In September of 2014, Arab Bank, a large Jordan-based financial institution, was found liable under the Anti-Terrorism Act (ATA) of processing payments used by Hamas to commit acts of terrorism in Israel during the early 2000s. In a significant broadening of the scope of the ATA, the jury in Linde v. Arab Bank found that the processing of these payments resulted in the death and injury of over 100 American citizens. Similar cases are also pending trial in the United States, including lawsuits against the Royal Bank of Scotland Group Plc’s National Westminster Bank, Bank of China Ltd., and Credit Lyonnais SA for their alleged involvement in processing transactions destined for Hamas and Islamic Jihad. Civil litigation against banks under the ATA for alleged involvement in handling financial transactions related to acts of terrorism in the Middle East poses a threat to diplomatic efforts in the region, collaborative investigation of terror financing, and the future stability of already vulnerable Arab states.
Civil Litigation as a Security Threat
Linde v. Arab Bank is the first case against a bank brought under the ATA, which was enacted in 1992. While civil litigation against banks that might have financed terror activities may serve to compensate the families of victims, the overall effect can be damaging to relationships with key regional partners and weaken the United States’ capacity to investigate terror financing. Additionally, litigation against banks operating in the Middle East could contribute to further regional destabilization by discouraging financial institutions from operating in areas heavily impacted by terrorism for fear of civil penalties. Setbacks in these areas may increase the vulnerability of the US and its allies to acts of terrorism.
Litigation may create distance between the US and key moderate allies in the region, such as Jordan. During Linde v. Arab Bank, the Government of Jordan felt compelled to submit a brief to the court describing this case as potentially very harmful to the Jordanian and Palestinian economies and to its relationship with the US. Jordan’s amicus brief stated, “The District Court’s sanctions order threatens the close U.S.-Jordan partnership…District courts should not be permitted to conduct the foreign policy of the United States in such a harmful and arbitrary manner.” Anti-American sentiment may be amplified by litigation against banks in the Middle East under the ATA, as many of the transactions in question occur through charitable organizations that are seen quite positively by many in the region, where the NGO community is an essential source of medical, social, and economic support.
Ligation under the ATA also creates conflict between financial institutions and domestic bank secrecy laws. During the trial, Arab Bank was sanctioned by the US court for not turning over information that the defendants believed was protected by the privacy laws of Jordan and the other countries in which the bank operates. Conflict over foreign bank secrecy laws may give foreign governments and the general public the impression that US courts are requesting international financial institutions to violate laws in the countries in which they do business. In its amicus brief, the government of Jordan wrote:
“The District Court evidently believed the Bank should have turned over the protected documents in violation of Jordanian law…That flippant attitude caused serious alarm within Jordan’s government—just as it would if the tables were turned, and, for example, Citibank were ordered by a Jordanian court to turn over U.S. customer names and bank account statements to private citizens in Jordan.”
In this way, lawsuits brought under the ATA against banks have the potential to promote conflict between the US and its partners and damage productive relationships in the Middle East.
It is important to note that mechanisms already exist for the investigation and prosecution of criminal and terror-related financial transactions. These mechanisms require extensive collaboration between the US and its allies in the region. As opposed to facilitating counterterrorism investigations, civil litigation by victims of terrorism or their families against banks under the ATA may hinder the US and its partners’ ability to track the flow of funds to terror groups. Banks that fear significant penalties for inadvertently processing funds that contribute to terrorism may decide to halt operations in high risk areas, called “de-risking.” This may promote the use of informal markets (“black markets”) by criminals and terrorist organizations,hindering investigation. In a letter to the court in the Arab Bank trial, the governor of the Palestinian Monetary Authority wrote “If customers are discouraged from utilizing the banking system…the means of eliminating illegal banking activity will be thwarted, and the potential risk of that activity will be elevated.” Additionally, financial institutions may become less willing to share information with the intelligence community if the fear of civil litigation exists.
