're just talking about -- 13 15 68 At that point we're talking about Bank- Secrecy-Act-protected information, the SARs. 18 THE COURT: 19 MS. LEE: Okay. There is no other category of protected 20 information. 21 that's the term the Court used in its preliminary injunction 22 opinion and possibly also the remand order. 23 yes. We were using that term because I believe But as to that, 24 So there really is nothing except the unclassified 25 nonprotected info that has been made publicly available, and Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 69 of 110 1 then the classified information, and then, well, the Bank- 2 Secrecy-Act-protected information, which as to those two 3 categories, I don't believe that -- it doesn't sound like 4 the Court believes that we should be disclosing those two 5 other categories. 6 procedural side, this comes down to whether or not we 7 disclosed everything we should have on the unclassified 8 materials. 9 69 So I think this all -- at least on the And as we said in our brief, our opposition brief, 10 we believe that plaintiffs, in some ways, are moving the 11 goal post or changing the scope of what it is that they were 12 entitled to in terms of notice. 13 anything in the case law that suggests that FinCen was 14 obligated to make available what it was thinking was 15 important or what conclusions it would draw from the 16 unclassified evidence or, you know, what aspect of it would 17 be most problematic. 18 what it was considering, and it did that. 19 I don't think there's All it was required to do was provide And also, even if you take each of their itemized 20 objections to things that they called surprises, none of 21 them, I think, were really surprises on their own terms. 22 The two examples that -- 23 THE COURT: Why don't we talk about the one that 24 Mr. Shaffer emphasized, which is this allegation that in 25 late 2014 there were efforts to obscure information from Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 70 of 110 investigators. 2 MS. LEE: 3 THE COURT: 4 way, shape, or form? 5 with respect to that issue? 6 Yes, Your Honor. MS. LEE: So for that — Was that disclosed to them in some Or what's the government's position Well, as you know, the specific fact 7 underlying that sentence was classified, so that couldn't 8 have been disclosed. Now, as to the larger -- 9 10 11 THE COURT: But the sentence could have been disclosed, right? 12 MS. LEE: 13 THE COURT: 14 70 I mean, I think -Because you did disclose it in the rule. MS. LEE: 15 We did eventually. The sentence I think 16 was cleared relatively late or recently or prior to the 17 rule. 18 plaintiffs were on notice that, you know, the general area 19 of concern that — 20 pattern of evading regulators and trying to evade oversight 21 was very much made apparent both in the notice of -- well, 22 in the notice of finding and, of course, in the enjoined 23 final rule. 24 that this took them completely by surprise, and for that 25 reason, I don't — I don't know the exact timing, but the fact is that sorry — that FinCen had about FBME's So I think it's somewhat disingenuous to say I don't think that constitutes any Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 71 of 110 71 1 failure of notice or — 2 the APA standard. 3 don't -- we've continued to believe that due process -- that 4 plaintiffs are not entitled to due process. 5 either under the due process or And I can get, in a minute, to why we But I guess the other thing that was brought up 6 was the Hezbollah associate, but they themselves admit that 7 they had notice of that so I don't really see how that also 8 is any sort of failure to provide unclassified information 9 or to comply with the Court's order. 10 So moving on. 11 THE COURT: Talk about the due process issues. A, 12 the threshold question as to whether the bank is entitled to 13 due process and, B, that the procedures accorded them did 14 not satisfy due process. 15 MS. LEE: So for the first part, we're backing in 16 at whether or not they have established sufficient 17 constitutional presence, and we continue to submit that they 18 have not. 19 THE COURT: Answer the question that I asked 20 Mr. Shaffer, which is, if the rule goes into effect 21 tomorrow, what would become of an escrow account in North 22 Carolina as to which the bank is the beneficiary? 23 those funds be withdrawn consistent with the final rule or 24 converted into something of value and given to the holders? 25 MS. LEE: Could My understanding is yes. Your Honor. Case l:15-cv-01270-CRC 1 2 Document 77 THE COURT: Filed 06/07/16 Page 72 of 110 And what's that based on? 72 I'm having a -- you know, I need a banking primer to answer that. MS. LEE: 3 I admit I am not an expert either. Your 4 Honor, but I do — first of all, there's no dispute that the 5 funds are currently not in a correspondence account. 6 They're in an escrow account. 7 anything that prevents the plaintiffs from withdrawing the 8 funds. THE COURT: 9 And there doesn't seem to be What's the difference between a 10 correspondent account and an escrow account held by a U.S. 11 FDIC-insured bank? 12 MS. LEE: Well, to that I don't know the exact 13 answer, but I can certainly find out from the agency. 14 will say that I've been -- I understand that there's nothing 15 that would prevent them from at least withdrawing the funds 16 in cash, or I think spending them within the United States 17 even after the rule goes into effect. 18 I But I think everything else is a bit hypothetical 19 since the rule hasn't actually gone into effect yet, but the 20 burden -- 21 THE COURT: But would you agree, under the 22 Judge Sentelle decision and the Judge Moss decision that 23 Mr. Shaffer referred to, that if I find that the bank's 24 assets are in jeopardy, that the bank has assets in jeopardy 25 here that are not simply de minimis, that that would be Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 73 sufficient to establish due process? 2 MS. LEE: I don't agree with that. 3 remind me which case that was? 4 THE COURT: 5 MR. SHAFFER: 6 THE COURT: 7 MS. LEE: And can you This is the In Re: $70,990,000 — And NCRI, I believe. -- and the NCRI decision by Judge -So I think in NCRI, there wasn't just a 8 bank account. 9 building so it was -- There was also a physical presence in a 10 THE COURT: 11 MS. LEE: 12 Page 73 of 110 In the National Press Club. Yes. So that combination, I think, was considered to be enough. 13 As for the other case, I believe that was a case 14 where the funds actually were going to be seized, which is 15 really not the case here. 16 account. 17 burden of showing that they wouldn't be able to access this 18 account or to get the funds from it, and I'd submit, if you 19 look at their declarations, they really haven't. 20 basically said in their declaration from their lawyer that 21 they were not -- they found they were unable to transfer the 22 funds in the way that they were used to, whatever that 23 means, and so they put it in this escrow account, but they 24 certainly have not made a showing that they couldn't get 25 these funds, for instance, in cash from the account once the No one is going to touch this And I'd like to reiterate, the plaintiffs have the They Case l:15-cv-01270-CRC 1 2 Document 77 Filed 06/07/16 Page 74 of 110 rule goes into effect. So we submit they have not met that burden, and so 3 they really haven't established a presence that would 4 qualify for due process. 