Wednesday, December 9, 2015

Follow the Money: The Connection between Terrorism and Banking

Two developments on this topic:

1.  Yesterday the 2d Circuit handed down its decision in In re Arab Bank, PLC Alien Tort Statute Litigation,  The plaintiffs were non-US citizens who sought compensation for injuries caused by terrorist attacks in Israel between January 1995 and July 2005.   The plaintiffs brought their claims under the Alien Tort Statute (ATS), 28 U.S.C. sec. 1350 ("[t]he district courts shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States and federal common law").  Their claims were against Arab Bank, PLC, which has its headquarters in Jordan and branches around the world, for its alleged role in facilitating the banking activities of organizations who caused plaintiffs' injuries.  Arab Bank's branch in New York provides clearing and correspondent banking services to foreign financial institutions.   

The Second Circuit's opinion provides fascinating details about how Arab Bank allegedly and knowingly maintained accounts that customers used to raise funds for terrorist organizations, laundered funds for a purported charitable organization that was really a front for a terrorist organization, and maintained accounts for known  terrorists and supporters.  The plaintiffs also alleged that Arab Bank knowingly and actively organized banking services to transfer funds from terrorist groups to the families of suicide bombers, routing transfers through its New York branch to convert Saudi currency to Israeli currency.  Plaintiffs allege that after the accounts were funded, the Bank provided instructions to the public on how to qualify for and collect the money.

The district court dismissed the claim against Arab Bank on grounds that under Kiobel v. Royal Dutch Petroleum Co., 621 F. 3d 111 (2d Cir. 2010)(Kiobel I), the ATS does not permit claims against corporations.  On appeal, the plaintiffs argued that the 2d Circuit's decision in Kiobel I was overruled by the Supreme Court when it affirmed Kiobel I three years later on other grounds, 133 S.Ct. 1659 (2013)(Kiobel II).  The legal issue in Kiobel I was the scope of liability recognized by the "law of nations" referred to in the ATS.  The panel concluded that the ATS does not permit claims against corporations because corporations have never been subject to any form of liability under customary international law of human rights.  One of the three judges on the panel, however, filed a separate opinion concurring in the judgment but disagreeing with the panel's conception of the "law of nations" as invariably precluding action against a corporate actor.   In his view, the ATS does not prohibit corporate liability per se.  Rather, because the "law of nations" does not specifically address the issue of corporate liability, the scope of liability under the ATS should be considered a question of remedy governed by domestic law.  The Supreme Court in Kiobel II affirmed the 2d Circuit's dismissal but on extraterritoriality grounds-- the alleged banking conduct does not sufficiently "touch and concern" the territory of the United States to invoke the subject matter jurisdiction of the federal courts.

In In re Arab Bank, the 2d Circuit held that Kiobel II "casts a shadow" on Kiobel I.  On the question of extraterritoriality, the Court held that because corporations are "present" in many countries, corporate presence alone is not sufficient to displace the presumption against extraterritorial application of US law.  Because the Court in Kiobel II noted that mere corporate presence alone is insufficient to support subject matter jurisdiction, the obvious implications are that corporate presence plus something more may be sufficient and that the ATS does permit suits against corporations under some circumstances.  The Second Circuit noted that Kiobel I and II read together would limit application of the ATS to an extremely narrow set of circumstances-- suits against natural persons and perhaps non-corporate entities, based on conduct occurring at least in part within (or that "touches and concerns") US territory.  Because corporations are "among the more important actors on the world stage" this narrow reading of the application of the ATS may be inconsistent with the intent of Congress to provide access to US courts for injured aliens when more than two centuries ago it passed the ATS.  The Second Circuit noted that Kiobel II "may be viewed as casting doubt on Kiobel I, even though Kiobel II does not squarely address the issue of corporate liability under the ATS.  Nonetheless, it declined to conclude that Kiobel II overruled Kiobel I, setting up the question for an appeal to the court en banc and likely to the Supreme Court. 

The decision protects Arab Bank from claims under the ATS, but the protection is precarious.  Banks are intensely interested in the answers to two questions implicated in this litigation:  1) whether corporations can be liable under the ATS; and 2) whether "corporate presence" of a bank is sufficient for subject matter jurisdiction over it. The Institute of International Bankers filed an amicus brief in In re Arab Bank before the 2d Circuit in support of the defendant, arguing that bank clearing operations conducted in New York should not be enough to support jurisdiction over a foreign bank.  It noted that more than $1 trillion in foreign currency exchange transactions clear through New York City every day.  Recognizing this clearing function as "presence" in the US would subject foreign banks to suit in US courts whenever their provision of banking services to customers abroad included clearing operations in the US. 

2.  Closer to home, the gunman in the recent San Bernadino massacre had applied for and received a loan from online lender Prosper Marketplace, Inc. a few weeks before he and his wife opened fire at their office holiday party.  Criminal investigators are looking at a $28,000 deposit in the gunman's bank account likely to determine if he used it to buy weapons or ammunition.  Prosper is an online lending platform that matches up borrowers with lenders. The loans are actually provided by WebBank, a Utah-based bank.  Federal law requires both the gunman's bank and WebBank to "know their customers" and report suspicious transactions.

The online marketplace lending industry is in its infancy and federal regulators are considering how to regulate it.  It's clear that consumers who need cash fast like online lending as a faster, easier, and more anonymous alternative to traditional credit card debt or bank loans.  One capital market analyst told Bloomberg News that the connection between online marketplace lending and the San Bernadino shooter could be a "game changer" in the development of regulations.