Reports emanating from regional Arab bankers' conferences in Beirut indicate that a number of American financial institutions are exiting their correspondent relationships with "some small and medium-sized Middle Eastern banks."The question arises: are these actions a risk-based reaction to the verdict, on liability, entered this year against Arab Bank, in the New York District Court terrorist financing case ?
The official line. according to published reports, is that the US banks are closing those correspondent relationships, due to the threat of increased compliance costs. FATCA compliance expenses, however, will fall mainly upon the overseas banks, not the onshore financial institutions. Is this some sort of spin on the facts, to avoid the truth ?
We must then consider whether the Arab Bank case, and the impact that it now may now have upon risk managers, who are painfully aware that a final judgment on damages, which could exceed hundreds of millions of dollars, might threaten the reputation, or bring regulatory heat down upon, US banks who are closely linked to some of the other Middle Eastern banks with future civil judgments for terrorist financing. Compliance officers may now be seeking to extricate their banks, early on, from any future problems, arising in the aftermath of the Arab Bank case, by severing any correspondent connections with banks in the region.
Have American bankers begin to change the way they do business with banks in the Middle East, solely because of the groundbreaking effect of the Arab Bank case ? We cannot say, but we will be watching how US banks respond to the upcoming damages trial, and the absolutely damning effect of the testimony about the terrorist acts committed by Hamas upon the Bank's reputation. Some banks may choose to exist the region at large, to minimize risk of suffering the filing of terrorist financing or facilitation charges against them, and their offending correspondents.