Anti-Terrorism Act Liability Requires More than Mere Failures of Customer Due Diligence

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Town of Metula at the Israel-Lebanon border – the site of 2006 rocket attacks by Hizbollah

On September 25, 2019, the Southern District of New York dismissed a complaint brought by victims of rocket attacks in Israel perpetrated in 2006 by Hizbollah, operating in Lebanon. Kaplan v. Lebanese Canadian Bank, SAL, Civ. No. 08 Civ. 7253, 2019 U.S. Dist. LEXIS 162505 (S.D.N.Y. Sept. 20, 2019). The Complaint was brought under the Anti-Terrorism Act, 18 USC 2333 (“ATA”). In it, the Plaintiffs alleged that the Lebanese Canadian Bank, SAL (“LCB”) provided banking services to five members of Hizbollah (“Hizbollah affiliates”), and by doing so, they materially supported an act of international terrorism.

Specifically, the Complaint alleged, among other things, that LCB failed to take certain due diligence measures, including reviewing public sources, and as a result continued to bank with members of Hizbollah. According to the Complaint, the bank’s customers’ afficilation with Hizbollah was “notorious public knowledge” due to news articles, reports, and Hizbollah’s own media sources. The Plaintiffs alleged that, even if the bank did not have actual knowledge, the bank at least should have known because it had a duty to perform due diligence on its customers, monitor and report suspicious or illegal banking activities, and not provide banking services to terrorist organizations.

Although the Kaplan case arises in the context of international terrorism and potential liability under the ATA, its analysis and conclusions can apply to more mundane state law tort claims against financial institutions by investors or consumers defrauded by the institution’s (former) customers. These claims often attempt to bootstrap allegations that a bank knew should have known about the customer’s fraud scheme due to the bank’s anti-money laundering (AML) monitoring and reporting obligations under the Bank Secrecy Act (“BSA”). As we have blogged, courts hold that evidence of an imperfect AML program and potential red flags about a customer fall short of the high bar required to sustain a claim for aiding and abetting a fraud or other tort against third party non-customers.

The ATA Claim

As we have previously blogged, the ATA establishes a cause of action for U.S. nationals who are the victims of international terrorism, and sets forth three elements of the claim (1) an injury to a U.S. national, (2) an act of international terrorism, and (3) causation. Such a cause of action is considered “primary liability” under the statute.

In dismissing the Plaintiffs’ claim for primary liability under the ATA, the Kaplan district court found that Plaintiffs failed to allege that LCB committed any act of international terrorism or that Plaintiffs’ injuries were caused by its actions. The provision of financial services to a known terrorist organization may be deemed “material support” to a terrorist organization, if defendant’s own actions involved violence or endangered human life and that these actions appeared to be intended to cause the requisite harm. The Complaint alleged that LCB had known or should have known through the performance of their banking due diligence that the account holders in question had a relationship with Hizbollah. Indeed, by the very provision of wire transfer and other financial services, Plaintiffs argued that LCB had provided material support to a terrorist organization – but such allegations were not enough. LCB was not alleged to have itself perpetrate the rocket attacks and no other facts would lead to an inference otherwise.

Nor were these allegations enough to demonstrate that LCB, by providing financial services to the Hizbollah affiliates, had caused the specific harm to the Plaintiffs – such acts were too attenuated and conclusory to show the causal relationship between the cash transferred by LCB to the Hizbollah affiliates and the terrorist attacks by Hizbollah that injured Plaintiffs. In short, the court found that LCB lacked any actual knowledge of the international terrorist attack.

The JASTA Claim

Plaintiffs also asserted a claim of secondary liability under Justice Against State Sponsors of Terrorism Act, Pub. L. 114-222, 130 Stat. 852 (2016) (“JASTA”), which amended the ATA in 2016. The statute extends liability to “secondary actors who, while not committing international terrorist acts themselves, facilitated such acts by others.” Under the statute, secondary actors may be liable if they aid and abet an act of international terrorism, by knowingly providing substantial assistance or conspires with a person committing an act of international terrorism. The Court found that Plaintiffs had neither alleged that LCB had aided and abetted the commission of the rocket attacks or conspired to do the same.

As for a conspiracy, the Court found that the Plaintiffs failed to allege that the LCB and Hizbollah entered into any type of agreement to engage in the rocket attack, a necessary element of a conspiracy claim. Plaintiffs argued that the wire transfers performed on behalf of the Hizbollah affiliates were taken pursuant to and in furtherance of a common plan to conduct the terrorist attack. But the Court disagreed, holding that these transfers merely demonstrated that LCB provided financial services to the five accountholders. Simply providing financial services does not support an inference that LCB knew that the accountholders were affiliated with Hizbollah or that LCB knew of the planned attacks.

A High Standard for Liability

Plaintiffs’ aiding and abetting claim also failed. Under the JASTA, Plaintiffs had to show that LCB provided “assistance,” that is, had a general awareness that by providing financial services to the five accountholders, it itself assumed a role in the terrorist activities. Although specific intent or knowledge is not required, the Court held that a “general awareness” requires a showing of something more than the provision of material support to a designated terrorist organization. For instance, Plaintiffs alleged that LCB should have known that the accountholders were integral constituent parts of Hizollah, which the bank should have gleaned through open source due diligence. But the Court noted that none of the accountholders were designated by the U.S. as having an affiliation with Hizbollah and the Complaint failed to allege that LCB actually read any of the news articles describing the affiliations between the accountholders. Importantly, the Court held that the “failure to perform due diligence on clients or to adhere to sanctions and counter-terrorism laws do not, on their own, equate to knowingly playing a role in terrorist activities.”

Perhaps the worst fact for LCB was that, in 2011, the U.S. Treasury Department had designated the bank as an institution “of primary money laundering concern” under Section 311 of the USA Patriot Act due to its alleged “role in facilitating the money laundering activities of an international narcotics trafficking and money laundering network.” As we previously blogged, FinCEN may designate foreign financial institutions as being “of primary money laundering concern” and take any of five special measures against institutions so designated pursuant to Section 311. As we also have blogged, being designated as an institution “of primary money laundering concern” can represent a “death sentence” for that institution. Nonetheless, the Kaplan court found that neither this designation nor certain “damning” allegations in a 2011 forfeiture action against the bank “suggest[] that Defendant supported Hizbollah’s ‘anti-Israel’ agenda or that Defendant provided financial services to the Five Customers pursuant to this agenda.”

The major take away here for financial institutions is that alleged failures in their BSA/AML processes do not necessarily subject them to civil liability to third-parties – even when the bank has been the subject of public enforcement proceedings relating to BSA/AML failures. The fact that the Kaplan court dismissed the case at the motion to dismiss stage, rather than later at the summary judgment phase, is even more telling.

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