Handling Hamas money just got a lot riskier for Middle East banks

As the dust settles on a landmark ruling against Jordan-based Arab Bank, found liable for knowingly processing transactions of Hamas members and thereby supporting its attacks on civilians, legal experts have just begun to parse the implications for banks that do business in the volatile Middle East. But as the case heads toward appeal, the world’s financial institutions have been put on notice: Turn a blind eye to clients designated by the U.S. as "foreign terrorist organizations," as Arab Bank was accused of doing, and face the consequences.

Late last month, the jury in a class-action civil case filed by 297 relatives and representatives of American victims of Hamas suicide bombings in Israel found that Arab Bank, one of the region's largest financial institutions with over $40 billion in assets, had provided material support for the group — 10 years after the lead case, Linde et al. v. Arab Bank PLC, was filed.

Among other Hamas-related transactions that totaled about $100 million, Arab Bank processed a series of $5,300 payments to the families of suicide bombers  from a Saudi-registered charity, the Saudi Committee.

The bank argued that it followed the rules under the Know Your Customer provision of the Patriot Act by running the individuals' names by the U.S. Treasury’s Office of Foreign Assets Control (OFAC) and other U.S. government blacklists. It only proceeded with the transactions after coming up with no matches, apparently because of misspellings in the English transliterations of their names.

But that wasn’t enough, the plaintiffs argued. According to Peter Raven-Hansen, one of the attorneys for the plaintiffs and a law professor at George Washington University, his team were able to convince the jury that the Hamas members in question — including spokesman Omar Hamdan — were high-profile enough that Arab Bank must have been willfully ignorant of their identities.

“Suppose Osama Bin Laden walked into a bank in November 2001 and asked to withdraw $100,000, and the teller says: ‘That’s Osama Bin Laden.’ But the manager says to run his name on the OFAC list and sees he isn’t there, so he tells the teller to proceed with the withdrawal,” Raven-Hansen said.

“The plaintiffs weren’t arguing that if Bin Laden’s driver comes in and no one has seen him before that the bank should be liable. The question was whether these guys were more like Bin Laden, or his driver,” he said.

The Arab Bank suit, and a series of others like it on dockets around the U.S., could have far-reaching implications for the region's economy if foreign banks and companies decide that doing business in the Middle East has become too risky.

The trend has already unnerved the region's banks, who worry their clients could be linked to any number of violent attacks on American civilians by myriad armed non-state actors and therefore subject to exorbitant penalties under U.S. law. At the same time, they cannot afford to cut lucrative ties with U.S. banks in order to dodge U.S. counterterror laws.

Arab Bank, along with the government of Jordan, where it is based, have suggested the U.S. is imposing too great a burden on banks and that similar rulings will put the Middle East’s very financial infrastructure in jeopardy. That plea caught the attention of both the Obama administration and the State Department, which recommended the case to the U.S. Supreme Court out of loyalty to Jordan, one of its closest allies in the region.

U.S. authorities have prosecuted banks that deal with drug cartels and other criminal networks, but the Arab Bank case, tried in a federal court in Brooklyn, marked the first time a bank has been held liable in a civil suit under the 1990 Anti-Terrorism Act, a broad statute that says banks are accountable if their services are demonstrated to be a “substantial contributor” to plaintiffs’ “reasonably foreseeable injuries.”

The jury decided that Arab Bank should have known that by processing these transactions it would be abetting Hamas’ well-documented attacks on civilians — even though the group also operates legitimate wings for charity and governance. The Arab Bank verdict, along with a recent overturned dismissal in a similar NatWest Bank case also involving Hamas attacks, suggest banks will have a harder time asserting the legitimate wings of these groups as cover for carrying out such transactions.

“What’s been liberalized here is that you don’t have to show the bank knew the material support was going towards terrorism. It’s enough to know the funds went to a terror organization,” said John Coffee, a law professor at Columbia University.

“Terror organizations don’t maintain Chinese walls between departments or subject themselves to audits, so there’s no way to stop money earmarked for a kindergarten actually going to bombs,” added plaintiff attorney Raven-Hansen.

Arab Bank, which plans to file an appeal, likened the ruling to a “show trial.” The bank had refused to turn over a large percentage of documents requested by the court on grounds that doing so would violate the privacy laws of various countries where it does business. A judge subsequently issued sanctions on the defense, which prevented the bank from explaining to the jury why it had withheld the documents in question, casting suspicion on its argument.

“Taken together, the Court’s rulings excluded nearly all evidence about banking and put Hamas on trial,” read a statement posted to the bank’s website shortly after the verdict.

It also noted that Saudi Committee, which transferred the questionable funds through the bank, was a “lawful humanitarian aid program for a Palestinian population impoverished by the conflict of the Second Intifada,” as “confirmed by senior U.S. government officials.” Designating Saudi Committee or any other body as a “terror organization” is the government’s job, not the bank’s, Arab Bank attorney Shand Stephens argued before the jury.

Given the steep burden of proof in the Arab Bank case, experts don’t expect the verdict to open up the floodgates for any victim of attacks from U.S.-designated “foreign terrorist organizations” to sue banks that deal with such groups. The decade it took to reach a decision on the suit was considered worth the effort because the amount of money was high enough for private firms to get their payoff. “You’re only going to sue a group that has a deep pocket — not someone with a $10,000 bank account,” said Columbia University’s Coffee.

It isn’t clear how groups like Hamas will be impacted as banks that process their funds are held accountable, but one theory is that increased vigilance by banks could have the inadvertent consequence of tripping up U.S. counterterror investigations, which often follow the money trail that snakes through legitimate financial institutions like Arab Bank and leads back to shadier organizations, like Saudi Committee.

“If upheld, this could cause banks to cut ties with foreign banks or customers in volatile regions, which from a security perspective could make it harder to track terror financing,” said Martin Reardon, a senior vice president of the Soufan Group, an intelligence consultancy, and a veteran of the FBI’s Counterterrorism Division.

Many analysts caution against alarmism, and suggest that banks may bellyache about the far-reaching and invasive Patriot Act but that ultimately the profits in doing business with wealthy U.S. banks will motivate them to simply be more active in pursuing obvious red flags. As Arab Bank noted in its defense, dealings with Saudi Committee were only a tiny fraction of its business.

At the same time, transnational networks or groups like Hamas that rely on foreign benefactors will have a difficult time avoiding banks altogether when transferring money across borders, according to Reardon, who has investigated the financing of similar attacks across the Middle East.

“Unless you’re dealing in a cash basis, you need banks,” he said. “The billions that go through these institutions — how else are you going to move that money around?”