Lebanese Bank Case Tests U.S. Privacy Law
A judge's looming decision in a case that has snarled a fugitive Lebanese woman and eight financial firms could challenge how bank-privacy laws are interpreted in the U.S.
Judge Ellen M. Coin of New York State Supreme Court in Manhattan is weighing whether to force banks such as Banco Santander SA,Credit Suisse Group AG, HSBC Holdings PLC and UBS AG to turn over information about private accounts tied to the woman, Rana Koleilat. Ms. Koleilat, a former secretary at Lebanon's Al-Madina Bank who later became one of its top advisers, fled the country in 2005 following her conviction by a Lebanese court of a massive fraud that led to the bank's collapse in 2003.
The New York civil suit, filed earlier this year by Al-Madina's founder and majority owner, Adnan Abu Ayyash, seeks the recovery of more than $3 billion allegedly stolen by Ms. Koleilat, according to court filings and Steven A. Cash, a lawyer representing Mr. Ayyash. As part of his efforts to determine where the money went, Mr. Ayyash, who lives in Saudi Arabi, is seeking information about money transfers and accounts tied to Ms. Koleilat at foreign banks with U.S. operations. The lawsuit doesn't allege wrongdoing by the banks.
Lawyers for the banks told the judge at a hearing last week that they shouldn't be compelled to search for records held by entities outside the U.S. Mr. Ayyash contends that the New York operations of each bank and the city's stature as a global financial center support the disclosure demands. Judge Coin hasn't made a decision but ordered the banks not to transfer any assets relevant to the suit.
Some lawyers not involved in the dispute said it is a test of bank-privacy laws. When bank records are sought in U.S. lawsuits, banks with branches or subsidiaries in the U.S. generally aren't required to search for the documents outside the U.S. Such battles usually must be decided in foreign courts. Behnam Dayanim, co-chair of the litigation and regulatory practice at Axinn, Veltrop & Harkrider LLP said he would be surprised if the lawsuit leads to wider disclosure requirements by non-U.S. banks on foreign accounts. Still, the judge could make a narrower ruling that "creates significant change in how foreign institutions understand their vulnerability to discovery in the United States, especially in cases where they're not parties," Mr. Dayanim said.
At the court hearing, Heather Kafele, a lawyer representing Santander and Itaú Unibanco SA of Brazil, said that forcing the banks to comply with the demand would result in a "world-wide search" for documents, violating foreign privacy laws and "inundating" New York courts with similar cases. Lawyers for Credit Suisse, HSBC and UBS said U.S. operating units should be considered separate from non-U.S. entities for the purposes of legal jurisdiction and disclosure.
Ms. Koleilat, the former Al-Madina employee, couldn't be reached for comment, and her whereabouts couldn't be determined. She fled to Brazil after her conviction in Lebanon. Attempts to reach lawyers who have represented her weren't successful. Mr. Ayyash, who didn't attend last week's court hearing, has alleged that Ms. Koleilat began stealing from Al-Madina as early as 2002, according to court records. In 2006, Ms. Koleilat was arrested in Brazil but then released. In 2007, a Brazilian court denied an extradition request from Lebanon, citing a lack of follow-up from the Lebanese government.
A United Nations commission questioned Ms. Koleilat about whether the missing funds were linked to the 2005 assassination of former Lebanese Prime Minister Rafik Hariri.She has denied knowing anything about the missing money or the assassination. She wasn't mentioned in the U.N.'s 2010 report on the Hariri killing.
Since at least 2005, Mr. Ayyash has enlisted lawyers and private investigators "throughout the world" to help locate the stolen assets through "a complex and intricate network of bank accounts, shell companies and funds transfers," according to his lawsuit. The suit initially sought cooperation from a dozen banks, but Mr. Cash said he is no longer seeking information from four or those firms. Additional banks might be added to the records request, he said. The spat comes as some lawmakers and other critics push for toughened oversight by banks of their global operations, in part because of the potential for money-laundering. HSBC said in July 31, 2012 that it set aside $2 billion to cover regulatory problems tied to money laundering and other issues.
A Senate report alleged that some of the U.K. bank's global operations, including those in Mexico and the U.S., were used by money launderers and potential terrorist financiers. HSBC Chief Executive Stuart Gulliver said "what happened in Mexico and the U.S. was shameful."
—Matthew Cowley, Farnaz Fassihi and Leila Hatoum contributed to this article.
Lebanese Bank Case Tests U.S. Privacy Law
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