A New York State trial court recently held that claims of terrorist attacks victims based on Israeli law could proceed against the bank that allegedly had knowingly executed money transfers to the terrorist groups responsible for the attacks. Keren Elmaliach v. Bank of China Ltd., No. 102026/09 (N.Y. Co. 2011) (“Elmaliach”). Specifically, the court found that, despite banks not having a general duty to protect non-customers from the intentional wrongs of its customers, defendant Bank of China Ltd. (“Bank of China”) could be liable for not taking action where it allegedly had actual knowledge that it was assisting in the funding of terrorist attacks. The court also found that dismissal of the case was not appropriate on the grounds of forum non conveniens, as Bank of China was conducting discovery in New York State in connection with a similar pending case.

Background

This case started as two separate suits with nearly identical factual allegations and causes of action that were consolidated by the court. Both complaints concern terrorist attacks perpetrated in 2006 and 2007 by the terrorist groups Hamas and Palestine Islamic Jihad (“PIJ”), and were brought on behalf of the victims of the attacks.

Both Hamas and PIJ have been designated as Foreign Terrorist Organizations by the United States since 1997, and as Specially Designated Global Terrorists since 2001. As a consequence, both organizations are “subject to strict economic sanctions,” which are enforced by “[n]early all banks and financial institutions around the world,” and are intended to severely limit both Hamas’ and PIJ’s ability to conduct banking activity that can fund terrorist activities. Bank of China allegedly began providing banking services to Hamas and PIJ in 2003, and executed several wire transfers totaling millions of dollars by and through Bank of China’s branches in the United States. Most of the transfers were allegedly sent to an account belonging to Said al-Shurafa (“Shurafa”), a senior operative in both Hamas and PIL, who transferred money to Hamas and PIL in Israel “for the purpose of planning, preparing and executing terrorist attacks.”

The complaint alleged that Bank of China’s participation in the wire transfers violated Israeli law and “was the proximate cause of their injuries.” Specifically, the plaintiffs alleged that during a 2005 meeting between the Prime Minister of the State of Israel, China’s Ministry of Public Security and China’s central bank, Israel officials told the Chinese officials that the Bank of China wire transfers were being used to perpetuate the attacks, imputing actual knowledge to Bank of China. The plaintiffs also asserted that Bank of China “knew or should have known” that the wire transfers were funding terrorist attacks prior to the 2005 meeting, because “the transfers were made in cash, [] the funds were withdrawn by Shurafa within a day of being received, [and] the transfers were large . . . .” The plaintiffs alleged that banks recognize that these practices are indicative of illegal activity and that they are “under an obligation to monitor, report and refuse to execute such suspicious and irregular banking transactions.”

Related Litigation

Counsel for plaintiffs filed two other substantially similar lawsuits on behalf of other Israeli terrorist victims against other financial institutions that similarly provided wire transfers to terrorist organizations. For example, in Licci v. American Express Bank Ltd., 704 F. Supp. 2d 403 (S.D.N.Y. 2010) (“Licci”), the plaintiffs alleged that American Express Bank Ltd. was negligent under Israeli law because it “effected millions of dollars in wire transfers” for the Lebanese Shahid (Martyrs) Foundation, which is alleged to be the financial arm of Hizbollah. The court dismissed the action, reasoning that the plaintiffs had not pled any factual allegations to suggest that American Express “had any ties to Hizbollah, or that they knew or had reason to believe that the monies at issue would be used to carry out terrorist attacks on civilian targets.” Absent such knowledge, banks are not negligently liable where they benefit “in some general, nondescript manner” from “routine banking services.”

The second related action, Wultz v. Islamic Republic of Iran, 755 F. Supp. 1 (D.D.C. 2010) (“Wultz”), involved an American citizen who was killed in a PIJ suicide bombing in Israel that also killed six of the decedents in the Elmaliach case. The court in Wultz denied a motion to dismiss the case brought by Bank of China, a defendant in the Wultz case, reasoning that the plaintiffs’ allegations “were sufficient to give rise to an inference that the bank actually knew it was providing financial services to a terrorist organization.” The court in Wultz also found that the plaintiffs had adequately pled causation, because the “plaintiffs’ injuries were reasonably foreseeable to the bank,” and distinguished the case from Licci on the ground that the defendant in Licci was not alleged to have actual knowledge of the bank’s terrorist activities. On a motion by Bank of China, the Wultz court later severed and transferred the claims against Bank of China to the Southern District of New York, where the case is in the discovery phase.