5 74 As to whether extra procedures are required, we 6 would submit, even with due process standards, we would 7 submit absolutely not. 8 not an adjudication. 9 that it's a slightly unusual rule-making in the sense that As Your Honor pointed out, this is This is a rule-making. And we admit 10 it is more or less focused on one entity, but the fact is 11 that Congress, in Section 311, mandated that the Fifth 12 Special Measure be imposed by regulation, and it could have, 13 if it had wanted to, required a hearing or more formal 14 procedures, but it didn't. 15 THE COURT: Is it FinCen's position or is it your 16 position that the classified material was critical to 17 FinCen's designation, or would it or could it have relied 18 simply on the public material and the SARs? 19 MS. LEE: 20 THE COURT: 21 22 Sorry. So would it -- Was the classified material critical to FinCen's decision? MS. LEE: I think it was a significant portion. 23 Now, if you're asking whether the decision would still stand 24 without the classified information, I would have to re­ 25 evaluate the totality there. You know, I think there's Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 75 of 110 1 still evidence in there that is not classified, and, again, 2 maybe I didn't get this quite clear, but if this includes 3 the SARs, then I think that also makes a stronger case. 4 THE COURT: 5 MS. LEE: Okay. But if -- in any case, we don't believe 6 that the presence of classified information changes or the 7 reliance on classified information changes the -- what is 8 actually required by due process. 9 were required to have a neutral -- what's called a neutral In terms of whether they 10 arbiter and/or a live hearing, as Your Honor noted, in many 11 of the cases that are most similar to this one involving 12 targeted financial sanctions or terrorist designations -- 13 and I would like to note that there are cases that 14 explicitly reject the idea that you would need a hearing of 15 any kind. 16 Kadi. 17 indicative of the fact that such extra proceedings are not 18 required. I think Holy Land is one of them, and possibly I think that's in our briefs. So that in itself is 19 The other thing is the other cases -- 20 THE COURT: But as Mr. Shaffer says, there were at 21 least indications in those cases that the decision did not 22 critically rely on -- 23 24 25 75 MS. LEE: Well, I would submit — with that characterization. THE COURT: Okay. I don't agree Case l:15-cv-01270-CRC 1 Document 77 MS. LEE: Filed 06/07/16 Again, I'm not — Page 76 of 110 76 I think "critical" is 2 not the most precise term, but I would submit that -- and, 3 again, I didn't — 4 was in the record in those cases, but that the information 5 was probably at least as important there, the classified 6 information, as it is here, if not more so, and yet no 7 hearing was required. I don't know those -- I don't know what 8 Also, in terms of the other cases, the 9 nonsanctions cases that plaintiffs cite, they rely more on 10 the risk of bias. 11 in their briefs and also at argument, they haven't shown 12 this risk. 13 the standard that was set forth in Withrow. 14 shown that this decision, FinCen's decision, is really any 15 different from any other kind of decision that involves this 16 kind of targeted financial measure. 17 you know, they can't deny the fact that more process, as the 18 Court has noted, has been presented here than in those other 19 cases. 20 And for all the rhetoric that they show This intolerably high risk of bias I think is They haven't In fact, if anything, They did get notice and comment. They had two 21 comment periods, and even if we're talking just about the 22 second one, they had -- they were able to submit an 23 extensive submission. 24 took issue with the specific way in which those comments 25 were addressed, they were addressed, and really nothing more We'd submit that, like, even if they Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 77 of 110 77 1 should be required under the APA -- well, under due process, 2 and certainly under the APA. 3 And Vermont Yankee, that case has been routinely 4 held by the D.C. Circuit to stand for the proposition that 5 you really shouldn't be importing extra procedures on top of 6 the APA unless, again, some sort of extraordinary 7 circumstances are shown, which, again, I don't think the 8 plaintiffs have shown here. 9 the book, if you will, the notice and comment rule-making 10 procedures, and there really hasn't been any demonstrated 11 irregularity setting aside this issue of the allegedly 12 privileged materials, which we would submit were handled 13 entirely appropriately. This has been done according to 14 So with that, we believe that even if you do read 15 a due process right into this action, FinCen would have met 16 that standard. 17 THE COURT: Okay. Address FinCen's discussion of 18 the SARs, the aggregate data from the SARs, and tell me why 19 the Court can draw a conclusion one way or the other about 20 the -- you know, how good or bad or indifferent the data are 21 from that aggregate data. 22 MS. LEE: Well, respectfully, Your Honor, I think 23 that's the wrong question to be asking the Court. It's 24 pretty much textbook APA law that the Court isn't supposed 25 to be evaluating each evidence on a piece-by-piece basis, Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 78 of 110 1 and it's also not supposed to be imposing its own judgment 2 for the agencies, and this is pretty much exactly what 3 the — 4 THE COURT: But what is the agency's judgment? 78 I 5 mean, if the EPA says, "We find that someone dumped, you 6 know, 300 million gallons of a toxic material," and that's 7 the basis of a rule-making in an adverse finding, how is the 8 Court to know whether that's a high amount? 9 How can I assess FinCen's exercise of its discretion if it's 10 just a raw number with no benchmark? 11 struggling with. 12 MS. LEE: A low amount? That's what I'm Again, I still think that — I don't 13 believe that the APA requires the agency to set down a 14 benchmark. 15 evidence that the -- I'm sorry, that FinCen was looking at 16 in the context of the other information. 17 Remember that SARs are, again, only part of the THE COURT: They -- But it says there was $387 million in 18 suspicious wire transfers in one year, and that's the basis 19 of the finding. 20 Is that a little? 21 How am I to assess that? Is that a lot? I mean, I understand FinCen has the expertise. 22 They know better than the Court or the plaintiffs. 23 without explaining and putting that number in context, how 24 can I assess whether that's a reasonable exercise of the 25 agency's discretion? But Case l:15-cv-01270-CRC 1 Document 77 MS. LEE: Filed 06/07/16 Page 79 of 110 I think -- if you look at that number in 2 the context of the rule, I think the implication is that it 3 is an unusually high number. 4 5 Now, I don't read -- again, I don't read the APA or really due process -- 6 7 THE COURT: MS. LEE: I mean, at a deeper level I think the agency does have the expertise here and is -- 10 11 So you're saying that I should just trust the agency because it has the expertise? 