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Potential game changer in terror finance law

November 29, 2012

A ruling by the New York Court of Appeals may change the way terror financiers take advantage of correspondent bank relationships in the U.S.  Kudos to Shurat HaDin for pushing this case forward (and for linking to the news too).

This ruling will probably cause a stir among bank compliance circles because it could be difficult and expensive to conduct sufficient screening of correspondent banks.  But the alternative, which is to passively condone terrorist transactions in your bank that originated from a foreign bank, isn’t such a great alternative.

Given the size and centrality of the financial sector in New York, this state-level ruling will have international consequences.

From the Jerusalem Post on Nov. 21:

Lebanon War victims alter game of terror financing

Terror groups may no longer be able to do transactions in US dollars after a groundbreaking ruling by the highest state court in New York, the New York Court of Appeals, announced Shurat Hadin, the Israel Law Center, on Wednesday.

The ruling was issued on Tuesday in favor of victims of Hezbollah rocket attacks from the 2006 Lebanon War and could be a “game changer” in the global financial war on terror financing.

Until now, terror financing could avoid scrutiny in the US by making fund transfers through American correspondent banks.

A correspondent bank essentially serves as a middle bank for fund transfer for banks that do not have local US branches.

As long as the terrorist-affiliated banks had no local branch in the US they were insulated from any legal consequences, and the correspondent bank could plead ignorance regarding the transactions.

However, using a new interpretation of an existing law, the appeals court ruled that correspondent banks will now be held liable for civil damages if it is found that they facilitated transactions that ultimately can be traced back to terror entities.

This places the onus on correspondent banks to do more careful policing of where fund transfers are eventually going even behind sometimes what could be many layers of straw companies to hide that terrorists are receiving the money.

Most importantly, many correspondent banks simply may cease involvement in any transactions where they have doubts about a possible terror connection to avoid even the possibility of heavy civil liability and bad press.

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