How the US Alien Tort Statute might expose Canadian financial institutions

By Christine Duhaime | March 18th, 2018

The US Supreme Court this term is ruling on a case that may impact Canadian banks and other financial institutions. The case, Jesner v. Arab Bank, involves over 6,000 petitioners from Israel who were victims of terrorism in the Middle East who filed a tort claim against a corporation in New York, the Arab Bank, under the Alien Tort Statute, 28 U.S.C. 1350 (“ATS“). The ATS allows a civil action by a foreign national in the US for a tort committed in violation of the law of nations or a US treaty. The US Supreme Court has interpreted the ATS to permit litigation of a narrow set of common law actions derived from the law of nations available for alleged violations of international law norms that are specific, universal and obligatory.

The petitioners allege that the Arab Bank violated international law by financing (e.g., banking) and facilitating (e.g., exchanging foreign currency and wiring funds) the activities of a terrorist organization that committed the terrorist attacks in the Middle East that caused their injuries. Although the victims are in another country and the torts occurred in another country, the nexus to the US is that the Arab Bank had a branch in New York (as well as a correspondent relationship), and wired funds through the US.

The case is important and being closely followed because the US Supreme Court is being asked to determine whether a corporation can be held liable under the ATS. The petitioners allege that the Arab Bank violated the law of nations insofar as it financed terrorism, and also insofar as it directly and indirectly engaged in genocide and crimes against humanity as a result of banking terrorist organizations and wiring  funds for them. In their view, the ATS can be used to hold foreign corporations civilly liable essentially for terrorist financing that caused injuries to foreigners.

A number of groups, including the U.S. Chamber of Commerce, have filed to defend against corporate liability, pointing to the fact that there are more than 150 ATS lawsuits against US and foreign corporations doing business in two dozen industry sectors arising out of corporate activity in more than 60 countries which would be harmed by the ability of foreigners to sue corporations for torts that occurred outside the US.

Interestingly, the US federal government filed its brief, arguing that the ATS allows corporate liability but that in this case, no liability should flow because the mere fact that a bank managed and wired  transactions through its US branch does not establish a sufficient nexus to the US. It also argued that holding foreign banks liable may cause foreign banks to be less cooperative with the US to prevent terrorist financing, including in particular in respect of the Kingdom of Jordan and its efforts to defeat ISIS.

The reason why I think it may cause exposure to some Canadian banks and financial institutions in particular, is because at least one large Canadian bank relied upon a legal opinion it received from a law firm in respect of anti-money laundering law and counter-terrorist financing law that effectively advised the bank that AML and CTF laws only kick in to affect the on-boarding of a bank’s clients if and when there is a predicate criminal offence that occurred in Canada. The opinion arose in the context of the practice by some Canadian banks to allow the receipt of funds from smurfing of hundreds of wires from China of up to US$50,000 each from one person that violated China’s federal banking laws on reporting outflows of currency – it apparently advised the bank that, provided  no criminal offence had been committed in Canada, the Criminal Code of Canada allowed the receipt into Canada by banks of funds from other countries. In order words, the opinion was that as long as no offence occurred in Canada in connection with a client’s funds, the bank was go-to-good and it did not need to undertake due diligence beyond the borders of Canada for AML and CTF purposes in respect of funds.

There are problems with that advice. The Criminal Code prohibits importing into Canada (whether by wire transfer or other means), of any property (which includes funds) or proceeds thereof obtained or derived from an indictable offence that occurred anywhere, whether in Canada, China or the Middle East. In anti-money laundering law, the concept of funds or income “lawfully obtained” has always been used and it means income or funds obtained lawfully under the laws of the country from where the income or funds arise (see for example, the Criminal Finances Act 2017).

If one or more Canadian bank acted upon the view that only criminal offenses that occur in Canada were relevant for AML and CTF on-boarding purposes, then it means there is a gaping hole in how they on-board when it comes to banking clients from foreign countries which may impact them if the US Supreme Court decides banks, including Canadian banks, can be held liable under the ATS for foreign torts committed that injure foreigners.

Thinking ever further ahead, it is likely going to be in the area of injuries sustained from torts committed by cybercriminals and cyberterrorists in foreign countries against foreign nationals or foreign corporations, that have a Canadian banking connection, that may come back to bite Canadian financial institutions who have a too-narrow view of the application of the Criminal Code of Canada if the US Supreme Court holds foreign corporations liable for foreign torts in Jesner v. Arab Bank. Illustrative is the case of US v. Baratov, the 22-year-old Canadian convicted hacker who had no job but was able to buy a Mercedes Benz, an Aston Martin, a home, multiple Rolexes and to blow through millions in cash and his Canadian bank did not de-risk him despite the lavish lifestyle not matching his unemployed status.

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