8 9 79 THE COURT: I don't doubt that, but, you know, what's my job then? 12 MS. LEE: Well, the Court's role in this is to -- 13 and I think Your Honor had asked about this earlier in the 14 context of error. 15 the totality -- well, to confirm that the agency's decision 16 was based on a, you know, reasonable reading of the overall 17 totality of the evidence. 18 The Court is really supposed to look at Again, it's not the Court's job to really 19 confirm — 20 as well as the regular APA cases, but to confirm whether 21 each piece of evidence was analyzed correctly, but whether 22 the overall decision and whether -- whether the overall 23 decision laid out what's I think it's called a reasonably -- 24 or a discernible path to its conclusion and whether it was 25 based on substantial facts. and this is also in the sanctions cases as well, Case l:15-cv-01270-CRC 1 Document 77 THE COURT: Filed 06/07/16 Page 80 of 110 So your position is that the agency 2 advised the bank that it was concerned about a high volume 3 of suspicious wires, the use of shell companies, the, you 4 know, churning of accounts, and that that was sufficient to 5 put it on notice of the general issues that were the basis 6 of the money laundering concern? 7 MS. LEE: 8 THE COURT: 9 10 11 12 Yes, Your Honor. And that the agency did not have to go farther and substantiate that $387 million in one year of suspicious wire transfers was high, low, or average. MS. LEE: Yes, Your Honor. I don't believe that was what was required here. 13 THE COURT: 14 MS. LEE: 15 For the rest of the substantive issues, again, Okay. Yes. 16 just stepping back, almost all the plaintiffs' complaints 17 repeat this pattern of trying to take a very granular 18 approach to how FinCen analyzed this or that piece of 19 evidence and whether or not that was correct. 20 we would submit that is not what either -- well, that is 21 certainly not what the Court is supposed to do in reviewing 22 the decision. 23 And, again, Now, specifically on the CBC, that actually falls 24 in the same category in that, well, first of all, this is 25 squarely the area in which FinCen should be accorded the Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 81 of 110 81 1 highest level of deference because it has to do with its 2 relationship with foreign regulators, and, again, it's the 3 expert here in what is valuable information to be gotten 4 from foreign regulators and how credible it is. 5 only issue there is whether or not it considered FBME's 6 submissions regarding the CBC, and it did. 7 considered other comments that drew attention to concerns 8 about the CBC as well, but it adjudged in its own -- it laid 9 out its own assessment that the CBC was reliable, at least 10 I think the You know, it reliable enough to rely on their evidence. 11 I don't want to get into too much detail, but the 12 MONEYVAL report, if the Court wants to look at it, actually 13 does come out overall positively in favor of the CBC. 14 that's not even what the Court should be asking because, 15 again, this is -- the Court shouldn't be substituting its 16 own judgment for what the agency determined to be a reliable 17 source. 18 THE COURT: But Well, certainly the MONEYVAL comment 19 indicates that the agency considered CBC's reliability and 20 credibility generally. 21 MS. LEE: 22 THE COURT: Indeed. Is there anything in the rule that 23 suggests that it considered the specific sources of bias or 24 allegations of bias as to FBME? 25 MS. LEE: If you mean does the rule draw Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 82 of 110 82 1 attention -- I mean, does the rule focus on, you know, each 2 specific allegation that FBME had about the CBC, no. 3 again, I would submit that that's not -- 4 5 THE COURT: And, Your position is that it didn't have to? 6 MS. LEE: 7 THE COURT: Yes, Your Honor. Okay. Because FinCen is charged with 8 working with its sister regulators around the world, and it 9 should be given leeway to accept or reject recommendations 10 made by them based on all the circumstances given its 11 expertise. 12 MS. LEE: Yes, Your Honor, and the same thing 13 applies to the CBC evidence as well as the others. 14 of many pieces that FinCen is relying on, and it also was 15 relied on to the extent that it was consistent with some of 16 the other audit reports that were submitted, including, I 17 might add, the report submitted by FBME, which although FBME 18 presents them as showing how strong their controls were, it 19 also identified — 20 21 22 THE COURT: It's one These are the KPMG and Ernst & Young reports? MS. LEE: Ernst & Young, yes. But the reports 23 also identified significant weaknesses and deficiencies 24 that, again, were consistent with both what FinCen found and 25 also what the CBC found, and, you know, if this -- this. Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 83 of 110 1 again, should not come down to whether FinCen interpreted 2 these reports correctly or it should have focused on other 3 things. 4 come to the conclusion it did, and we submit that all of the 5 evidence in the record and the rule shows that it did. It's more overall did it have a reasonable basis to 6 7 THE COURT: Ms. Powell is going to address that. 8 9 On the disputed documents -- I guess MS. LEE: Yes, I just — just as sort of — well, will I get a chance to talk again, or is this it? 10 THE COURT: 11 MS. LEE: 12 THE COURT: 13 Friday afternoons. 14 MS. LEE: This is your last shot, so go ahead. Okay. I wanted -- That's why I schedule these things on Yes, Your Honor, and it's not my desire 15 to keep anyone any later than we need to be, but I just 16 wanted to reemphasize that, again, notwithstanding 17 plaintiffs' rhetoric about death sentences and imaginary 18 conspiracies of the CBC, the Fifth Special Measure, like all 19 of the special measures under Section 311, is a prophylactic 20 measure. 21 protect the U.S. financial system against the threat posed 22 by money laundering and terrorist financing. It's not punitive. It's really intended only to 23 And it's not imposed lightly or capriciously. 24 It's only imposed after great deliberation and a lot of 25 work. FinCen isn't doing this, you know, for fun or just Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 84 of 110 1 because it doesn't like FBME. And it is continually 2 assessing the developments that relate to FBME and keeping 3 an open mind, which is what it did on this final rule. 4 It's the reason it undertook the remand. It 5 considered a lot of new information, but it concluded that 6 because it showed -- because the information showed that 7 there was still a pattern of FBME continuing to evade 8 oversight even after it became aware of concerns, and the 9 fact that there wasn't a lot of — there was no concrete 10 documentation of reforms made that FinCen could rely on, 11 that it would have to impose the Fifth Special -- sorry, the 12 prohibition on U.S. correspondent accounts. 13 And I think, again, if Your Honor looks at the 14 whole of the rule and the underlying evidentiary memo, you 15 can see that it was a reasoned conclusion well supported by 16 the facts, and that's all that's required under the relevant 17 standard under the APA to uphold the decision. 