Combating Terrorist Financing: Implications for Financial Institutions

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A N 8 8 D 8 B 1 AR SINCE www. NYLJ.com Volume 252—NO. 106 Wednesday, December 3, 2014 Outside Counsel Expert Analysis Combating Terrorist Financing: Implications for Financial Institutions

he 24-hour news cycle provides a (2) is designed to evade BSA regulations; constant reminder of the threats (3) has no apparent lawful purpose; or (4) posed by the Islamic State in Iraq is an abnormal transaction for a particular and Syria (ISIS) and Al-Qaeda affili- customer with no reasonable explanation.5 ated groups. Unlike many other ter- Information from CTRs and SARs is main- roristT groups, however, ISIS has consider- tained in a database administered by the able financial resources at its disposal. Financial Crimes Enforcement Network (Fin- On Oct. 23, 2014, the Under Secretary By And CEN), a bureau within the U.S. Treasury of Treasury for Terrorism and Financial David I. Brianna Department. Law enforcement, financial Intelligence, David Cohen, noted that ISIS Miller Abrams regulators, and the intelligence community raises tens of millions of dollars a month.1 can access the database to identify possible As Cohen emphasized, “[W]e at the Trea- and Strengthening America by Providing terrorist financing and money laundering. sury Department are intensifying our focus Appropriate Tools Required to Intercept Because of the importance of CTRs and on undermining [ISIS’s] finances.” and Obstruct Terrorism Act of 2001 (USA SARs, the government has stressed the The U.S. government has indicated that PATRIOT Act), the International Emergency need for filing compliance.6 Furthermore, it will use all tools at its disposal to cut off Economic Powers Act (IEEPA), and criminal the above BSA provisions work in connec- ISIS’s financial network and act against enti- statutes proscribing money laundering and tion with AML laws criminalizing money ties, including financial institutions, that are terrorism-related activities. laundering activity,7 strengthening penal- conduits to fund terrorist activities. Indeed, The cornerstone of the government’s ties for money laundering,8 and enhancing since Sept. 11, 2001, financial institutions effort to combat the financing of criminal the reporting and compliance requirements have faced increased scrutiny for their activity is the BSA, which imposes stringent for financial institutions.9 often-unwitting role in terrorist financing. requirements on financial institutions to Since the 1990s, Congress has enacted a The myriad of laws and regulations that monitor and report potentially suspicious number of statutes criminalizing terrorist govern this area require diligence to avoid customer activity.2 The BSA was designed financing. Two of the key enforcement tools potential criminal and civil liability. This to help identify, inter alia, the laundering of were added in 1994 and 1996, when Con- article outlines the applicable laws and reg- money deposited into U.S. financial insti- gress criminalized the provision of “mate- ulations, discusses recent civil and criminal tutions. Traditionally, money laundering rial support” to enumerated terrorist-related action in this area, and offers suggestions to involved making illegal proceeds (“dirty activities or to a designated foreign terrorist try and avoid the crosshairs of government money”) appear legal (“clean money”) by organization (FTO).10 Currently, there are authorities and privatelitigants. introducing dirty money into the legitimate 59 groups designated as FTOs by the State Applicable Laws financial system, often through the use of Department.11 For financial institutions, foreign bank accounts.3 providing “material support or resources” Over the last four decades, Congress The BSA assists authorities in tracking can mean providing banking and/or wire and the president have devised several illicit funds through the use of report- services to an FTO.12 Indeed, banks are mechanisms to choke the lifeblood of ing forms such as Currency Transaction required to seize any funds in their pos- criminal enterprises: money. These laws Reports (CTRs) and Suspicious Activity session in which a terrorist organization has include the Bank Secrecy Act (BSA), Anti- Reports (SARs). CTRs must be filed for all an interest.13 Further, Congress has criminal- Money Laundering laws (AML), the Uniting transactions greater than $10,000.4 Gener- ized the provision of funds to terrorists with ally, a financial institution must file a SAR knowledge that such funds will be used to for bank transactions involving $5,000 or carry out certain violent acts.14 Congress more if the bank knows or suspects that the has also provided a private civil remedy to David I. Miller is a partner with Morgan, Lewis & Bockius and a former assistant U.S. attorney for the Southern District transaction: (1) involves, or is intended to any U.S. national “injured…by reason of an of New York. Brianna Abrams is an associate at the firm. hide, funds derived from illegal activities; act of international terrorism.”15 Wednesday, December 3, 2014

