Crystal ball theory of liability – How banks and financiers became liable for terrorist acts of their non-terrorist listed customers

In an odd twist of law, our global anti-money laundering laws (that include counter terrorist financing) that were designed to bankrupt terrorist organizations, and prevent the flow of illicit funds, may bankrupt many of our banks instead.

Early this week, in Linde v. Arab Bank, the Arab Bank was found liable in a civil proceeding in US Federal Court for providing banking services to terrorists and terrorist groups, and faces a jury award potentially in the hundreds of billions of dollars in triple damages.

Precedent setting case

The case is precedent-setting because it is the first case where a bank was found liable for supporting terrorism by acting as a bank, namely providing banking services.

More importantly, this is the first case where a bank was held liable for providing banking services to persons who were unlisted or undesignated terrorist organizations or persons.

In this case, the Arab Bank, among other things, processed wire transactions and provided banking services to, inter alia, 12 charities that were not listed or designed as terrorist organizations in the US, or by the UN or EU. Some of the charities paid out a type of life insurance policy payment to the families of martyrs injured or killed in terrorist attacks they committed (such as suicide bombers). The payments came from the US and other countries and were wired halfway across the globe where they were received by the charities.

Banking can contribute to death or injuries in tort

Lawyers will no doubt be wondering how a causal connection was established in tort  to tie banking services to personal injuries sustained in order to find liability. In other words, how can wiring funds to another continent cause a person’s death by a terrorist organization? The answer is that the jury was instructed that liability could be found in tort if there was proof that banking services were a substantial contributor to the plaintiffs’ reasonably foreseeable injuries from terrorism. The jury affirmatively found that banking an undesignated terrorist organization, or a terrorist person, can substantially contribute to foreseeable injuries.

Banks need a crystal ball to comply with counter-terrorism law

It may sound reasonable but it is not. Here’s why. At the material time of a wire transaction, the foreign bank in the US (or Canada) does not know the customer in another continent is a terrorist organization or person because the customer is unlisted. Even the government, with its greater intelligence resources (with access to NSA for example), does not know that the customer is a terrorist person or organization, or has such a propensity. Logically, if it did the person or entity would be listed. So then how can bank executives possibly possess that knowledge in order to foresee that banking that unlisted customer will lead to a terrorist act which would lead to injury? They can’t. Unless they have a crystal ball.

And yet, the decision places limitless liability on banks because they do not have a crystal ball to be able to foresee (foretell in this analogy) which among their unlisted customers will cause an act of terrorism that will harm innocent people.

Banks may be liable in the billions of dollars for not knowing that which they cannot know. But not all banks, just foreign banks in the US or in Canada which has substantially similar legislation. And not just banks – any foreign entity providing designated financial services in the US is exposed including private equity funds.

The way anti-money laundering law works on the counter-terrorist financing side is that a government agency (such as OFAC) identifies certain persons or groups as terrorists based on intelligence and after a due diligence process, designates those persons or groups on public lists in respect of which financial and other transactions are strictly prohibited. Banks establish compliance regimes to ensure that services are not provided to prohibited or designated persons and face strict liability for errors they make over designated persons.

Banks must do more than rely on listed entities

As a result of the Arab Bank decision, banks may no longer be able to rely solely on lists provided by government agencies for counter-terrorism efforts. They must now theoretically treat every customer as a potential terrorist organization or person and make a judgment call on whether they may pose a terrorist risk and whether to bank them. 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.

Additionally, 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 from those to whom they wrongly branded and denied services.