18 Now, I think FBME, realizing this, is trying to, 19 instead, find lots of procedural defects that don't actually 20 exist, and I just wanted to, again, emphasize that all of 21 the unclassified nonprotected information was disclosed, and 22 there isn't any other category of information, aside from 23 what we've already known to be either classified or BSA- 24 protected, so there really isn't anything more that should 25 be required on the process side either. Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 85 of 110 And it kind of underscores the truth that we -- 2 plaintiffs have taken the position that there's almost 3 nothing -- there is almost no process that would be enough 4 for them, I think, if the outcome were not in their favor, 5 but that outcome should be respected because it was based on 6 a carefully reasoned and well-supported analysis of the 7 information, and it came after an unprecedented amount of 8 process and considerable input from FBME. 9 I believe that's all for me. 10 THE COURT: 11 MS. LEE: 12 THE COURT: 13 MS. POWELL: 14 THE COURT: Okay. Thank you. Thanks. Ms. Powell. Yes. I'll be brief, I promise. Yes, I don't have too much on this. I 15 guess the one question I do have is: 16 the delay in notifying the bank that it had received these 17 documents because of this taint review that it undertook by 18 sending the documents to the justice department, or is there 19 some other explanation for the delay? 20 MS. POWELL: Does FinCen explain In part, there are two tranches of 21 documents that is useful to break them out. 22 first tranche -- 23 THE COURT: 24 MS. POWELL: 25 I think the This is before the comment? -- was received by email after the first rule-making, before the second rule-making, while Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 86 of 110 1 FinCen and the government were in the midst of the PI 2 proceedings. 3 relevant to any ongoing proceedings, and set aside. 4 It was quickly reviewed, determined it was not It was picked back up again during the remand to 5 determine whether it had any bearing on the rule-making. 6 FinCen determined it could not relate -- determine the 7 credibility of those materials. 8 rely on it, but in light of the fact that an attorney is 9 mentioned in it, it was sent for the taint review. 10 They weren't inclined to When FinCen then received comment from the same 11 individuals, it was determined that needed to be provided to 12 FBME to determine whether it could be put on the public 13 record or considered. 14 received materials at that time. 15 THE COURT: It was done along with the previously Okay. Let me stop you. What was the 16 basis for the taint review conclusion that the documents 17 were not privileged? 18 MS. POWELL: So I have not reviewed any — I have 19 not reviewed the August 2015 materials at all so I'm not 20 familiar with their substance. 21 attorney who reviewed them who said there was no 22 communications from counsel on their face. 23 appear to be privileged. 24 25 I have talked to the filter They did not Upon receiving further communications from plaintiffs' counsel on this matter, we determined that it Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 87 of 110 1 was not possible to tell from the record currently before us 2 whether or not there was work product -- i.e., whether this 3 was material that was directed by an attorney in 4 anticipation of litigation -- and it was set aside. 5 least because the agency had no interest in it. 6 THE COURT: 7 MS. POWELL: Not Okay. I have -- well, first I wanted to 8 quickly respond to the Court's suggestion that they go ahead 9 and be added to the record so that the Court could determine 10 11 the issue. THE COURT: Well, I didn't decide that they should 12 be added to the administrative record, but that I would 13 consider extra-record materials. 14 the administrative record. 15 MS. POWELL: 16 THE COURT: 17 18 19 So they won't be a part of Understood, Your Honor. They will be part of the record of the summary judgment proceeding here. MS. POWELL: Understood. The government does not object to the Court taking notice of them in some way. 20 THE COURT: 21 MS. POWELL: Okay. We do object to the plaintiffs' 22 motion that they be supplemented to the administrative 23 record because that is a finding that the agency considered 24 them, which it explicitly decided not to and in part at the 25 plaintiffs' request. Case l:15-cv-01270-CRC Document 77 1 THE COURT: 2 MS. POWELL: 3 THE COURT: Filed 06/07/16 Page 88 of 110 I agree with you. Yes. Unless and until I find that the 4 agency, in fact, considered them and then they can be added 5 to the record, I think we're on the same page. 6 MS. POWELL: Understood. So with respect to the 7 two motions to supplement, I have three very quick points, I 8 think. 9 First, I think they can both be disposed of with 10 reference to the certification of the administrative record 11 by Richard May, which is entitled to a presumption of 12 regularity and, if necessary, the supplemental certification 13 that explains that they were received, but then not 14 considered, not transmitted to the decision-maker, not used 15 to track down leads and formed no part of the agency's 16 analysis or decision-making. 17 sufficient to deny both motions. 18 I think those alone are Second, I think it bears repeating that plaintiffs 19 demanded all along that this material be excluded and they 20 have now demanded that it be included as a basis for 21 attacking the record. 22 ethics rules are intended for such technical employment. 23 THE COURT: 24 MS. POWELL: 25 THE COURT: I don't think the privilege or the Counsel, I think we're past that. Okay, understood. We're not adding them to the record. Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 89 of 110 1 We're considering them outside of the record for the 2 purposes of this motion. 3 MS. POWELL: 4 THE COURT: 5 MS. POWELL: 6 issues — THE COURT: 10 MS. POWELL: 12 Well, that is what I have on those I also wanted to talk briefly about the taint 9 11 Okay. motions other than what is in our briefing. 7 8 Understood. Sure. -- that are raised in the summary judgment motion. The government's position is certainly that, 13 because they were not considered and are not part of the 14 record, there is no taint. 15 THE COURT: 16 MS. POWELL: 17 Okay. They were effectively walled off from any decision-making. 18 Second, even -- 19 THE COURT: And the issues as to which the 20 plaintiffs suggest that they may be connected you think are 21 supported by information in the classified record. 22 MS. POWELL: In the classified and nonpublic 23 record -- that is correct -- but in no way relates to the 24 disputed materials. 25 that can be discerned from the classified version of the And, in fact, the precise location of Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 90 of 110 90 evidentiary memorandum. 