Following 9/11, the USA PATRIOT Act nationals and family members who were only two days of deliberations, the jury bolstered BSA and AML enforcement. victims of international terrorist attacks. returned a verdict in favor of the plaintiffs, The act imposed more stringent pro- They claimed that Arab Bank materially finding Arab Bank liable for knowingly sup- cedures and requirements on financial supported the efforts and goals of terrorist porting terrorism. institutions, including tougher prohibi- organizations, including Hamas, by provid- The same day as the Linde verdict, the tions against business activities with ing banking services for those organiza- U.S. Court of Appeals for the Second Cir- foreign shell banks and enhanced due tions—knowing that the accounts were cuit held in Weiss v. National Westminster diligence procedures for private banking being used to facilitate terrorist attacks— Bank25 that there is no requirement that a accounts.16 Additionally, other enforce- and for charities that Arab Bank knew were bank knowingly aid terrorist activities to ment tools, including IEEPA, have enabled affiliated with those organizations or were be liable under the Antiterrorism Act. The the president to block or restrict transac- fronts for them. The plaintiffs also alleged plaintiffs in Weiss were 200 U.S. nationals, tions with targeted countries, organiza- that Arab Bank administered the financial estates or heirs who were victims of Hamas tions, and individuals.17 Several presiden- infrastructure by which the Saudi Commit- terrorist attacks. They claimed that the tial executive orders, including Executive tee for the Support of the Intifada Al Quds defendant bank provided material support Orders 13224, 13099, and 12947, prohibit (the Saudi Committee) distributed benefits and resources to Hamas by maintaining financial transactions with designated to the families of “martyrs.”21 bank accounts and transferring funds for individuals and groups known as Specially a non-profit organization, Palestine Relief Designated Global Terrorists (SDGTs) and & Development Fund, a/k/a Interpal (Inter- organizations designated as Specially Des- Over the last four decades, pal), which allegedly solicited funds and ignated Terrorists (SDTs).18 otherwise provided support for Hamas. The Office of Foreign Asset Control (OFAC) Congress and the president have Before the district court, the bank won of the Department of Treasury maintains a devised several mechanisms to summary judgment by arguing that the list of FTOs, SDGTs, SDTs, and other indi- choke the lifeblood of criminal plaintiffs had not shown that the bank viduals and entities that are targets of U.S. had knowledge of, or exhibited deliberate economic sanctions—collectively, these enterprises: money. indifference to, whether Interpal funded targets are known as Specially Designated terrorist activities.26 In reversing the dis- Nationals (SDNs).19 The Department of At trial, the bank argued it provided trict court’s decision, the Second Circuit Justice has pursued sanctions and crimi- routine financial services and in no way relied on the Supreme Court’s decision in nal charges against banks that transact “knowingly” supported a terrorist organi- Holder v. Humanitarian Law Project,27 which business with SDNs. Notably, the govern- zation. It presented evidence of its AML held that under 18 U.S.C. §2339B, the requi- ment has also prohibited, and aggressively compliance program, including the use of site mental state is “knowledge about the prosecuted, financial transactions with four automated screening systems that incor- organization’s connection to terrorism, not countries that have been designated as state porate OFAC sanction lists. The plaintiffs’ specific intent to further the organization’s supporters of international terrorism: Cuba, case was built on the theory that “when terrorist activities.” Iran, Sudan, and Syria.20 a bank opens its doors to terrorists, The Second Circuit concluded that the Recent Litigation they’re going to be held accountable.”22 plaintiffs were only obliged to show that The plaintiffs highlighted the