Civil litigation through the ATA may encourage banks based or operating in the Middle East to withdraw from those regions. De-risking has occurred in response to the significant fines levied by the US government for breaking money laundering and drug-trafficking laws and violating US Treasury sanctions. HSBC halted operations in several high risk countries after paying a nearly two billion dollar fine to the US government in 2012 for violations of Iranian sanctions and money laundering laws. Risk aversion can become institutionalized due to the threat of litigation and fines: in 2013, 68 percent of banks worldwide reported refusing transactions due to anti-money laundering requirements on financial institutions. Developing regions, small businesses, and charities are most negatively impacted. There is concern that similar de-risking could occur as a result of ATA litigation. The potential risk of facing penalties for contributing financially to an act of terror despite following US Treasury guidance on terror financing and money laundering and employing mechanisms to detect illegal activity may outweigh any economic benefit derived from banking in the region for some banks. A withdrawal by multiple institutions in an already vulnerable area, such as Yemen or Palestine, might hinder economic development and potentiate the draw of extremist organizations. Furthermore, direct damages to banks operating in the Middle East from a verdict in an ATA case could impact the ability of those banks to issue loans and credit. Legitimate investors may withdraw their funds from institutions due to concerns over the perceived vulnerability of banking privacy laws. These factors all have the potential to decrease access to credit and destabilize the region economically. The Government of Jordan has warned that “Economic instability could in turn lead to political instability, which would disrupt the mutual efforts of Jordan and the United States to broker peace in the Middle East.”
Alternative Views on the ATA
Supporters of the Arab Bank ruling view litigation under the ATA as a mechanism to strengthen US influence on foreign financial infrastructure. Proponents of the ruling argue that as most financial institutions must engage with US financial markets in order to maintain profitability, the threat of civil action in US courts will serve as an impetus to increase compliance with US anti-terror financing regulations. Additionally, advocates of the Linde v. Arab Bank verdict suggest pursuing civil cases under the ATA can encourage financial institutions to take more responsibility for the actions of their clients, by proactively determining whether funds are being used for crime or terror-related offenses.
While there may indeed be some validity to these claims, it is important to highlight some of the unintended consequences of the potential benefits of litigation under the ATA. As discussed above, increasing compliance to avoid litigation may entail avoidance of entire markets altogether. This can decrease the intelligence community’s ability to investigate the financing of terrorism by driving groups to the informal sector. Withdrawals by banks may in turn economically depress regions, increasing the vulnerability of individuals living in those areas to the allure of extremism. Furthermore, in terms of increasing the responsibility of banks for their clients’ actions, one must use caution in demanding that financial institutions assume a greater role in evaluating their customers’ use of their funds. It is the role of governments to delineate who or what a terrorist is for sanctioning purposes. In assuming more responsibility, financial institutions would be forced to use discriminatory banking practices to ensure that they are not processing transactions for potential terrorists and in doing so may disenfranchise entire communities.
Beyond Banks, to State Institutions?
This debate has been revived in recent months by another verdict under the ATA. In February, a New York Federal court delivered a $218.5 million verdict against the Palestinian Authority and the Palestine Liberation Organization for their role in financing terror acts against US citizens by Al-Aqsa Martyrs Brigades and Hamas in the early 2000s during the Second Intifada. The ATA automatically triples this figure to $655.5 million, an enormous sum for an already economically floundering Palestinian Authority.
As the cases being brought under the ATA by alleged victims of acts of terrorism increase in number and scope, it may be time for a reevaluation of the ATA and the impact of cases being brought in its name. The financing of terror remains a significant, complex challenge, and the US must continue to strengthen its ability to investigate and prosecute the financing of acts of terror. Important challenges remain for the US in the often overlooked war on terror financing, including ineffective interagency information sharing, poor international standardization and implementation of terror finance laws, and the emerging threat of novel tools for money transfer, including virtual currencies. There is ample room for improvement, but US policymakers must examine whether permitting the proliferation of cases brought under the ATA will remedy any of the current areas of weakness in US terror finance policy and capacity. It will be important to understand how these cases, so-called “lawfare,” are affecting cooperation with the public and private sectors in the Middle East, the intelligence community’s ability to investigate terror financing, and investment and economic development in vulnerable states. As this new chapter in financial counterterrorism unfolds, mitigating the consequences of litigation may become paramount. Effectively targeting development aid to regions affected by financial de-risking, reinvigorating terror finance cooperation with key public and private sector partners in the Middle East, collaborating with financial institutions to reduce risk aversion in terror-prone areas, and improving understanding of the informal and virtual markets may assist in reducing the negative impacts of litigation under the ATA.
Feature photo: Wikimedia
Michael DeLuca is a graduate student at Georgetown University, where he is pursuing a master’s degree in Biohazardous Threat Agents in addition to a medical degree. Prior to graduate school he worked for several years in international development and health finance consulting. He has worked extensively in sub-Saharan Africa, the Middle East, and Latin America on public health, finance, biosecurity, and development projects.
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