2 Even -- second, even if FinCen had considered the 3 materials in some way, plaintiffs don't actually cite a case 4 suggesting that the agency is forbidden to consider material 5 submitted in response to a request for comment, and we're 6 aware of none. 7 plaintiffs had the ability to comment on those materials 8 then, which they did. 9 The only question would be whether All of their taint cases are related only to 10 improper ex parte communications, informal rule-makings and 11 adjudications, or in cases that the D.C. Circuit has limited 12 to decisions which are about competing private claims to a 13 valuable right, like the Home Box Office case, none of which 14 are at issue here. 15 making with the investigators or with anyone else who had 16 improper access to FinCen. 17 18 FBME was not competing in this rule- There's simply no impropriety even properly alleged here in any factual form or evidentiary dispute. 19 Does the Court have any further questions? 20 THE COURT: 21 Okay. 22 MR. SHAFFER: No, that's all. Mr. Shaffer, one more bite at the apple. Thank you. 23 Honor. 24 materials at the outset, if I may. 25 Thank you very much. It will be quick. Your I have one point to make about the privileged THE COURT: Yes. Case l:15-cv-01270-CRC 1 Document 77 MR. SHAFFER: Filed 06/07/16 Page 91 of 110 91 Ms. Powell makes the point that the 2 D.C. Circuit has confined the taint cases that we're citing 3 to instances where there are competing claims to a valuable 4 privilege. 5 those cases. 6 so confined, Your Honor, but to the extent that there is 7 that specific limiting principle, I believe we fall squarely 8 within it. 9 pressing claims for monetary recovery against FBME, and how That's the formulation she used coming out of I don't think the principle of those cases is The former investigators in question were 10 did they get those claims satisfied? 11 reflects, we've demonstrated, with the affidavit from the 12 special administrator in Cyprus, 100,000 euros were paid out 13 of FBME's funds while the special administrator had control 14 to the former investigators. 15 administrator, that was in the settlement of claims in a 16 lawsuit brought by those former investigators. 17 claims remain pending. Your Honor. 18 only thing that was obtained was the information that was 19 submitted to FinCen in exchange for those funds being paid 20 over. 21 As the record According to the special But those As best we can tell, the And I won't return again and belabor the point, 22 but we think CBC is very much competing against FBME in this 23 proceeding, and not for hundreds of thousands of dollars or 24 millions, but for hundreds of millions of dollars multiple 25 different ways, through the assets of the claims and by Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 92 of 110 1 resisting claims in arbitration. 2 squarely within the fact pattern that concerned the D.C. 3 Circuit in those cases. 4 THE COURT: So I think this falls Let's be clear, Counsel. CBC would be 5 a receiver, but they wouldn't profit from ownership of the 6 bank. 7 92 They're the regulator, correct? MR. SHAFFER: Your Honor, I don't want to go too 8 far afield here, but I do believe the administrative record 9 reflects -- and, again, you have the Bank of Tanzania saying 10 to Cyprus, "You are trying to take funds from FBME Bank that 11 should be used, if anything, to pay off depositors, and 12 you're claiming them for Cyprus, including to insulate 13 Cyprus against liability that it may have to the 14 shareholders through an arbitration." 15 tell Your Honor, because you're asking the question, if left 16 to its own devices, Cyprus will pay depositors off from 17 FBME's assets in pennies on the dollar. 18 deal they're proposing. 19 will stay in Cyprus, Your Honor. 20 accommodation struck with Tanzania, but that's where CBC is 21 going in this case. 22 And I will simply That's the current And the remainder of those funds There may have to be some And, again, I will rest on our arguments in our 23 briefs and on the administrative record for that, but I want 24 to turn to the classic APA points, and then turn to due 25 process, if I could, Your Honor, briefly. Case l:15-cv-01270-CRC 1 Document 77 Filed 06/07/16 Page 93 of 110 93 Rhetoric aside, I would submit to Your Honor that 2 FinCen, through 311 cases, is wielding extraordinary 3 administrative discretion. 4 in very sensitive areas, and we note there have been twenty- 5 three 311 cases. 6 challenge that has made its way to any sort of adjudication. 7 They emphasize that up and down Your Honor, there's been one judicial As you know. Judge Boasberg had his case that was 8 before him mooted involving the Bank of the Andora, so 9 there's one case. Your Honor, and when you issued the 10 preliminary injunction opinion, you referred to starting to 11 fill a void that was there. 12 the principles behind the Administrative Procedures Act, 13 U.S. agencies -- we can all stipulate -- they work hard. 14 They're out to do the right thing, Your Honor. 15 doing difficult jobs. 16 And I would submit, given all They are No question about that. But the Administrative Procedures Act, the 17 procedural requirements of it, the substantive requirements, 18 they sit atop that to ensure that agencies are going to have 19 a discipline. 20 what comes with judicial review. 21 transparency, the accountability, all those things. 22 FinCen, I respectfully submit, is an agency that in 23 practice, in operation, has been proceeding without that. 24 25 They're going to have an understanding of They're going to have the And I do think that our case reflects that. And Last time around there was unclassified, unprotected information Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 94 of 110 1 that Your Honor had to order turned over. 2 that the defects have been cured, and I don't think it 3 should be a shock if they haven't been cured. 4 94 We don't think And on the substantive side of it, Your Honor, on 5 the substantive side of it, the government has accused us of 6 looking at this backwards. 7 if it's not basically a rescission of the 311 sanction, then 8 we're always going to be pressing our arguments under the 9 Administrative Procedures Act. We want a certain outcome, and But, Your Honor, my 10 arguments are irrespective of outcome, and that's how this 11 court looks at its judicial review under the APA. 12 I submit it's the government that wants to say to 13 you, "Never mind the specific substantive criticisms that 14 are reflected in the record and how the agency reasoned its 15 way through them. 16 If you can just look at the soup and say maybe the agency 17 could have come to the same decision, that's good enough to 18 uphold the rule." 19 stand on the precedence that I was citing earlier, but I'd 20 submit that under Ms. Lee's framework, I'd have to establish 21 that there should be no remand to the agency because it 22 can't possibly, under any set of reasoning, reach the 23 decision it did on this record. 24 tougher case for me to make. Your Honor, than the case I'm 25 here to make, which is that Your Honor should vacate the Don't worry about those individual ones. And it's simply not, Your Honor, and I That's not -- that's a Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 95 of 110 95 1 rule with the explanation that it comes to you with and send 2 this proceeding back to the agency. 