inadequacy the bank knew (or exhibited indifference) Over the last decade, government of the bank’s compliance program with that Interpal provided material support to authorities and civil litigants have used the testimony that bank representatives had a FTO, i.e. Hamas, not that the bank knew aforementioned laws to combat terrorist seen documentation specifically referenc- (or exhibited indifference) that Interpal’s financing more forcefully. While there are ing “martyr” payments. A critical issue support aided Hamas’s terrorist activities, several notable examples, we identify three arose during discovery when the bank and found that the plaintiffs had presented cases that illustrate the efforts financial argued that foreign bank secrecy laws pre- genuine issues of fact on this issue.28 institutions should take to avoid being used vented the production of certain customer An example of criminal enforcement is as an instrument of terror. account records. After years of refusing to the Justice Department’s prosecution of Using the private right of action cre- produce the records, the court imposed the largest Muslim charity in the United ated under the Antiterrorism Act, civil lit- adverse inference sanctions.23 States: United States v. Holy Land Founda- igants in Linde v. Arab Bank, CV-04-2799 At trial, the court instructed the jury tion for Relief & Dev., No. 3:04–CR–0240–P (NG)(VVP) (E.D.N.Y.), sought redress that because of the bank’s non-production (N.D. Tex.). Holy Land Foundation for Relief against a Jordanian bank claiming it had of customer records, the jury could infer & Development (HLF) was declared a Spe- actual knowledge that customers’ funds that the bank knowingly provided financial cially Designated Terrorist in 2001. In 2004, were used to facilitate terrorist attacks. services to Hamas and it processed pay- a grand jury indicted HLF for providing Linde represents the first lawsuit brought ments on behalf of the Saudi Committee to funding to Hamas’s Social Wing and using under the Antiterrorism Act to reach a terrorists, including those affiliated with HLF funds to support the families of sui- trial verdict against a financial institu- Hamas.24 The court also gave an instruc- cide bombers. Several banks that HLF used tion, and the verdict was unfavorable tion that the jury could find that Arab Bank were subpoenaed during the Justice Depart- for the bank. acted “knowingly” if the bank was willfully ment’s investigation. In November 2008, The plaintiffs were hundreds of U.S. blind to a fact. On Sept. 22, 2014, after after a mistrial and lengthy retrial, HLF and Wednesday, December 3, 2014

individual defendants were found guilty of ance between due diligence and jeopardizing dation,” Oct. 23, 2014, available at http://www.treasury.gov/ press-center/press-releases/Pages/jl2672.aspx multiple terrorism-related charges.29 client relations may be a delicate task, but 2. See 31 U.S.C. §5311 et seq. 3. Legal and Economic Impact of Foreign Banking Pro- Recommendations due diligence should be commensurate with cedures on the United States: Hearing before the House of the perceived level of risk. Representatives Comm. on Banking and Currency (Dec. 9, 1968) (statement by Rep. Patman, Chairman, House Comm. The above discussion demonstrates that Third, a financial institution should on Banking and Currency). 4. 31 C.F.R. §1010.311. robust BSA/AML compliance programs monitor and report suspicious activity 5. 12 C.F.R. §353.3. may be critical defense tools in avoiding and file SARs in a timely, comprehensive 6. See, e.g., Remarks of Jennifer Shasky Calvery, Director, Financial Crimes Enforcement Network, on Aug. 12, 2014 enforcement actions and civil lawsuits fashion. Financial institutions should pay (noting that BSA-required information reported in preced- alleging support for terrorist financing. close attention to the source of funds and ing month is directly relevant to 1,100 ongoing FBI investi- gations) available at http://www.fincen.gov/news_room/ The following are ways in which financial to suspicious money transfers. speech/html/20140812.html. 7. Money Laundering Control Act of 1986, P.L. 99-570. institutions may consider bolstering their 8. Annunzio-Wylie Anti-Money Laundering Act of 1992, P.L. compliance programs to defend against 102-550. 