How a Great Power Falls Apart
Decline Is Invisible From the Inside
On October 1, over the objection of the U.S. Justice Department, the U.S. Supreme Court granted a hearing to an unusual petitioner: Bank Markazi, the Central Bank of Iran. The dispute centers around a statute, passed by Congress in 2012, that effectively ordered a federal district court to distribute Bank Markazi’s assets as restitution to the survivors and families of those killed by Iranian-sponsored terrorism. If held constitutional, the statute will enable plaintiffs to get hold of $2 billion worth of bonds, currently frozen in New York City, to satisfy some of the $43.5 billion that Iran owes to American victims. Among the plaintiffs are those affected by two catastrophic bombings in Beirut in 1983, which were conducted by the Iran-funded militant group Hezbollah. The attacks killed 17 employees at the U.S. embassy and 241 others at the U.S. Marines barracks.
The Supreme Court’s eventual decision, and the findings in many other similar cases, may provide overdue justice for terrorism victims. But these cases could become a major barrier to U.S. foreign policy, especially in light of the nuclear deal with Iran, which went into effect on October 18. Iran could potentially use ongoing disputes about these cases to shirk its obligations under the nuclear deal. Even though the deal promises to unblock Iranian funds, U.S. courts could keep Iranian assets, such as those in the Bank Markazi case, frozen. Some courts may eventually use those frozen assets to satisfy unpaid terrorism judgments—a result that would hardly constitute sanctions relief.
Similarly, these restitution cases could harm U.S.-Iranian business relations. Even after the nuclear deal is fully implemented, only narrow categories of U.S. business with Iran will be permitted, but it seems unlikely that state-owned Iranian enterprises will strike even small deals with U.S. companies if much of their revenues will go toward satisfying terrorism claims. And this isn’t just an Iranian problem. From a business perspective, these terrorism judgments present a far larger hurdle for U.S.-Cuban relations, which are in the process of defrosting along much broader economic terms. Entire industries within Cuba, such as oil, mining, shipping, and tobacco, are state-owned and will likely want to trade with the United States. But with Cuba owing judgments totaling at least $4 billion—more than twice the Cuban government’s annual budget—to victims of Cuban torture, imprisonment, and execution, such trade may not be possible.
Washington has struggled for decades to strike the right balance between protecting its foreign policy interests and respecting the rights to recovery for the victims’ families—with mixed results.
Sometimes, victim compensation rules the day. Last year, U.S. District Court Judge Katherine Forrest decided that under the so-called terrorism exception to the Foreign Sovereign Immunities Act (which determines how foreign governments can be sued in U.S. courts), three corporate entities that owned U.S. property were effectively fronts for the Iranian government and that their assets could thus be forfeited to pay terrorism victims. This order enabled the U.S. Marshals Service to seize and auction off 650 Fifth Avenue in Manhattan, a 36-story office building next to Rockefeller Center that was built by the shah of Iran in the late 1970s. A large portion of the proceeds will go to families of the Beirut bombings.
Similarly, Gustavo Villoldo, a former CIA officer who won a large judgment over his father’s imprisonment by (then) Cuban President Fidel Castro, has slowly made headway in seizing the Cuban government’s New York bank accounts—HSBC turned over the contents of a blocked Cuban account just last week.
Other times, recovery has been more difficult. Congress has twice passed provisions to help terrorism victims satisfy claims—but both provisions are subject to a waiver by the president, and no president has ever allowed these legal mechanisms to become active. In 2002 and 2008, Congress passed legislation overruling judicial decisions that had prevented plaintiffs from recovering any money.
This incoherent mix of statutes has led to deep frustration, not only for claimants but also for judges and policymakers. In 2009, U.S. District Court Judge Royce Lamberth authored a seething 108-page opinion in a case against Iran, in which he had to deny some claims in part because of poorly drafted statutes. He wrote that in the “failed policy” of civil litigation against terrorist states, judges had been “cast as the perennial bearers of bad news and as the designated apologists for the meaningless charade that our political branches have created.”