3 There was a discussion of waiver on the 4 consultation point. Your Honor. 5 waived -- 6 THE COURT: 7 MR. SHAFFER: 8 The notion that we'd You don't have to. I don't have to address that, okay. Thank you. 9 The other point was the zone of interest. Ms. Lee 10 returned to it briefly, and I just wanted to say this. Your 11 Honor. 12 that we're outside the zone of interest given our stakes in 13 this, and I would simply add to it this. Your Honor: 14 can't invoke the consultation requirement as a target of the 15 311 proceeding, no one ever will, Your Honor. 16 within the zone of interest, there's no challenger who -- 17 the Secretary of State -- with all due respect, the 18 Secretary of State is not going to come here bringing a 19 challenge. 20 Secretary wanted to. 21 with the chairman of the Federal Reserve. 22 who get to invoke that requirement. 23 You made the point it's really not logical to say If we If we're not They probably couldn't pursue it if the THE COURT: Same with the Attorney General. Same We're the ones I will give you an opportunity to 24 respond to any declaration that they submit, but just on the 25 fly, can they cure the deficiency simply by providing a Case l:15-cv-01270-CRC 1 2 Document 77 Filed 06/07/16 Page 96 of 110 96 declaration affirming that they consulted and with whom? MR. SHAFFER: No, Your Honor. It's a show- 3 don 't-tell requirement, and the show-don't-tell of the APA 4 has to be in the administrative record. 5 Again, they have blessings under the APA: the 6 deference that comes with that, the fact that the Court's 7 not second-guessing their judgment. 8 that comes with that is they have to explain themselves and 9 show this Court, through the administrative record, that 10 11 But the responsibility they've complied with their statutory obligations. To that I'd add the agency has a very strict 12 construction of the statute, Your Honor. 13 from Ms. Lee. 14 says that they can do -- 15 You've heard it If they've done what the statute -- what 311 THE COURT: I'm not saying that they could consult 16 after the fact, but simply indicate to the Court that they 17 did consult at the proper times. 18 MR. SHAFFER: 19 THE COURT: 20 MR. SHAFFER: And my — That wouldn't fix the problem? No, Your Honor, because the APA 21 cases really are confined to the administrative record. 22 That's why the administrative record is such an important 23 touchstone. 24 skirmishing over what's in the administrative record. 25 they can't satisfy their obligation there after the fact any That's why we've had our differences in But Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 97 of 110 1 more than they can offer their substantive explanation that 2 would satisfy Your Honor. 97 3 And, again, I think the cases that I've cited to 4 you are consistent with that. Your Honor, and we would add 5 to that the cases that say that agencies can't submit post 6 hoc declarations in order to cure things that are missing in 7 the administrative record. 8 9 And, Your Honor, I just want to point to one aspect of the Second Final Rule in the Federal Register that 10 you and Ms. Lee were discussing. 11 ambiguous, the portion of it that she was reading to Your 12 Honor — 13 Your Honor, I don't see any ambiguity in what she was 14 pointing you to. 15 required consultations and the consideration of all relevant 16 factors discussed in the NOF" -- notice of finding -- 17 "FinCen proposed the imposition of a prohibition under the 18 Fifth Special Measure in an NPRM published on July 22, 19 2014." 20 preceded that July 22, 2014, issuance. 21 Ms. Lee said it was 81 Federal Register 18488 — Let me just read it. and I have to say. "Following the It's referring to one set of consultations, and they So I think it's as clear as can be in there, but, 22 again, I don't want to prejudice whatever they may want to 23 submit after this. 24 us rather than them. 25 I just think that that excerpt supports The other thing on the consultation point that Case l:15-cv-01270-CRC Document 77 Filed 06/07/16 Page 98 of 110 1 Ms. Lee said is they can't provide details because they're 2 deliberative. 3 deliberative materials that show consultations, I'm not 4 saying that would suffice if they weren't shared with us 5 during notice and comment, but there's nothing that 6 prevented them from producing them to Your Honor, even if 7 they could say that they were withholding them from us. 8 9 98 Obviously, Your Honor, if there were Ms. Lee said that there's no issue for the Court as to the classified information in this record. I just 10 wanted to emphasize, Your Honor, the last time around, as I 11 understood Your Honor's disposition of the classified 12 evidence that was altogether withheld from us, you assured 13 yourself that the notice had summarized the specific 14 inclusion in the form of the allegations in the notice. 15 FinCen had disclosed, to the best of its ability, the 16 conclusions it derived from the classified evidence, and I 17 would contrast what you'll see in the remand notice in that 18 regard as to the intervening allegations that became so 19 critical to the Second Final Rule. 20 Ms. Lee also said that none of these were really 21 surprises to us or should have been surprises, and I just 22 have to tell you in earnest. Your Honor, they were huge 23 surprises to us. 24 think with the benefit of hindsight, as I look back, I don't 25 know how we would have guessed where they were going. They were huge surprises, and that we — I C a s e l:15-cv-01270-CRC D ocu m en t 77 Filed 06/07/16 P a g e 99 of 110 99 1 And I want to emphasize just a couple. Your Honor. 2 THE COURT: 3 We've talked about the late 2014 . 4 5 Okay. MR. SHAFFER: I'm not going back there. Your Honor. 6 THE COURT: 7 MR. SHAFFER: Okay. So the allegation — well, the 8 conclusion by FinCen that all of our documentation as to the 9 AML improvements, I understood from all — from the rule 10 last time around and from our litigation here, from what 11 FinCen was saying in the remand notice, that they might 12 question whether those AML improvements sufficed, whether 13 they were too little too late. 14 different in the final rule, which is, they weren't even 15 convinced that we made any AML improvements. 16 determine from mere documentation that we had AML 17 improvements in place, and that, Your Honor, does come as a 18 shock because we submitted hundreds of pages of 19 documentation on that point. 20 But FinCen said something They couldn't We'd asked, "Is there anything else we can do? 21 Will you meet with us?" 22 conclusion in the Second Final Rule that everything that we 23 did and was available to us through the process we had. 24 That didn't suffice. 25 Nothing. All we get is the Same thing as to their point that they haven't C a s e l:15-cv-01270-CRC D ocu m en t 77 Filed 06/07/16 P a g e 100 of 110 1 been assured that we made these improvements in Tanzania. 2 Again, we think that was clear enough from the record that 3 we put in. 4 improvements, and we were complying with Tanzanian law in 5 making them. 6 Honor, other than had a question from FinCen about could we 7 establish or confirm or clarify what we were doing in 8 Tanzania. 9 It said that these were across-the-board AML But I don't know what we could have done. Your We would have done that. THE COURT: The bank is headquartered in Tanzania. 