New EO on Terrorist Listings Could Worsen Bank Derisking

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Date: 
September 19, 2019
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A new Executive Order (EO) signed by President Trump on September 10, 2019, specifically targets correspondent bank relationships as possible sources of terrorist financing. The new order, which gives U.S. Treasury’s Office of Foreign Asset Control (OFAC) the authority to block, prohibit or restrict the scope of these banking relationships, could further limit financial access for nonprofit organizations (NPOs) and other sectors.

EO 13886 amends EO 13224, signed in 2001, which established the Specially Designated Global Terrorist (SDGT) list maintained by OFAC and had served as the foundation for most counterterror designations since the 9/11 attacks. The new EO also terminates EO 12947, signed by President Bill Clinton in 1995, which established the much smaller Specially Designated Terrorist (SDT) list for those who threaten the Middle East peace process. That program has been described as a “bureaucratic artifact” that failed to keep up with the modern patterns of terrorist activity. The new EO is intended to address where and how terrorists operate today.

Section 1(a)(ii)(A) of EO 13886 provides for the first time that people who have participated in training to commit acts of terrorism are eligible for the terrorist designation. In addition, Section 1(a)(ii)(B) adds leaders of designated entities to those eligible for designation. Although the new EO terminates EO 12947, it incorporates the SDT list by referent in Section 1(a)(iv).

Section 1(b) allows U.S. Treasury to prohibit the opening, as well as prohibit or impose strict conditions on the maintenance of correspondent accounts or payable-through accounts of any foreign financial institution that is determined to have knowingly conducted or facilitated a significant transaction on behalf of any blocked entity. Over the past several years, the decline in correspondent banking relationships has been cited as a driver of the global problem known as bank “derisking,” when financial institutions terminate, rather than manage accounts or transactions perceived as higher risk.

In addition, this provision allowing Treasury to block correspondent accounts means that bankers or account managers who materially assist or support these blocked foreign financial institutions could face action from U.S. Treasury, including designation (Section 1(a)(iii)(F)). This personal liability could send a chilling effect through the financial industry and further limit financial access.

Experts have noted that the new EO allows the U.S. government to target supporters of terrorism without requiring that designees be tied to a specific act of terrorism.

Read EO 13886