WASHINGTON — A number of class actions in New York have the potential to redefine how far banks have to go to vet customers for potential ties to terrorism around the world.
The plaintiffs, family members of victims of attacks in Israel, argue that three foreign banks with U.S. branches should have known to block transactions involving certain charities because they were on other countries' terror watch lists.
The banks — Arab Bank of Jordan, Royal Bank of Scotland Group PLC's National Westminster Bank PLC, and Credit Agricole SA's Credit Lyonnais of France — say that they followed all relevant U.S. laws and that, in the vast majority of the events cited in the lawsuits, the Treasury Department had not yet identified the alleged perpetrators as terrorists.
Experts said rulings against the banks could have a broad impact on the anti-laundering system.
"If the plaintiffs are successful, … the practical effect will be to raise the bar to a different and much higher standard of whether the bank reasonably could have formed a suspicion, based on a search for publicly available information, that their customers were involved in financing of terrorism or other terrorist activities," said Ross Delston, an anti-laundering consultant and the founder of GlobalAML.com.
"This would be a change of volcanic proportions, literally changing the landscape for banks in their relationships with their customers, since no law, regulation, or international standard that I am aware of requires this to be done in order to combat the financing of terrorism," he said.
The Financial Crimes Enforcement Network fined Arab Bank $24 million in 2005 for problems with its anti-laundering program, including lax controls — a fine the bank said was unjustified. However, the new suits go further. They allege that the bank knowingly provided services to a charity linked to terror.
Previous cases of this kind have been thrown out of court, and experts said that they believe the New York suits are the first of their kind to move forward, and that they could spur additional ones.
"It's a very new concept saying that the failure of a bank to comply with AML would make them liable for domestic or international crime," said Peter Djinis, an anti-laundering consultant and a former Federal Crimes Enforcement Network official. "No question it could open the door to more cases."
To date, 13 suits are pending in New York, with the earliest filed in August 2004 and the most recent last month.
The plaintiffs in all the cases — two against Credit Lyonnais, two against National Westminster, and nine against Arab Bank — allege that the banks knowingly provided financial services to charities with links to terrorist organizations and are therefore partly to blame for attacks from 2000 through 2003 in Israel.
They cite designations by other countries, including Israel, as proof the banks should have known the charities had terrorist ties, since information that cast suspicion on the charities' activities was publicly available.
Michael Elsner, a lawyer at Motley Rice LLC representing plaintiffs who are suing Arab Bank, argued that the bank must be held accountable. "Banks are almost always used in financing terrorism, and if the victim of a terrorist act can't hold a bank accountable, the enforcement of terrorism does not have any teeth."
Stephen Kroll, a former Democratic special counsel for the Senate Banking Committee and a former Fincen official, said the cases against Arab Bank are the most significant, because they involve people who are not U.S. citizens and are being tried under the 1789 Alien Tort Claims Act. The law grants foreigners the right to sue in U.S. courts for crimes "in violation of the law of nations," such as genocide, even for acts committed outside the United States.
The Arab Bank cases are the only suits involving foreign plaintiffs. "These decisions really do broaden out the definition," Mr. Kroll said. "It means any bank in the world with an office in the U.S. could be liable if found aiding and abetting terrorism. Given the size of some banks with international clients, it could have broad implications."
The banks say they followed proper anti-laundering procedures. Robert Chlopak, a partner at Chlopak, Leonard, Schechter and Associates, a public relations firm that represents Arab Bank, said it "condemns terrorism of any kind, and the bank has not and would not do business with any person or organization" known to be involved in terrorism.
"The plaintiff's legal theories in the cases already filed against three banks pose a potential risk to the industry," Mr. Chlopak said. "If successful, they could expose global banks to unprecedented legal and financial liability in the United States for transactions executed outside this country in full compliance with applicable national banking laws."
Credit Lyonnais said that it had no way of knowing the charities were connected with terrorism, and that all financial activities with accused charities occurred before they were designated as such by U.S. authorities.
Linda Harper, a Royal Bank of Scotland spokeswoman, said National Westminster had "no knowledge of the alleged terrorist activities" of the charities named in the complaint and disagreed with a September court decision allowing the case to go forward.
The bank "strongly believes that the legal claims against NatWest are unfounded," Ms. Harper said. "NatWest remains confident that its defense of the U.S. proceedings will prevail."
Anti-laundering experts acknowledge that banks must go beyond simply checking for U.S. designations when investigating a customer's activities. But they also question whether a bank should be held criminally responsible if a customer uses an account to fund terrorism.
Terrorist financing often lacks the hallmarks of traditional money laundering and involves very small-dollar wire transfers, the experts said.
"Given the fact that most terrorists have no criminal record, are dealing in small financial transactions, and are engaged in innocuous activities, having the banks do this kind of enhanced due diligence will not be very effective," Mr. Delston said.
Chris Myers, a partner at Holland & Knight LLP and a co-chairman of its global compliance and governance practice, said these cases are using anti-laundering standards as public liability standards.
"You can't expect us to be out in front of the federal government," Mr. Myers said. "We cannot be and are not equipped to be the police."
David Caruso, the chief executive officer and managing director of Dominion Advisory Group LLC, a Centreville, Va., anti-laundering consulting firm, said the potential implications of these cases are severe, because they would put the burden of finding a crime on the bank.
"These types of suits may have merit only if prosecutors … are able to prove these banks failed to identify criminal acts and that failure was criminal," he said.