10 How could it be a surprise that FinCen was considering your 11 AML program in your headquarter's organization? 12 100 MR. SHAFFER: Well, Your Honor, all the 13 allegations were about things that were happening in Cyprus. 14 All of them were about that, and we pointed to legitimate 15 activities in Tanzania. 16 those in its rule. 17 FinCen never even took account of We had specific allegations, all of which were 18 about Cyprus. There was one allegation that we talked 19 about, Your Honor, which was unredacted from the First Final 20 Rule memorandum that referred to the alleged Hezbollah 21 connection in Tanzania. 22 it wasn't stated with the substance that came out in the 23 Second Final Rule that this was a new and different 24 Hezbollah connection that had been first alleged in the 25 First Final Rule, and nor did we understand that it was a We didn't understand that because C a s e l:15-cv-01270-CRC D ocu m en t 77 Filed 06/07/16 P a g e 101 of 110 1 Tanzanian entity that was managed by this alleged Hezbollah 2 affiliate. 101 3 So you just won't find in the Second Final Rule -- 4 I'm sorry, in the notices preceding the Second Final Rule or 5 anywhere else the specific concrete allegations that then 6 become pivotal to the Second Final Rule. 7 And I want to turn now, if I could. Your Honor, to 8 the due process threshold questions, and I think that we 9 have to be -- 10 THE COURT: 11 MR. SHAFFER: 12 show that due process attaches. 13 THE COURT: 14 MR. SHAFFER: 15 THE COURT: It's your burden, correct? It is our burden. Your Honor, to Okay. And I would offer — And sitting here now, if I can't 16 figure out whether you can withdraw these funds or not, how 17 is it that you've satisfied your burden? 18 MR. SHAFFER: Well, Your Honor, I'm hoping that 19 your premise is simply hypothetical, but I think that we 20 have, through our declarations, shown the concrete reality 21 that we can't move the money. 22 money. 23 property. Your Honor, the value of which is -- as sales are 24 made in U.S. dollars, those funds are to be sent to FBME 25 Bank, and nothing's been able to happen on that. The lawyer can't move the The bank can't move the money. We have liens on So they've C a s e l:15-cv-01270-CRC 1 Filed 06/07/16 P a g e 102 o f 110 THE COURT: A lien is a piece of paper, right? Couldn't you -- 4 MR. SHAFFER: 5 THE COURT: 6 MR. SHAFFER: Yes. Can't you transfer the lien? I don't know how we would do it, 7 Your Honor, in a way that's monetizable, which is, of 8 course, ultimately what the bank wants to get from its 9 investment, is money back to the bank. And when, even from 10 the escrow account, funds have been attempted to be 11 transmitted, the declaration says that those have not been 12 able to go. 13 And, Your Honor, this is what happens to banks 14 that are subject to 311 designations. 15 happened to FBME. 16 last time around and this time around, vendors won't do 17 business with FBME because they read the 311 rule as 18 basically requiring prophylaxis. 19 bank that's not meant to be touched by any U.S. entity or 20 any U.S. account or anything going through a correspondent 21 account. 22 102 been going -- 2 3 D ocu m en t 77 Certainly it's what's You'll also find in the declarations, Nobody wants to touch a That's how the money travels. As to withdrawals, Your Honor, could it just come 23 out in cash? You can't take out more than $10,000 in cash 24 without running afoul of FinCen. 25 And we acknowledge, under Fifth Amendment jurisprudence, That would be illegal. C a s e l:15-cv-01270-CRC D ocu m en t 77 Filed 06/07/16 P a g e 103 of 110 103 1 when it comes to takings, for instance — 2 such case -- there are regulatory takings. Your Honor. 3 There are things that the government answers for short of 4 "I'm taking your house" or "I'm seizing your property." 5 There are things that the government can do to harm or 6 jeopardize established interests, and I don't understand. 7 Your Honor, how this case could fall outside of them. and we cite one 8 I would make to Your Honor the more ambitious 9 argument, the argument based on the GSS Group case that 10 says, "Look, if you're a foreign entity that's being made to 11 answer to a U.S. agency, you should have due process rights 12 there, just as if you were answering to a U.S. court, and 13 you can make your arguments about personal jurisdiction." 14 15 I think that's right. I think that we ought to be affording others around the world -- 16 THE COURT: 17 MR. SHAFFER: 18 So I retreat to the formal argument that says do I That's a more aggressive argument. It's a more aggressive argument. 19 have the property here, and I point to more than $290,000 20 worth that's been cut off, effectively, as a result of the 21 prelude to implementation of the Second Final Rule, and I 22 quote the literal terms of the rule that explain exactly how 23 we're going to be cut off in terms of legal effect. 24 I hope. Your Honor, that that's enough to establish the due 25 process interest, because I think otherwise it would be very And so C a s e l:15-cv-01270-CRC D ocu m en t 77 Filed 06/07/16 P a g e 104 of 110 104 1 difficult to envision how any bank under the Fifth Special 2 Measure rubric could even invoke the claim to due process. 3 And there was a reference to the NCRI case and the 4 fact that there was also the office in the press club, Your 5 Honor. 6 excerpt that I was speaking to was about the property 7 interest, and the property was grounded in the small bank 8 account that existed in that case, and I read, I believe, 9 the relevant reason there. That's what gave them a liberty interest here. The 10 There was also the point that Ms. Lee didn't agree 11 with my characterization that the other terrorism cases that 12 have been cited didn't involve critical reliance on 13 classified evidence. 14 Your Honor, my characterization comes straight out of the 15 D.C. Circuit's decision in People's -- 16 THE COURT: She quarrels with my characterization. And what does "critical" mean? 17 means essential? 18 information the decision would not have been made? 19 It It means that but for the classified MR. SHAFFER: I believe that the D.C. Circuit was 20 saying that they wouldn't — 21 rule even without resort to the classified evidence or the 22 determination, and there. Your Honor, I would submit it 23 really is, in a terrorism context, an up or down 24 designation. 25 that they could have upheld the Are you a terrorist entity, or are you not? Here there is a more nuanced statutory in C a s e l:15-cv-01270-CRC D ocu m en t 77 Filed 06/07/16 P a g e 105 of 110 105 1 corollary with 311. We are not squarely under the terrorism 2 rubric. 