Policymakers, too, have grown frustrated with laws that restrict families from receiving what’s owed to them. In September, Republican Congressman Patrick Meehan of Pennsylvania introduced a bill, with 118 Republican co-sponsors, that would forbid the president from lifting any sanctions until all of Iran’s $43.5 billion in terrorism debts are paid. The bill passed the House of Representatives on October 1, with ten Democrats voting in favor, but the White House has promised to veto it. Historically, however, writing laws for the benefit of terrorism victims has not been a partisan affair. The Iran Threat Reduction and Syria Human Rights Act of 2012—the statute currently being challenged by Bank Markazi at the Supreme Court—was passed with broad bipartisan support.
The reason it has been so difficult to have a consistent, effective policy toward these restitution cases is that these lawsuits—by touching frozen foreign assets and by impeding efforts at economic reopening—affect the president’s ability to direct foreign policy. Frozen funds can be a bargaining chip for the president to resolve a foreign policy crisis. (The roughly $100 billion of frozen Iranian funds played a key role in bringing the nuclear deal to fruition.) The president loses that bargaining chip if the courts can siphon off blocked assets without presidential consent. In the initial controversy surrounding the “terrorism exception” to the Foreign Sovereign Immunities Act, Congress and the president had to strike what courts have called “a delicate legislative compromise.” But as nearly two decades of litigation have revealed, Congress’ delicate compromise has proven largely ineffective for plaintiffs and unsustainable for U.S. foreign policy.
One solution to this problem would be to delegate responsibility over these cases to the executive branch, which is better positioned than the judiciary to weigh individual rights against the nation’s foreign policy goals. The president can negotiate directly for restitution money with foreign nations, and Congress can hold him or her accountable by refusing to accept agreements that secure too little for plaintiffs. The president can also direct these cases to the Foreign Claims Settlement Commission, an independent, quasi-judicial agency within the U.S. Justice Department that was set up in 1954 to handle postwar claims against foreign states. The commission regularly resolves claims like the ones against Cuba and Iran. For instance, the commission adjudicated hundreds of claims dealing with Libyan terrorist acts and has distributed nearly $400 million from the late Libyan President Colonel Muammar al-Qaddafi to those plaintiffs.
The key difference between the commission and the courts is that the commission can only distribute money that the executive branch secures through negotiation and that foreign sovereigns give up willingly. The upside of resolving claims through negotiation (and then the commission) is that one person, the president, is politically accountable for both managing foreign policy and obtaining justice for terrorism victims. That should make for a more coherent and consistent policy than the current system—which involves judicial decisions independent of and sometimes contrary to the goals of international negotiations. Economic cases against Cuba, mostly from U.S. companies that had assets expropriated by the Castro regime, have already received final (albeit unpaid) judgments from the commission, but terrorism claims, which only became possible 30 years after the embargo went into effect, have been handled exclusively by the courts. Similarly, the commission has handled small claims against Iran, but never any of the claims now brought under the “terrorism exception.”
At this point, the major difficulty of handing full responsibility to the executive branch would probably be getting existing claimants—who already have judgments worth nearly $50 billion—to agree to a new process after fighting for so long in the courts.
If Bank Markazi loses its case before the Supreme Court, the $2 billion at issue will be distributed to terrorism victims regardless of whether doing so interferes with the national interest, such as holding Iran to its part in the nuclear deal. That large sum is less than 5 percent of what Iran risks losing through these cases if economic relations with the U.S. reopen more broadly. Iran, as its relationship with the United States changes, could run across the same issues that Cuba is struggling with right now: a new, tentative desire to trade, but an inability to trust the outcome of negotiations because the courts, rather than the president, will decide how much is paid to terrorism victims. Perhaps the problems raised by these judgments will finally force the president and Congress to engage in the innovative policymaking that is needed to end this “delicate legislative compromise” that has proven too delicate to be effective.