The Supreme Court granted certiorari on April 3 to decide whether Jordan-based Arab Bank may be liable for claims including allegations that its New York branch processed transactions for known terrorists. While the central issue before the Court will be the scope of the Alien Tort Statute (“ATS”) – namely whether it permits corporate liability for violations of international law – Jesner v. Arab Bank also illustrates how alleged AML/BSA failures can lead to yet another avenue for secondary legal liability for financial institutions, as we previously have noted in other contexts. Depending on the outcome of the Court’s opinion in Jesner, such U.S. exposures may extend to foreign financial institutions even when the alleged conduct occurs primarily abroad.
In brief, the petitioners in Jesner represent foreign nationals injured by, or whose family members were killed in a string of terrorist attacks in Israel, the West Bank and Gaza over a period of ten years. Prior to the petitioners’ original action, Arab Bank New York, acting as a correspondent bank for Arab Bank, was penalized by FinCEN and the Office of the Comptroller of the Currency for violations of the Bank Secrecy Act. In a related case in the Eastern District of New York, the bank was found liable for violations of the Anti-Terrorism Act (“ATA”) (under which American victims of terrorist attacks abroad may sue for damages in federal court). According to the petition for certiori, the complaint implicates the following facts:
This case involves corporate transgressions that occurred within the United States. Petitioners allege (and a jury has determined, in parallel proceedings involving non-alien plaintiffs) that respondent Arab Bank knowingly used its New York branch to collect donations, transfer money, and serve as a “paymaster” for international terrorists. Indeed, the Bank distributed U.S. dollar payments in the hundreds of millions to finance suicide bombings and to make so-called “martyrdom” payments – payments rewarding families of the perpetrators for killing innocent civilians.
On appeal, a panel of the Second Circuit held in Jesner that the Second Circuit’s prior opinion in Kiobel v. Royal Dutch Petroleum, or “Kiobel I,” foreclosed the complaint because it held that the ATS categorically did not extend to corporate defendants. The Jesner panel explained that Kiobel I remained the controlling law of the Second Circuit, despite the contrary rulings of other federal circuit courts regarding possible corporate liability under the ATS, and even though the Supreme Court affirmed the Second Circuit’s conclusion on other grounds in Kiobel II for a reason which, according to the Jesner plaintiffs, suggested that corporations still could be liable under the ATS, at least under certain factual claims. Specifically, the Supreme Court held in Kiobel II that the general presumption against the extraterritorial application of statutes applied to the ATS because the ATS failed to provide a clear Congressional indication that it applied to extraterritorial acts. The Court also explained:
On these facts, all the relevant conduct took place outside the United States. And even where the claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritorial application. . . . Corporations are often present in many countries, and it would reach too far to say that mere corporate presence suffices. If Congress were to determine otherwise, a statute more specific than the ATS would be required.
Last year, the Second Circuit decided against rehearing the Jesner case en banc. Four of the judges issued an opinion concurring in the decision not to grant rehearing, writing that the case could and should have been decided simply under Kiobel II: that is, regardless of whether the ATS extends to corporations, the bank’s “mere corporate presence” in the U.S. did not overcome the ATS’s presumption against extraterritoriality because, according to the facts alleged in the complaint, “[t]he only contact with the United States mentioned in the Arab Bank [panel] opinion is that terrorist groups used branches of Arab Bank in a score of countries (including a single U.S. branch, in Manhattan) for, among other ordinary transactions, the conversion of funds from one currency to another.”
The Supreme Court’s ruling in Kiobel II did not decidedly rule on corporate liability; the Court now will have a second opportunity to determine whether a corporation, as opposed to a natural person, ever can be found liable under the ATS – and if so, possibly explain how, when the fact pattern primarily involves conduct occurring abroad. As we previously have noted, the criminal money laundering statutes have been recognized as having extraterritorial application – based on explicit Congressional intent – and that they can so apply even when a defendant never even enters the U.S. and the alleged “conduct” within the U.S. includes non-physical activity such as a wire transfer, e-mail or other electronic activity.
Jesner may serve to impact the foreign financial services industry’s approach to AML/CFT compliance, especially as it relates to correspondent banking activities within the United States. If the Supreme Court finds that foreign banks are at least potentially subject to jurisdiction under the ATS, then actual findings of jurisdiction – as well as liability – in particular cases will turn on whether there are sufficient allegations of related misconduct occurring within the U.S. Of course, a bank’s AML/BSA compliance staff operating within the U.S. represent the persons charged with initially detecting and preventing such improper financial transactions. The crux of Arab Bank’s liability hinges on the adequacy of its controls – namely how far it was reasonably expected to go to understand and appreciate how its services were being used. Given this, findings of jurisdiction and ultimate liability (assuming that jurisdiction exists) under the ATS likely will depend on whether the bank’s U.S. correspondent banking transfers served as a means to aid and abet violations of international law, and whether it acted with a sufficient mental state. Should the Court conclude that these transfers form a sufficient footprint in the U.S., such a decision will likely reinforce the need for rigorous correspondent banking controls. Such a decision also will reinforce the need for foreign banks to support their U.S. AML/BSA compliance staff.