3 from those exigencies and the timing that surrounds those 4 cases, but I would say, Your Honor, as FinCen analyzes its 5 statutory factors, when it relies upon classified evidence 6 for why it's imposing the Fifth Special Measure and why 7 they've determined that there has to be a prohibition rather 8 than a condition, that specific determination is explicitly 9 and exclusively grounded in the classified evidence. We've submitted to Your Honor we're well removed And so 10 it's clear -- I think it should be clear that that aspect of 11 the reasoning does rest critically on the classified 12 evidence, and of course that's of critical importance to the 13 rule and to the bank. 14 Also on due process, Your Honor, before I move on 15 from there -- this is the last point -- Ms. Lee made the 16 point that we can't say that there was bias here at FinCen 17 and within the meaning of the Supreme Court's decision in 18 the Withrow case, and. Your Honor, I don't have to show 19 that -- I think we have concerns about bias. 20 bias interjected by the CBC. But the problem, the core due 21 process problem that Withrow was pointing to is when there's 22 an absence of opportunity for meaningful adversarial 23 contestation in the first round of decision-making, and then 24 you go up, and when you have your adversarial hearing as we 25 do here, you're not getting a fresh look. Certainly the Someone is coming l:15-cv-01270-CRC D ocu m en t 77 1 at it with deference. 2 determined below. Filed 06/07/16 P a g e 106 o f 110 106 It's kind of poisoned by what was 3 We do have that problem. Your Honor, because as 4 to the black box, and certainly as to critical aspects of 5 the black box, there was no adversarial contestation because 6 we not only didn't know what was in there, we didn't know 7 that -- any particular use that FinCen was making of it or 8 what conclusion it was deriving from it. 9 that problem in a big way. 10 So I think we have And then the other cases that we're citing 11 explain, you know, what you can do about that problem in 12 terms of additional procedures, and you don't have to 13 decide -- I emphasize -- whether we get a live hearing and a 14 neutral decision-maker or any of that. 15 you to decide that there's a due process violation here, and 16 leave it to the agency in how to do better next time around. 17 It would suffice for Last point is on the Ernst & Young and KPMG 18 reports that Ms. Lee says align with the CBC. And, Your 19 Honor, I don't think that those reports align with the CBC 20 by any stretch of the imagination, but they certainly don't 21 in one critical respect. 22 on in saying why it needs to impose a prohibition upon FBME 23 Bank, no monitor, no conditions, no separate framework to 24 make sure this bank is doing right and not posing any 25 concerns, there's really one core explanation for that, and The bottom line that FinCen lands C a s e l:15-cv-01270-CRC D ocu m en t 77 Filed 06/07/16 1 it's that FBME can't be trusted. 2 information. P a g e 107 o f 110 107 It's going to cover up It's not going to operate in good faith. And the basis for that, Your Honor, I believe 3 4 comes from the CBC. 5 and I believe it comes from Cyprus, Your Honor, and you 6 cannot read the Ernst & Young and KPMG reports -- and 7 they're in the record, the exchange about them -- and 8 believe that this was a bank that was not cooperating with 9 them, not transparent with them, not out to implement their It certainly comes from the black box, 10 recommendations in good faith. 11 different in this critical respect in their view of the 12 bank, and that's why FinCen relies upon what's coming out of 13 Cyprus and the regulators in Cyprus, and as to that, the one 14 independent -- 15 THE COURT: They are fundamentally But, you know, I've read accountants' 16 reports, and they're hedged, and they don't — 17 there's a disclaimer on the front of every one that says, 18 you know, we're only relying on the information that the 19 clients give us. 20 whether the principles were cooperative or not, can you? 21 22 And you can't make any determination as to MR. SHAFFER: Well, Your Honor, you have more experience with accounting reports than I do. 23 THE COURT: 24 MR. SHAFFER: 25 you know, say this: Not necessarily. I believe it's true. But I would One thing I know about an accounting report is if C a s e l:15-cv-01270-CRC D ocu m en t 77 Filed 06/07/16 P a g e 108 of 110 1 you bring in an outside, disinterested, professional 2 auditor, like, let's say, PricewaterhouseCoopers, okay, and 3 let's say they're commissioned by the Central Bank of Cyprus 4 to perform an audit, you would expect the findings coming 5 out of that are going to be somehow -- you're going to loop 6 that accounting firm back in so you make sure you have the 7 benefit of their insights, their impressions, their 8 contemporaneous observations. 9 THE COURT: I think you can rely on the findings, 10 but I don't think you can make any conclusions about the 11 reliability of the reporters of the information given to the 12 accountants one way or the other, can you? 13 MR. SHAFFER: But my submission is it's telling 14 that CBC felt it couldn't go back through 15 PricewaterhouseCoopers before it arrived at its supposed 16 2015 findings as to what it had found in the summer of 2014 17 after taking all that time and taking it by itself. 18 Thank you, Your Honor. 19 patient on a Friday afternoon. 20 THE COURT: 21 Okay. 22 23 24 25 I know you've been very Thank you very much. So we will take this under advisement. you can provide a notice of a declaration -- Ms. Lee. MS. LEE: Can I just -- Your Honor, can I just make one very small, short point? THE COURT: Sure. If C a s e l:15-cv-01270-CRC 1 D ocu m en t 77 MS. LEE: Filed 06/07/16 P a g e 109 o f 110 It's just about on the due process 2 point. 3 wouldn't be able to withdraw more than $10,000 in cash from 4 the account at a time. 5 They would have to report such transactions, but I don't 6 think there's anything preventing them from actually 7 withdrawing that amount. I think plaintiffs' counsel had indicated that they My understanding is that's not true. 8 THE COURT: 9 If we could get a notice of a declaration within Understood. 10 seven days, and I'll give the plaintiffs seven days to 11 respond to it. 12 109 MR. SHAFFER: 13 Honor. 14 thought the procedure Your Honor was suggesting would 15 suffice in order for the privileged materials to be 16 considered by the Court. 17 we can meet and confer with the government to make sure that 18 we have the proper materials that are before the Court. 19 Housekeeping. One more thing very quickly. Your THE COURT: I'd indicated to Your Honor that I All I would ask Your Honor is if Very well. So we will hold off on 20 entering an order on your motion until we've heard back from 21 you based on your meet-and-confer, okay? 22 MR. SHAFFER: 23 THE COURT: Thank you. Your Honor. Okay. Thank you very much. Thank you 24 for your patience, ladies and gentlemen. 25 are not as comfortable as they could be, but have a good I know those seats C a s e l:15-cv-01270-CRC 1 D ocu m en t 77 Filed 06/07/16 P a g e 110 of 110 weekend. 2 (Whereupon the hearing was 3 concluded at 3:49 p.m.) 4 5 C E R T IF IC A T E OF O F F IC IA L COURT REPORTER 6 7 I, LISA A. MOREIRA, RDR, CRR, do hereby 8 certify that the above and foregoing constitutes a true and 9 accurate transcript of my stenographic notes and is a full, 10 true and complete transcript of the proceedings to the best 11 of my ability. 12 Dated this 6th day of June, 2016. 13 14 15 16 17 18 19 20 21 22 23 24 25 /s/Lisa A. Moreira, RDR, CRR Official Court Reporter United States Courthouse Room 6718 333 Constitution Avenue, NW Washington, DC 20001 no