Banks Beware: Know Thy Customer

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Financial institutions now have a duty to know exactly who their customers are. This week a United States federal jury found Arab Bank PLC, the major bank in Jordan, liable for supporting terrorism efforts in the Middle East. This is the first time a financial institution has been held liable in a civil suit under an anti-terrorism statute.

Family members of victims affected by the suicide bombings and attacks in Israel, the West Bank, and Gaza in 2000 sued Arab Bank for violating the Anti-Terrorism Act and the Alien Tort Claims Act. Arab Bank, which has branches in the United States, processed transactions for charities that were fronts for the terrorist organizations who committed those attacks.

The bank argued that it followed the proper compliance procedures and checked transactions against the appropriate terrorist list. Specifically, it claimed that the charity in question, Saudi Committee, was never listed as a terrorist organization by the United States. It admitted that one customer, Hamas leader Sheikh Ahmed Yassin, was on a designated terrorist list but was missed due to a spelling error.

This case certainly highlights the role that banks can play in funding terrorist groups and the extent to which they can be held responsible for monitoring their customers. As a result, banks are now expected to identify terrorists on their own.  This case poses two questions that need to be answered. First, does this verdict undermine the compliance systems that are used by financial institutions around the world? Second, does it create uncertainty and risk in conducting business with the United States?

This verdict may be unfair to banks that follow the proper banking compliance procedures, and will certainly make them more cautious when dealing with groups or individuals in unstable parts of the world.  Banks should be required to conduct proper due diligence when dealing with customers in these areas. This verdict is in the United States’ best interest in preventing the funding of terrorists groups. Although international banks may think twice about doing business with the United States, our financial sector is still in high demand.

Do you think it is fair to hold banks responsible for funding customers who they may not know are terrorists?  What do you think are other implications of this verdict?  Do you think that it is the government’s job to make sure banks are not funding terrorists or should banks create their own terrorist lists?

Sources: Bloomberg, New York Times, Linde v. Arab Bank

Picture: PJ Tatler

5 comments

  1. I think this is a very important issue as there is a lot of uncertainty in identifying terrorist groups by banks who follow proper compliance procedures. It is hard for banks to identify such groups especially when dealing with unstable parts of the world, which places a huge burden on these banks to be even more cautious in their procedures. Although it may be unfair to banks to hold them responsible for funding customers that they did not know were terrorists, this is a responsibility that banks assume when lending money to certain committees or organizations in the most dangerous parts of the world. In this case, the bank should have checked into the charity in question since it knew that one of its members was on a designated list. Not identifying this member due to a spelling error, which caused the death of many victims, is a huge mistake that could have been prevented if the bank had taken more interest in the situation at hand. I think banks need to work with the government to create and constantly update their terrorist lists because of the global concern for public safety.

  2. In times of war and in times of terrorist acts, which unfortunately seem so prevalent these days, I think it may be beneficial to impose a higher standard of care on corporations and businesses like that of the banking industry. Although this idea is believed to be in the best interest of the people and companies alike, it may not be realistic and this is where the clash of interests comes into play. Even if a company has met compliance regulations, the banks need to consider additional risks of association with such organizations beyond such standards. Despite the second thoughts international banks may have in doing business with the United States if the standards or regulations are raised, the fact that the U.S. is such a prominent player in the financial sector is likely to maintain relationships. While some may view this as a risk, it may be viewed as a measure to prevent future issues and minimize risky involvement with terrorist organizations and that is a formidable objective.

  3. I completely agree with Meredith above. While it may seem unfair to hold banks responsible for funding customers who are potential terrorists after they have done their due diligence, at the same time, they are in the business of conducting business with strangers on a daily basis so they also have a heightened duty to ensure that they are not indirectly encouraging terrorist activity that may put the nation at risk of attack. I think there needs to be a proper balancing act here with respect to the bank’s duty and the government’s duty. I do believe that banks should create their own terrorist list to ensure they are not engaging in financial activities with potential terrorist groups or individuals, but I also think the government should also have a part in supporting the banks in providing names as they do have more resources at their fingertips in identifying these people than banks do. There needs to be more cooperation between the government and banks to ensure that the safety of the nation is being properly monitored on all fronts.

  4. I do believe it is fair to hold banks responsible for funding customers who they might not know are terrorists. Banks take on these risks when they decide to lend money to certain groups or organizations. Requiring a bank to identify terrorists on their own is not a major concern when you weight it against public safety. Public safety is more important because innocent people’s lives are on the line. This new verdict may seem unfair to banks and make them more cautious when dealing with certain groups. However, this verdict is in the United State’s best interest in order to prevent funding of these terrorists groups. It is important that public safety comes first. It might be true that international banks may now think twice before doing business with the United States but public safety is more important. I do not believe it is the government’s job to make sure a bank is not funding terrorists. However, I do believe the government and the banks should work together to make sure the bank has the most up to date terrorist lists available.

  5. Terrorist organizations, like their non-terrorist counterparts, cannot function effectively without money, because an absence of capability to supply itself will leave almost any organization hamstrung. As Sun Tzu admonished in The Art of War, ” . . . an army without its baggage-train is lost; without provisions it is lost; without bases of supply it is lost.”

    Those that would use murder, mayhem, and violence in the form of terrorist activity with the goal of imposing their perspective upon others do not deserve the opportunity to propagate their views through such acts. If the only means of protecting ourselves is to cut off their ‘provisions,’ so to speak, then we must do so, and banks that issue those provisions in the form of monetary resources have an unmitigated and undeniable obligation to join in that effort. Turning a blind eye is no excuse (though good faith error might be).

    A bank can always make another dollar somewhere else; the families of terror victims cannot replace their loved ones so easily.

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