By Brett Wolf

ST. LOUIS (Reuters) - A U.S. court verdict this week finding that Arab Bank Plc provided material support to Hamas could cause banks to cut ties to foreign banks and customers and make it even harder to monitor the financing of militant networks, banking industry representatives said.

A U.S. jury on Monday found the Jordan-based Arab Bank liable for providing material support to Hamas and said it must compensate victims of two dozen attacks attributed to the U.S.-designated terrorist group in Israel and the Palestinian territories.

Nearly 300 Americans, who were either victims or related to victims of attacks linked to Hamas, had sued Arab Bank in 2004 under the Anti-Terrorism Act, which lets victims of U.S.-designated foreign terrorist organizations seek damages.

Arab Bank immediately said it would appeal the verdict and cited a series of what it considered legally incorrect court rulings that restricted its ability to mount a defense.

U.S. banks are awaiting the outcome of the intended appeal before taking concrete actions, said Rob Rowe, a lawyer with the American Bankers Association (ABA), a trade group.

But Rowe and other industry officials said the verdict could force U.S. banks to limit business in politically volatile regions such as the Middle East or elsewhere and drive transactions deeper underground, the officials said.

"What worries me is that it (the verdict) will also add to the likelihood of 'de-risking' – where banks exit customers and services," Rowe said.

"The transactions will continue because there's a need. But it may be underground or offshore, creating a fertile environment for illicit finance that's outside the scope of the United States to detect or control," he said.

A spokesman for the U.S. Treasury Department's anti-money laundering unit, the Financial Crimes Enforcement Network, did not immediately respond to a request for comment on the impact of the Arab Bank verdict.

"GUN SHY"

The case comes as banks become "increasingly gun shy" about serving customers thought to pose a high-risk of money laundering or terrorism finance, Rowe said. It has become too difficult to defend decisions to keep risky customers during examinations by increasingly aggressive regulators, he said.

Said a senior anti-money laundering officer at a large U.S. bank, who also expressed concern about the potential business impact on banks, "You cut off Jordan, you cut off the United Arab Emirates, you cut off Lebanon, you cut of Saudi Arabia. But what about China? Are you going to cut off China? Where does it end?"

Potential de-risking moves would likely involve banks in the United States cutting ties to both foreign counterparts and individual clients that are based in, or do significant business in, jurisdictions deemed to be at high-risk of terror finance.

Since the Sept. 11, 2001 attacks banks have been quicker to avoid business seen as risky from a counter-terrorism enforcement standpoint.

For example, banks in the United States and elsewhere have closed accounts belonging to money transfer businesses dealing with Somalia out of concern they might be facilitating transactions linked to U.S. designated-terrorist groups including al Shabaab.

As a result, Somali expatriates in Minnesota and elsewhere are finding it difficult to send money to relatives, and money-laundering experts have raised concerns that the money may be moving through illegal channels.

In 2011 U.S. regulators clarified that banks can provide services to foreign diplomatic missions and still comply with anti-money laundering laws after several major banks moved to close embassy accounts out of concern over compliance risks.

OTHER SUITS AGAINST BANKS

While Arab Bank was the first to go to trial, additional banks are being sued in the United States over allegations of involvement in terrorism-linked transactions.

Lawsuits are pending in New York against Bank of China Ltd, which is accused of providing services to Palestine Islamic Jihad, and Credit Lyonnais SA, which is accused of aiding Hamas. Those banks have denied the respective allegations.

Also, the 2nd Circuit U.S. Appeals Court in New York ruled on Monday that Royal Bank of Scotland Group Plc's National Westminster Bank unit must face claims by terrorism victims over banking services it gave a charity linked to Hamas.

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