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Does Fear of Terror-Finance Cases Drive Big Banks From Risky Regions?

Financial institutions call it "de-risking" and believe it will create trouble in Middle East and Africa

Big banks believe that lawsuits alleging that they are financing terrorism cause "de-risking," and the banks are warning that this is a bad development. What are they talking about?  

De-risking is jargon for pulling out of places—perhaps the Palestinian territories or Somalia—where doing business has led to regulatory penalties and/or lawsuits. As government agencies and plaintiffs' attorneys have increasingly accused international banks of engaging in money laundering and financing terrorists, some banks have cut ties to clients in the Middle East and Africa.

Banks describe de-risking as a way to limit exposure to U.S. government fines and court liability. The banks further claim that the trend has resulted in a scarcity of banking services for poor people who depend on remittances from relatives in the West and for nongovernmental organizations devoted to humanitarian causes. Further, the banks assert that cutting off troubled regions from the international financial system will result in more—not less—crime and terrorism.

"This is a much bigger problem than people realize," says Geoffrey Sant, a banking industry lawyer in the New York office of the law firm Dorsey & Whitney. "And once de-risking has occurred, it's not likely to get reversed, so it's a problem that won't get fixed. Having pulled out of a region, banks will not go back."

I encountered Sant while reporting on a wave of innovative lawsuits accusing major banks of providing services to charities and other organizations with links to terrorism committed in the name of Islam. Sant's firm represents Bank of China in one such case pending in federal court in New York. Other banks targeted in similar litigation include HSBC, Credit Suisse, Royal Bank of Scotland, Standard Chartered, Barclays, National Westminster, and Credit Lyonnais. (The banks all deny wrongdoing.)

Sant and other defense lawyers cite de-risking as one reason courts should reject the lawsuits. Is this a real issue or a clever argument on behalf of self-interested corporate clients? Perhaps it's both. 

De-risking is real. Sant's firm has compiled statistics showing that since 2007, HSBC and other large international banks "have terminated correspondent banking relationships in more than 30 jurisdictions, including nations in the Middle East, Africa, and Asia." The paper also cites a European Central Bank survey of 17 clearing banks that have reduced their correspondent banking relationships by 7.5 percent on average, year-over-year, since 2002. 

David Cohen, deputy director at the Central Intelligence Agency and formerly under secretary of the Treasury for terrorism and financial intelligence, discussed the significance of the issue in a recent speech: "We are keenly engaged with this issue because we recognize that de-risking can undermine financial inclusion, financial transparency, and financial activity, with associated political, regulatory, economic, and social consequences." Cohen thus offered support to the industry contention that countries plagued by terrorism will see their legitimate businesses denied international financial services, leading to additional shady practices.

To get a skeptical perspective, I went to Gary Osen, the New Jersey lawyer who has pioneered litigation accusing banks of doing business, directly and indirectly, with terrorists. Last September, he persuaded a jury in federal court in Brooklyn that Jordan-based Arab Bank, one of the most prominent financial institutions in the Middle East, transferred money from donors in Saudi Arabia and elsewhere, through its branch in New York, to backers of Palestinian suicide bombers who killed Americans in Israel. This summer, a second jury will consider how much Arab Bank must pay—an amount that Osen estimates could approach $1 billion. (Arab Bank denies wrongdoing and vows a vigorous appeal.)

"Civil counter-terrorism litigation doesn't change the risk calculus at all for good corporate citizens," Osen tells me. "But it should worry banks that have consciously chosen to compartmentalize their internal controls so that they can maintain their customer relationships in less vigilant jurisdictions with people or entities they know to be terrorists."

Just operating in a high-risk jurisdiction—a territory controlled by Islamic State, for instance—isn't grounds for suing a financial institution under the Anti-Terrorism Act. "The law allows terror victims to sue in situations where a defendant knowingly provides support to terrorists, or demonstrates deliberate indifference to that fact," Osen says. "It doesn't let victims of terrorism sue companies for poor business judgment."

The upshot? If banks police themselves vigorously, de-risking might not be necessary. On the other hand, a secondary result of a country's allowing terrorism to proliferate may be that profit-driven international businesses, such as banks, depart for more stable markets.

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