Arab Bank ruling raises compliance risk

Author: Zoe Thomas | Published: 26 Sep 2014
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A New York jury has found Arab Bank liable for providing financial services to terrorists. The ruling has raised questions about banks’ compliance programmes and their ability to operate under local law and US anti-terrorism laws.

The Jordanian bank was found liable in a US federal court of doing business with Hamas leaders who funded over two dozen suicide bombing attacks in the early 2000s.

The September 22 decision was the first time that a foreign bank was found liable in a US civil court for terrorism financing. It opens the door for more civil cases to be brought against banks an additional tool for tackling terrorist financing.

The verdict could serve as powerful deterrent for banks considering moving into emerging markets that have a terrorism risk, according to Glen Kopp, a former assistant US lawyer in the southern district of New York, now a partner at Bracewell & Giuliani.

"For banks considering emerging markets that have high risk, they may decide not go to these regions because there is too much vulnerability," said Kopp. "We’ll have to see whether banks start pulling out of these high-risk regions."

"That isn’t necessarily a good thing because most people in those regions are not connected with these acts and having strong capital flow is important," he added.

KEY TAKEAWAYS

  • A jury in New York has found Arab Bank liable for providing financial services to terrorists in a first of its kind decision;
  • The ruling will likely deter banks from entering these emerging markets;
  • Differences between US anti-terrorism laws and laws in home or operating jurisdictions may have been one of the reasons for the verdict and the lower level of internal compliance standards at Arab Bank.

Growing compliance
Banks have been beefing up internal compliance standards to meet stricter sanctions policies. Notably, BNP Paribas has a one-year ban on certain abilities to clear US dollar transactions because of violations of US sanctions against Iran, Sudan and Cuba.

A major difficulty for both sides in the case was discrepancies between local Jordanian law and US anti-terrorism laws. The bank argued that it had complied with international standards and that many of the terrorists it was accused of aiding were not on US, EU or United Nations watch lists. The Central Bank of Jordan issued a statement following the decision saying the verdict was a consequence of Arab Bank complying with Jordanian privacy laws. Arab Bank refused to provide a large amount of requested data on the customers and transactions in question on the objection that it violated Jordanian and Palestinian laws.

This objection eventually reached the US Supreme Court, which ruled that Arab Bank should turn over the records. A federal judge also ruled the jury could conclude the bank’s failure to provide the information was evidence that it had engaged in the acts it was accused of.

Civil verdict
The verdict has opened another avenue for pursuing terrorist financing. While civil cases, particularly against foreign-based defendants, can be harder to bring and pose difficulties for the discovery process, they also allow the case to reach a large class of victims and put a face to a tragedy.

"The case being brought by private plaintiffs helps enforce the government’s role in prosecuting terrorism through financing," said Kopp. "This has added a major downside for banks that were operating in pockets their competitors weren’t willing to."

Still, while the verdict may force banks to rethink their internal compliance policies, it is unlikely to have a big effect on most banks.

"The number of cases in which you have financial institutions knowingly involved in supporting terrorist organisations is relatively small," said Gary Osen, a lawyer for the plaintiffs. "This isn’t like mortgages or securities fraud where you may find instances every day of the week."

"For the small number of cases that are brought, I hope the Arab Bank verdict and the Court Appeals decision help to clarify the parameters of the law."

Mayer Brown and DLA Piper represented Arab Bank. Osen, Motley Rice, Stone Bonner & Rocco and Stone & Magnanini represented the plaintiffs.

Further reading:

Sanctions' impact on emerging market project

StanChart NY settlement prompts regulatory action

Regulators cooperate to target corporate governance

 


 

 

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