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Targeting the Terrorists but Hitting the Banks

How can a bank know if it's holding money for a hidden terrorist?

In a bizarre twist, our global anti-money laundering and financing laws, which were designed to bankrupt terrorist organizations and prevent the flow of illicit funds, may bankrupt many of our banks instead.

Last month, in Linde v. Arab Bank, the Arab Bank was found liable in a civil proceeding in U.S. Federal Court for providing banking services to terrorists. It faces a jury award potentially in the hundreds of billions of dollars in triple damages.

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The case is precedent-setting because it’s the first one where a bank was found liable for supporting terrorism by acting as a bank: namely, providing banking services. But, more importantly, this is the first case where a bank was held liable for wiring funds to persons who were undesignated terrorist organizations or persons.

Because of this liability, the jury found that it can substantially contribute to foreseeable injuries caused by the terrorist acts of those individuals. The verdict may seem reasonable, but actually it’s not—because no financial institution can foresee the unforeseeable, that an undesignated customer is a hidden terrorist or may devolve into one. And yet, liability may attach for not knowing.

Even the U.S. government, with its massive intelligence resources, doesn’t know the customer is a terrorist. If it did, that person or entity would be designated. So then, how can bank executives possibly expect that banking this customer will lead to a terrorist act? They can’t. But banks may be liable in the billions of dollars for not having a crystal ball.

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As a result of the decision, banks may no longer be able to rely solely on lists provided by government agencies for counter-terrorism efforts. Theoretically, they must now treat every customer as a potential terrorist and make a judgment call on whether they may pose a risk. If the judgment call is wrong, and the bank provides services to a customer who later commits a terrorist act that causes harm, the bank may be liable for substantially contributing to those injuries by banking the customer.

There will be cases where a bank wrongly brands a customer a terrorist organization or person, and in those situations, bank executives may be exposed to due process, discrimination and defamation claims. They may be “doomed if they do and doomed if they don’t” in cases of unlisted terrorist organizations that they bank or refuse to bank.

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Consider the ISIS situation. Many thousands of men who are undesignated—and whose identities are not known to banks—have defected to Syria from places like Germany, the U.K., France, Australia and Canada to fight for an extreme fundamentalist Islamic state. While they’re in Syria or before they arrive, they may receive funds from friends and family in their home countries through banks, electronic payment systems, money services businesses or other remittance services. If those men commit terrorist acts that cause the death or injury of Canadians or Americans, any foreign banks that provided banking services, such as wiring funds to them, may be liable.

There are more than 100 more cases similar to the Arab Bank case pending in the States, in which plaintiffs are seeking compensation for injuries arising from terrorist acts that were committed against American citizens. There may be hundreds more if the ISIS situation deepens and terrorism against Canadians and other Westerners increases around the world.

There is insufficient money in the bank, quite literally, to pay out all those claims. Our anti-terrorism laws were intended to bankrupt terrorists, not the banking industry.

Christine Duhaime is a lawyer and financial crime regulatory compliance specialist with the law firm of Duhaime Law.

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Copyright 2014 Rogers Publishing Ltd. This article first appeared in the November 2014 edition of Corporate Risk Canada magazine

Transcontinental Media G.P.