9. See e.g., Money Laundering Suppression Act of 1994, P.L. claims of “knowingly” providing material The same day as the Linde ver- 103-3235 and Money Laundering and Financial Crimes Strat- support to a terrorist organization. egy Act of 1998, P.L. 105-310. dict, the Second Circuit held in 10. See 18 U.S.C. §§2339A and 2339B. First, a financial institution may consider 11. See “Foreign Terrorist Organizations” available at http://www.state.gov/j/ct/rls/other/des/123085.htm. utilizing automated monitoring technology ‘Weiss v. National Westminster 12. Notably, in investigating terrorist financing, the enforcement discussion has shifted from a dirty-money-versus- that searches whether customers are on Bank’ that there is no require- clean-money analysis to a focus on the application of funds, governmental lists of FTOs, SDGTs and regardless of the source. ment that a bank knowingly aid 13. 18 U.S.C. §2339B(a)(2). Failing to comply with the SDNs, or are transacting with entities or seizure requirement can result in civil penalties. 18 U.S.C. individuals on the lists. As the Linde trial terrorist activities to be liable §2339B(b). 14. 18 U.S.C. §2339C. showed, however, an automated compli- 15. 18 U.S.C. §2333(a). under the Antiterrorism Act. 16. See e.g., USA PATRIOT Act, Title III, Section 311 et seq. ance program may be insufficient. (referred to as the International Money Laundering Abate- Second, a robust Know-Your-Custom- Finally, bank representatives should be ment and Financial Anti-Terrorism Act of 2001). 17. See 50 U.S.C. §§1701-1707; 31 C.F.R. §596.201. er program is recommended. In order willing to perform enhanced due diligence 18. The Department of Treasury has promulgated regulations detailing which individuals, groups, and entities may to comply with the terrorist financing and question potential connections to ter- be designated SDGTs—they are those listed in the referenced laws, financial institutions should con- rorist organizations even where it could executive orders and designated by the Secretary of State, in consultation with the Secretary of Homeland Security, the sider creating comprehensive Customer jeopardize client relationships. Attorney General, and the Secretary of the Treasury. See 31 Identification Programs (CIP) and perform C.F.R. §§594.201 and 594.310. Conclusion 19. See “Specially Designated Nationals & Blocked Per- requisite customer due diligence (CDD). sons” at http://www.treasury.gov/ofac/downloads/t11sdn. pdf. CIP compliance involves collecting and The landscape of terrorist financing laws 20. See, e.g., 31 C.F.R. §596.201. verifying customer information and thor- and regulations can be a veritable mine- 21. Linde v. Arab Bank, 269 F.R.D. 186, 191-92 (E.D.N.Y. 2010). ough record-keeping. Institutions may field for financial institutions to navigate. 22. Bernard Vaughan, “Arab Bank liable over Hamas attacks: U.S. jury” Reuters, Sept. 22, 2014, quoting Mark Werb- also consider performing CDD by iden- In implementing strong compliance steps, ner, a lawyer for some of the plaintiffs. tifying beneficial owners; understanding however, banks and other institutions 23. Linde, 269 F.R.D. at 202, 205. 24. Id.; Final Jury Charge at 14, Linde, 04 Civ. 2799 (E.D.N.Y. customer relationships; and monitoring can better safeguard against government Sept. 17, 2014) (Dkt. No. 1162). 25. 768 F.3d 202 (2d Cir. 2014). and updating customer information. enforcement actions and potential private 26. Id. at 205. Factors to consider when evaluating a cus- party lawsuits. Given large-scale terrorist 27. 561 U.S. 1 (2010). 28. Weiss, 768 F.3d at 205-06, 211-12. tomer’s risk level include the nature of the financing activity for the foreseeable future 29. In a related civil case against HLF, the family of a teen- customer’s business, the geography of the — including for groups like ISIS — diligent ager killed by Hamas sued HLF and was awarded $52 million, which was trebled to $156 million. Final Judgment Order, business, and the banking products used. monitoring and preventive measures are Boim v. Holy Land Found. for Relief & Dev., Case: 1:00-cv- High-risk factors may include: cash-inten- necessary to avoid damaging enforcement 02905 (N.D. Ill. Oct. 12, 2012) (Dkt. No. 889). sive account activity; entities controlled actions and private litigation. by offshore, private entities; private trust accounts; and fund transfers to or from •••••••••••••• •••••••••••••• • Reprinted with permission from the December 3, 2014 edition of the NEW YORK high-risk countries, including countries 1. See Remarks of Under Secretary for Terrorism and Fi- LAW JOURNAL © 2014 ALM Media Properties, LLC. All rights reserved. Further nancial Intelligence David S. Cohen at The Carnegie Endow- duplication without permission is prohibited. For information, contact 877-257-3382 embroiled in armed conflict. Striking a bal- ment for International Peace, “Attacking ISIL’s Financial Foun- or [email protected]. # 070-12-14-11