Banks and financial institutions around the world are closely watching theÂ Linde v. Arab BankÂ case unfold in New York City. It’s the first civil trial against a bank for alleged violations of theÂ AntiTerrorism Act of 1990Â (“ATA“), 18 USC 2331. TheÂ litigation seeks to hold the Arab Bank, a third party, liable for injuries resulting from acts of terrorism. Liability, potentially in the billions of dollars for financial institutions, may come down to whether the Arab Bank had a competent anti-money laundering compliance regime in place to assess terrorist financing risks, including from non-listed entities.
Whether we like it or not, unfortunately every terrorist organization at some point uses financial institutions, directly or indirectly. Many are unlisted or undesignated. And the numbers keep increasing. Unfortunately, acts of terrorism increased 69% from 2011 to 2012 and then a further 43% from 2012 to 2013. From a risk perspective, that equates to significantly more exposure for banks. We’re not seeing is a corresponding change at financial institutions to address increased risks by improvements to counter-terrorist financing programs.
Close to 300 victims of terrorist attacks committed in Israel, Gaza and the West Bank from 2001 to 2004 are suing the Arab Bank under the ATA for damages for injuries caused by terrorism, alleging that the Arab Bank provided terrorist financing by, among otherÂ things, providing wire transfer services to non-listed and listed organizations some of whom, in turn, paid terrorists and their families for committing terrorist acts. The Arab Bank says that it processed wire transfers in the normal course, consistent with its AMLÂ policies and procedures and did not knowingly provide financial services to persons affiliated with terrorism.
If the plaintiffs are successful, banks around the world may face exposure for similar claims in the tens of billions of dollars for dealing with funds that ultimately benefit terrorists or terrorist organizations (whether listed or not), not just in the Middle East but wherever terrorists receive financial services in the world, including the Middle East, Canada and the EU.
How perfect does your counter-terrorist regime have to be?
The litigation will focus minutely on wire transfers processed by the Arab Bank and on the steps the Arab Bank took to mitigate against terrorist financing activities to non-listed entities. Generally, under anti-money laundering and sanctions law,Â banks cannot provide financial services to listed terrorist groups, or deal in funds directly or indirectly controlled by a listed terrorist group. It’s the detection of theÂ indirect provision of financial services and indirect ownership of funds that is often difficult for banks to reconcile within their compliance regimes. In this case, a novel aspect is the alleged provision of services to non-listed entities.
The Arab Bank’s anti-money laundering compliance regime will either be a billion dollar liability or a billion dollar defence, depending upon the extent to which it adequately addressed preventing terrorist financing.
$50 million for not doing look-backs
In 2005, the Arab Bank New York, which acted as a correspondent bank, was penalized by FinCEN for,Â inter alia, clearing funds for beneficiaries or originators that were listed entities even though at the time of the processing of the funds, they were not listed. The Arab Bank failed to complete a “look-back” program. A “look-back” is performed by a financial institution after a person, group or entity is sanctioned or listed and it involves the financial institution completing a retroactive review of recent activity to identify potential suspicious activity. FinCEN found that if the Arab Bank had undertaken a look back, it would have discovered that it had cleared funds for persons that were subsequently listed and would have filed suspicious activity reports. It did neither and was penalized for failing to retroactively monitor transactions for sanctions and terrorist financing.
The litigation has already raised many areas of concern for international banking including:
(a) Liability for providing financial services to a non-listed entity
The Arab Bank is being sued for providing financial services to an organization named the Saudi Committee that was not listed as a terrorist organization but that allegedly had, as one of its purposes, the payment to families for completion of acts of terrorism. The Arab Bank allegedly permitted that organization to maintain bank accounts, receive funds from banks overseas and to make payments from its accounts for acts of terrorism. The Arab Bank argued that it properly screened clients and wire transfers and it is not liable for the downstream use of funds deposited and processed if it later emerges those funds were used for terrorism.
(b) Ruling that foreign banks cannot rely on national privacy lawsÂ
The Arab Bank was prevented by its national privacy laws in Jordan from providing documents it was ordered to produce in the litigation. It sought Jordanian Court approval to provide customer account documents to the plaintiffs, which was denied. The failure to produce documents resulted in a US Court sanction order that will allow the jury to make a negative inference on the failure to produce, namely that the Arab Bank provided financial services to listed terrorist organizations and distributed payments to terrorists for the Saudi Committee.
The plaintiffs maintained that the Arab Bank had previously disclosed some of the same documents that were part of the orders for production and it was unwilling, not prohibited, from producing them. Some of those documents were provided to the Department of Justice in connection with an investigation of another entity.
(c) Relevant to FATCA
The decision is relevant, win or lose, to the implementation of FATCA in places such as Canada where privacy laws doÂ not trump anti-money laundering laws. The Arab Bank unsuccessfully appealed to the US Supreme Court on the issue of a foreign financial institution’s ability to rely on sovereign privacy laws to avoid producing documents. The US Treasury weighed in the debate arguing that foreign banks could not rely on bank secrecy laws to trump certain activities such as the global efforts to combat terrorism or tax evasion. Tax evasion (FATCA), like anti-money laundering law, appears to trump privacy law.
