ICT Views

US long reach just got a little longer

by: (Director ICT Academic Faculty) on

For the last decade non-US financial services firms have become increasingly aware of the risk of US law enforcement action, regulatory sanction or litigation hitting them hard, even when their physical location or business activities in the US are limited.

Cases such as Arab Bank and Freeman v HSBC have continued to demonstrate the huge financial risks of being sued by US nationals for alleged links to terrorist activity. A range of actions under US statutes have targeted fraud and money laundering far beyond the physical territory of the US.

What will the incoming US president and his potentially more isolationist tone mean for this trend of expanded US extra territorial influence in respect of financial crime and money laundering?

Statue Of Liberty

Continued Expansion

A recent court case in New York has indicated that judge-led law at least seems to be set on a continued expansion of US reach.

The New York Court of Appeals recent ruling in Al Rushaid v. Pictet & Cie held that the New York courts can claim jurisdiction over NY based correspondent accounts even where a foreign bank does not direct that funds be deposited into the NY account.

The case involved litigation between a Saudi businessman who was suing a Swiss bank alleged to have accepted laundered funds from its NYC based correspondent accounts. The funds in question represented bribes and corrupt payments solicited from vendors by three employees of his oil company. The vendors allegedly wired the illicit funds to the Swiss bank’s correspondent accounts in New York, and the funds were then transferred to the Bank’s accounts in Switzerland that had been set up by a Bank executive for the allegedly corrupt employees.

Although the Swiss bank lacked any physical presence in New York, and did not itself deposit funds in the New York accounts, the majority found that “repeatedly approv[ing] deposits and the movement of funds through [a New York] account for the benefit of its customer” constituted “transacting business in New York”.

“Essential Step To Money Laundering”

The majority found that Pictet “affirmatively act[ed]” by crediting the funds transferred first to the New York correspondent account and then to the employees’ accounts in Switzerland, and that crediting these transactions was an “essential step in the money-laundering scheme.” As a result, exercise of personal jurisdiction over Pictet was warranted under New York’s Long Arm statute and within the bounds of “traditional notions of fair play and substantial justice” under the due process clause of the United States Constitution.

It is important to emphasise that the decision does not appear to give carte blanche to US agencies claiming jurisdiction over all correspondent accounts operated by non-US firms, central to the decision were the allegations that the bank knowinglyfacilitated wrongdoing through New York correspondent accounts, and the Court of Appeals reaffirmed that the use of correspondent accounts must be connected to the alleged wrongdoing to subject a bank to jurisdiction.

The case still remains subject to the bank’s possible legal challenge to the U.S. Supreme Court.

Despite this uncertainty, the Court’s decision emphasizes that foreign banks must continue to consider the very real risks of being subject to US extraterritorial sanctions when undertaking their risk assessments and formulating business strategies.

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