The Claims and Defenses

The complaints in Elmaliach alleged two causes of action. The first cause of action was brought pursuant to Sections 35 and 36 of Israel’s Civil Wrongs Ordinance “which create a civil wrong of negligence,” and imposes liability on a person “who injures others by committing acts (or refraining from action) under circumstances under which a reasonable person would have done otherwise.” The second cause of action was brought under Section 63 of Israel’s Civil Wrongs Ordinance, which imposes liability where a person violates an “enactment” that is “intended for the benefit or protection of another person.” To support the “enactment” requirement of Section 63, plaintiffs alleged that Bank of China violated a number of Israeli laws that “criminally prohibit the provision of material support to terrorist organizations such as Hamas and PIJ.”

Specifically, the plaintiffs alleged that Bank of China’s participation in the wire transfers to Hamas and PIJ “was the proximate cause of their injuries,” and carried out with actual knowledge that the wire transfers used by the terror organizations were funding terrorist attacks. Bank of China moved to dismiss the complaints for failure to state a claim or, in the alternative, on the grounds of forum non conveniens.

The Court’s Ruling

The court first noted that, even though the Wultz decision by a federal district court was not binding on it, Bank of China had not presented a sufficient argument as to why it should not adopt the reasoning and conclusions of the Wultz court. Despite this, the court stated that it had conducted its own de novo review of the applicable law and found that Wultz was correctly decided. The court agreed with the Wultz court’s finding that Bank of China’s actual knowledge of its customer’s terrorist activities distinguished it from Licci, “and takes it outside the usual rule that ‘banks do not owe non-customers a duty to protect them from the intentional torts committed by their customers.’” The court stated that, because on a motion to dismiss it was required to accept the facts alleged in the complaint as true, it was immaterial that Bank of China denied having actual knowledge and “denigrat[ed] the quality of the evidence supporting the allegation.”

The court stated that it agreed with Bank of China’s contention that, prior to the 2005 meeting, the “red flags” alleged by plaintiff “would, at best, impute constructive knowledge” to Bank of China and, citing In re Agape Litig., 681 F. Supp. 2d 352, 364 (E.D.N.Y. 2010), this would not be sufficient for liability. As such, the court found that, insofar as one of the attacks alleged in the complaint occurred before Bank of China allegedly had actual knowledge, these claims may be subject to dismissal at a later date. The court stated, however, that dismissal would not be appropriate until discovery was completed concerning Bank of China’s knowledge of Shurafa’s terrorist activities.

Lastly, the court rejected Bank of China’s forum non conveniens argument. Citing Islamic Republic of Iran v. Pahlavi, 62 N.Y.2d 474, 479 (1984), the court stated that the relevant factors are the potential hardship to the defendant, the unavailability of an alternative forum, the residence of the parties, and whether “the transaction out of which the cause of action arose occurred primarily in a foreign jurisdiction.” “Generally, unless the balance is strongly in favor of the defendant, the plaintiff’s choice of forums should rarely be disturbed.” The court held that Bank of China did not meet its burden in showing that New York was an inconvenient forum as it has three branches in New York, and noted that where a party is a “multinational corporation[] with ample resources, any hardship in bringing documents or witnesses to New York is generally minimal.” Citing Georgia-Pacific Corp. v. Multimark’s Intl., 265 A.D.2d 109 (N.Y. 1st Dep’t 2000), the court also found that the potential use of a New York banking facility to effectuate the wire transfers provided for a “sufficient nexus to the state.” Lastly, citing Rostuca Holdings v. Polo, 246 A.D.2d 475 (N.Y. 1st Dep’t 1998), the court held that New York was an appropriate forum because Bank of China was already conducting discovery in New York in the Wultz action.

Conclusion

While banks generally do not have a duty to protect non-customers from the intentional torts of their customers, the court in Elmaliach took the view that a bank may be liable for not taking action where it has actual knowledge that it is funding such a wrong. Accordingly, financial institutions should be on notice that, if they provide financial services to individuals or groups who partake in terrorist activities, they may be amenable to claims, including those based on foreign law. To reduce the risk of liability, financial institutions should be conscious of who it provides banking services to, and should take warnings seriously if approached concerning potential terrorism-related transactions.