Hamas’ Bank: Meet US trial lawyers

Could a jury decision on terror financing trigger #WTO liability for the US?

Earlier this week, a New York jury found a Jordanian bank liable for damages under the 1990 US Anti-Terrorism Act (ATA). According to the Times, it was “the first time a bank has ever been held liable in a civil suit under a broad antiterrorism statute.” The Bank plans to appeal the case, which could produce a damage award in the billions of dollars.

Allegedly, the Arab Bank (Jordan’s largest bank and a major conduit of US and Israeli foreign aid money) ran a life insurance program for suicide bombers. US victims of suicide bombing attacks in Israel invoked the ATA to claim civil damages. According to Fortune, the US courts have jurisdiction over the case because some of the transfers were conducted through Arab Bank’s New York affiliate – although the New York link is pretty tenuous from the available records.

The Arab Bank claims innocence, but has also refused to hand over documents proving this – saying it would violate financial secrecy laws of several countries where it conducts business. Here is Fortune again:

The Arab Bank’s prospects of successfully defending itself have been hobbled, if not foreclosed, by U.S. District Judge Nina Gershon’s July 2010 order imposing stiff sanctions on the bank for its failure to turn over records, an act that would have—according to both the bank and the Kingdom of Jordan, which filed papers on the bank’s behalf—violated the country’s bank secrecy laws…

Judge Gershon’s controversial sanctions order relates to document requests the plaintiff made in 2005, seeking bank records of certain named individuals and organizations. Most of the records were located in Jordan, Lebanon, or Palestinian territories, where they were protected by bank secrecy laws, meaning that the bank would have risked criminal prosecution in those countries for complying with Judge Gershon’s order.

The general U.S. rule is that, even under such circumstances, U.S. judges do have the power to order records to be turned over, but they must first perform a balancing test, examining all the equities of the situation and taking into account considerations of international “comity”—i.e., respect for foreign countries’ laws. Given the interests that both the U.S. and Jordan had expressed in fighting terrorism, Judge Gershon ordered the records turned over and, when they weren’t, imposed a crushing and, potentially, case-dispositive sanction order.

Under that order the jury would be instructed that it may (though it need not) infer solely from the bank’s failure to turn over those records that the bank did, indeed, “knowingly and purposefully” aid the financing of terrorists. Equally devastating, the order forbids the bank from introducing any evidence of its allegedly innocent state of mind if that evidence might have been contradicted by the records that were never turned over.

In other words, the judge made a decision that US interests trump foreign laws and that a jury was to be instructed to disregard much of Arab Bank’s argument. This does not put the Arab Bank in a strong position.

Obviously this case is of profound interest for scholars of terrorism and damages suits. But I am most interested in two different angles: the implications under international economic law, and how economic diplomacy affects domestic politics.

Let’s take the latter issue first. According to the Times, when Arab Bank appealed to the US Supreme Court…

The Obama administration was split: The State Department pushed for Supreme Court intervention; Jordan, where the bank has its headquarters, is a loyal ally, officials there said. Others wanted the court to stay out of it: Tax and treasury officials did not want banks to hide behind foreign bank-secrecy laws in their investigations, and other justice divisions felt that the department should not be intervening against American victims of terrorist attacks.

The Supreme Court declined to hear the case, and it went to trial with a version of the sanctions in place.

This recalls some of the internal Obama administration maneuvering around Argentina’s debt default. Certain administration officials supported Argentina’s cause – on the notion that the US has a financial interest in having governments feel comfortable making sovereign debt issues in New York, and a sovereign interest in not having boomerang lawsuits against it. Others wanted to punish Argentina for its supposedly bad policy decisions.

These internal divisions may explain why Obama’s solicitor general predicted doom-and-gloom if the Arab Bank case went forward, but also why it ultimately did not ask the Supreme Court to intervene.

This takes us to the international economic consequences. If the New York case were to go forward, the Obama administration predicts various adverse economic and political consequences:

The United States has a significant interest in the stability of Jordan’s financial and political system. Petitioner is the single largest financial entity in Jordan. Pet. App. 232a-233a. This Office is informed by the Departments of State and the Treasury that petitioner is responsible for processing financial assistance to Jordan through various United States foreign aid programs. Those Departments also report that petitioner is a constructive partner with the United States in working to prevent terrorist financing, including by reporting suspicious financial activities to the government of Jordan, which in turn exchanges information with the United States through international sharing arrangements. For example, petitioner is a leading participant in a number of regional forums on anti-money laundering and combatting the financing of terrorism.

Petitioner is also by market share the largest bank in the West Bank and Gaza, and it plays an important role in financing public debt there. See U.S. & Foreign Commercial Serv. & U.S. Dep’t of State, Doing Business in the West Bank & Gaza 54-55 (updated June 12, 2013), http://export.gov/westbank/build/groups/public/@eg_we/documents/webcontent/eg_we_064047.pdf. In addition, petitioner processes the customs clearance revenues from Israel that represent the overwhelming majority of Palestinian Authority revenue.

The district court’s sanctions order, by (among other things) permitting the jury to draw an adverse inference with respect to petitioner’s mental state, increases the likelihood that petitioner will be found liable at trial. See Pet. App. 240a-241a; Jordan Amicus Br. 17-19. Beyond the obvious financial stakes for petitioner’s shareholders, petitioner asserts (Pet. 31-32) that correspondent banks and other counterparties could cease doing business with petitioner, and depositors might withdraw their accounts out of concern for petitioner’s solvency. See Jordan Amicus Br.18.

To be sure, petitioner would face the risk of losing at trial even in the absence of the sanctions imposed by the district court. But the sanctions order makes a  finding of liability more likely by permitting the jury  to draw inferences adverse  to petitioner and by barring petitioner from presenting certain evidence. The  possible effect of a judgment  of liability on United  States foreign-relations interests and the stability of  the region was therefore a  relevant consideration in  determining the appropriate form and severity of the  sanctions.

The Obama administration made similar predictions of negative ripple consequences during US courts’ rough handling of Argentina’s debt default – see here, here and here for background – to about the same level of dismissal by the courts.

This discrepancy between the US executive and judicial branches – as well as the novelty of the court interpretations – would give ample fodder to Jordan and Arab Bank to push for international economic sanctions against the US. As I argued in those links, the US has the obligation to not discriminate and to allow free transfers in and out of its territory. If US courts award damages and seek to enforce them through measures like fund limitations, that could be a problem under the US’ WTO obligations and possibly under the US-Jordan bilateral investment treaty.

Arguably, the need for international law remedy is at its highest when domestic courts tread into extraterritorial jurisdiction and when they are most dismissive of a potentially special position of foreign or multi-nationally operating parties – as US courts seem to be in both the Argentina and Jordan cases. It will be interesting to see how this case plays out.