(d) By implementing anti-money laundering laws, countries have subordinated other legalÂ interests
The US Courts held that countries such as Jordan and Lebanon have “subordinated” the privacy rights of their natural and legal persons (banks and their clients) to their national interest in fighting terrorism by adopted the FATF Recommendations, and entered into agreements in respect of anti-money laundering laws in which they renounced reliance on bank secrecy as a basis for refusing MLA assistance of other governments in terrorist investigations. Fighting terrorism through private rights of action under the ATA is the greater protected interest. This would apply theoretically to any foreign bank sued in the US advancing the foreign privacy legal impediment versus terrorism argument.
II. Terrorist financing litigation against Canadian banks may increase in & outside Canada
Litigation in US
The decision will cause an increase in litigation against Canadian banks with branches in the US in cases with similar facts, namely an international act of terrorism with a US connection in which a Canadian correspondent or branch processed financial transactions that benefitted the terrorist organization that injured the victim.
The use of correspondent accounts in a US state is sufficient to assert personal jurisdiction over foreign financial institutions for terrorism-related injury claims by victims. The inability of foreign banks to rely on criminal and civil penalties imposed on them for disclosure of confidential client information as a result of the Arab Bank case, further erodes defences available to foreign banks in the US.
Litigation in Canada
Banks (Canadian and foreign) can also expect an increase in claims in Canada pursuant to theÂ Justice to Victims of Terrorism ActÂ (the “Act“) implemented a year ago because Canadian plaintiffs will similarly look to banks in Canada for recovery of damages for acts of terrorism.
The ActÂ creates a cause of action that allows victims of terrorism to sue natural and legal personsÂ and certain foreign states, in a Canadian court for loss or damages suffered as a result of acts or omissions that are punishable under Part II.1 of theÂ Criminal CodeÂ (the terrorism offences).Â The cause of action is available to victims who are Canadian, permanent residents or if none of those, to a person who can demonstrate a real and substantial connection between their claim and Canada.
Although any “person” (such as a bank, law firm, association, corporation, broker, private equity fund) is a potential defendant under the Act, the threshold is seemingly high in that claimants have to establish that the defendant committed one of the following acts or omissions:
- Knowingly collected or provided property for terrorist activities (such as financing);
- Knowingly possessed property to facilitate terrorist activities;
- Knowingly dealt in property owned or controlled by a terrorist group;
- Knowingly facilitated a transaction in respect of property controlled by a terrorist group;
- Provided financial or other services in respect of property controlled by a terrorist group;
- Failed to disclose property (assets, bank accounts, funds, etc.) in which the person has possession or control to the RCMP or CSIS; and
- Relevant to brokers, banks, financial institutions, trust companies, or any other deposit taking institution, failed to report to the RCMP that it is (or is not) in control of funds or other property controlled by a listed entity.
US courts have established on language substantially similar to Canadian provisions, above, that providing financial or other services to a terrorist group is an act of international terrorism.
Claims are available whether the loss occurred inside or outside Canada after January 1, 1985, however, if the loss occurs outside Canada, there must be a real and substantial connection to Canada.Â With respect to prospective defendants, under the Act aÂ defendant is presumed to have committed the terrorist act if the listed entity caused or contributed to the loss or damage and the defendant committed the act for the listed entity.
The Act also suspends limitation periods where the victim is incapable of commencing an action because of physical, mental and psychological conditions, or when the victim is unable to ascertain the identity of a perpetrator.
State Immunity Act
The Act amends theÂ State Immunity ActÂ to create a new exception to state immunity, the general rule that prevents states from being sued in Canadaâ€™s domestic courts. The exception removes state immunity only if the state in question has been placed on a list established by Cabinet on the basis that there are reasonable grounds to believe that it has supported or currently supports terrorism.
The relaxation of state immunity is controversial. Under international law, states have customarily enjoyed complete immunityÂ from being sued in the domestic courts of other states. This arises from the international law principle of the sovereign equality of states, which includes the principle that no one state be subject to the courts of another. This principle has been modified for years in the context of maritime law as a result of commercial necessity.
The Act is of questionable constitutionality because it allows victims to recover for tortious conduct which is a matter purelyÂ of provincial, not federal, competence under Â§92(13) of theÂ Constitution Act, 1867.
No doubt the first bank defendant in Canada will challenge the constitutionality of the Act, although for policy reasons, it would be arguably better for a banking association to challenge it in advance of the filing of a claim.
From an anti-money laundering perspective, it is advisable for global banks to ensure that the counter-terrorist financing components of their procedures are consistent with,Â inter alia, the FATF, the UN Security Council resolutions and sanctions laws and that, from the top down, their personnel have been adequately trained on terrorist financing counter measures.