A lawsuit brought by victims of suicide bombings in Israel, alleging that British bank NatWest knowingly provided services to a charity linked to militant Islamic group Hamas, is ringing alarm bells with banking lawyers.

A U.S. federal judge ruled earlier this week that the suit, making claims on behalf of 15 families of Americans wounded in 10 attacks between March 2002 and August 2003, could proceed.

The case against NatWest, a unit of the Royal Bank of Scotland, suggests that foreign banks may now be open to lawsuits in the U.S. by a victim of a terror attack, if it can be shown that an account holder was linked to an organisation that the U.S. believes to be linked to the attack, lawyers said.

It could also create a whole new set of terrorism related risks and burdens for European banks that operate in the United States and other foreign jurisdictions.

This is scary for any foreign bank, said Ellen Zimiles, a former U.S. federal prosecutor who heads Daylight Forensic and Advisory, a U.S. company advising banks on compliance issues.

It means any bank with activities outside the United States can be sued in the United States under U.S. law, she said in a telephone interview while on a visit to London.

It's a petrifying situation for foreign financial jurisdictions. This is about an account in the United Kingdom and I don't know if the UK had anything on whether this organisation had a link to terror activity.

LONG ARM OF U.S. LAW

The families, who filed suit in January in a federal court in Brooklyn, New York, allege that NatWest knowingly maintained accounts for a charity called Interpal and transferred money between those accounts and Hamas front organisations, court documents show.

Hamas said it was responsible for nearly all of the 10 attacks.

The U.S. government designated Interpal as a terrorist organisation in August 2003, several days after the last of the bomb attacks cited in the suit. Israel had branded Interpal as a terrorist organisation in 1998.

NatWest said that Interpal, or the Palestinian Relief and Development Fund, was cleared by Britain's Charities Commission, which regulates charities in England.

We are disappointed by the court's ruling and are discussing the position with our legal advisers. This is only the first stage of proceedings and we will continue to vigorously defend our case, said a spokeswoman for NatWest on Friday.

The U.S. court documents state that the Charities Commission twice froze Interpal's accounts, in 1996 and then in August 2003, on suspicion that it had links to Hamas, but then unfroze the accounts.

This (ruling) appears to be ramping up compliance and also suggests the long arm of the U.S. courts, said a lawyer with a major international practice in London, who asked not to be identified.

What this demonstrates is the risk banks with international offices face and how onerous the duty now is with banks to know precisely what they are dealing with and what sorts of accounts and funds they are holding, he added.

The lawyer also said that the outcome of the case may depend on whether plaintiffs could show there was a strong causal relationship known as proximate causation between funds moving through the Interpal accounts and the attacks in Israel.