• Accounts and Accountability: Arab Bank Found Liable for Transactions Under the Anti-Terrorism Act
  • October 14, 2014 | Author: Fatema K. Merchant
  • Law Firm: Sheppard, Mullin, Richter & Hampton LLP - Washington Office
  • On September 22, 2014, a Brooklyn jury found Arab Bank, Jordan’s largest lender, guilty of violating the U.S. Anti-Terrorism Act for providing financial services to individuals and entities linked to Hamas. Hamas is currently designated as a terrorist organization by the U.S. Treasury Department, Office of Foreign Assets Control (OFAC), and is listed on the Specially Designated Nationals List that OFAC maintains. Plaintiffs, victims and family members of victims of terrorist attacks, alleged that Arab Bank customers included members of Hamas and also a charitable organization, Saudi Committee, that sent payments to family members of Hamas suicide bombers. But not all of the individuals were on the SDN list, and neither was Saudi Committee.

    This is the first jury verdict to impute civil liability to a bank for its alleged role in financially transacting with alleged members or affiliates of a designated terrorist organization. According to Arab Bank, the Bank complied with international banking standards and screened its customers against U.S. government blacklists. But Plaintiffs argued that some of the individuals at issue were well-known members of Hamas and that Arab Bank should have known that Saudi Committee was funneling payments to Hamas family members. Arab Bank plans to appeal, but the verdict certainly raises serious questions about the extent of a financial institution’s responsibilities to know its customers and inquire into their activities.

    Legal Background

    The Anti-Terrorism Act, 18 U.S.C. § 2331 et seq. (“ATA”), provides U.S. citizen plaintiffs with a private right of action when “his or her person, property, or business” has been injured by acts of terrorism and (i) the defendant has “provided material support,” including the provision of financial services, to (ii) an organization or individual designated by the U.S. government as a terrorist or terrorist organization. Courts have interpreted the “material support” clause to require only that the defendant know material support is being provided for a terrorist organization, not that the defendant know such funds would be used to aid terrorist activities.

    The State Department designates entities as Foreign Terrorist Organizations (FTOs) and the Treasury Department designates Specially Designated Global Terrorists (SDGTs) and Specially Designated Terrorists (SDTs). OFAC maintains the SDN list, which includes designated FTOs, SDGTs, and SDTs and other entities and individuals that the U.S. government has designated as “terrorists” or “terrorist organizations.”

    International banks have often been sued under the ATA for processing foreign wire transfers for the benefit of entities or individuals designated as FTOs, SDGTs or SDTs. But the Arab Bank case appears to be the first time a bank has been held liable for engaging in financial transactions with individuals and an entity (Saudi Committee) that were not so designated.

    The Trial and Verdict

    The Plaintiffs consisted of 297 victims and family members of victims of suicide attacks that occurred in the early 2000s, during the Second Palestinian Intifada. The transactions at issue involved: (i) the provision of financial services to alleged members of Hamas; and (ii) routing payments for a charitable organization, Saudi Committee, that were allegedly in support of family members of suicide bombers.

    Arab Bank said it complied with banking due diligence standards: the Bank screened its customers against lists of designated terrorists. The evidence presented at trial did reveal a screening error. One of the individuals was designated on the SDN list at the time of the Second Intifada, but due to a spelling inconsistency, Arab Bank did not identify him as an SDN. (As an aside, because of the transliteration variances from Arabic to English, these type of discrepancies are common.) Another Arab Bank customer was placed on the SDN list in 2003, after the period at issue. Plaintiffs argued that certain Arab Bank customers were well-known Hamas members, including the founder of Hamas. However, some of the key transactions at issue were related to the Saudi Committee, a seemingly legitimate charitable organization that is not on any U.S. government blacklist. Of the approximately 180,000 transactions run through Arab Bank during this period for Saudi Committee, only a handful were questioned.

    Arab Bank plans to appeal. Among other assertions, the Bank contends that its defense was tainted when the District Court sanctioned it for refusing to provide voluminous customer records that Arab Bank did not produce due to other countries’ privacy laws. The Second Circuit abstained from reviewing the issue. The State Department urged the Supreme Court to intervene and lift the sanctions, siding with Arab Bank in the matter, in part - presumably - because Jordan is an American ally. But the Justice Department avoided taking sides, and argued that the matter did not warrant the Supreme Court’s involvement even though the lower court may have erred. The Supreme Court ultimately declined to hear the case.

    After a six-week trial in the U.S. District Court for the Eastern District of New York, the jury reached its decision after two days of deliberation. Damages will be decided in a separate trial.

    Compliance Complications

    The Arab Bank verdict is likely to put global banks on edge. A slate of recent cases and investigations against foreign financial institutions have created a chill in the foreign financial industry. Since 2009, a number of large European banks have been stung with huge fines for violations of U.S. sanctions regulations. France’s BNP Paribas pled guilty to criminal charges and paid a record-breaking $8.9 billion penalty for processing billions in payments related to Sudan, Iran, and other sanctioned countries. We wrote about the Paribas case here.

    The Arab Bank case has enormous implications for financial institutions that operate in high-risk areas and highlights how a bank can be held accountable for the alleged wrongdoing of its customers. The case raises the question of what a financial institution’s compliance responsibilities are when it comes to knowing the recipients of payments.

    This case will likely also give rise to a flurry of similar litigation under the ATA, and open banks to greater scrutiny and risk regarding individuals involved in wire transfers and payments, even when those parties are not designated by the U.S. government as terrorists. Arab Bank’s attorney argued that it wasn’t Arab Bank’s job to determine who “terrorists” were: “You wouldn’t want to have Google or Facebook or Walmart or Target or Citibank or Bank of America or TD Bank or Arab Bank deciding who belongs on a terrorist list.” Plaintiffs’ lawyers argued that the Bank should have inquired into its customers’ activities, saying it “strained credulity” that the Bank could not identify high-profile members of Hamas.

    The Arab Bank verdict could represent a serious threat to international financial institutions, triggering them to beef up their compliance beyond mere screening to more in-depth due diligence of their customers and transactions, especially in risky parts of the world.