Royal Bank of Scotland, the country's second-biggest bank, stands accused of acting as a conduit for terrorist funding.
An American lawsuit brought by 14 victims of terrorism and their families alleges that the London-based charity Interpal funnelled millions of dollars to Palestinian terrorists through accounts held in Britain with the NatWest Bank, which was bought by RBS in 2000.
Gary Osen, the co-head counsel for the families, said: "We claim that NatWest, in maintaining accounts for Interpal, has transferred millions of dollars to Hamas, a group designated a terrorist organisation by America and Israel."
Interpal itself was labelled an "unlawful organisation" by Israel in 1997 and as a "specifically designated global terrorist" by America in 2003.
The lawsuit alleges that the charity is the biggest fund-raiser in Europe for Hamas, which admitted responsibility for all the attacks on the plaintiffs carried out between March 2002 and the following August. However the Charity Commission, which regulates charities in England and Wales, gave Interpal a clean bill of health after investigations in 1996 and 2003, when the charity's bank accounts were frozen for a month. There is no investigation into Interpal at present.
Ibrahim Hewitt, chairman of Interpal, said: "Whatever the position in the US, Interpal operates entirely in accordance with UK law under the supervision of the Charity Commission."
Interpal's website bills itself as a "non-political, non-profit making British charity that focuses solely on the provision of relief and development aid to the poor and needy of Palestine".
RBS strongly denies any wrongdoing. Mike Keohane, a spokesman for bank, said: "NatWest is aware of the lawsuit commenced against it relating to Interpal, a UK-based charity. The claims asserted against NatWest are without merit."
The bank will ask the Federal District Court in Brooklyn, New York, to throw out all charges later this month.
The victims of attacks by Hamas maintain that banks should do more to strangle terror funding. Sarri Singer, who was on a bus blown up by a suicide bomber in 2003, said: "We need to stop terror funding. People need to realise that banks are helping terrorists. We can't let them get away with it."
A further victim of a terror attack in Israel is also taking the French bank Credit Lyonnais to court in New Jersey on similar charges. It too denies any wrongdoing.
In Britain the Financial Services Authority, the City regulator, requires firms to report suspicious transactions. Banks must identify the beneficiaries of any account.
RBS is not the first British bank to become embroiled in controversy over funding for unsavoury organisations.
Earlier this year, HSBC launched an internal inquiry after a US intelligence report claimed Saddam Hussein had passed money through the bank's branch in Jordan to bypass United Nations trade sanctions.
That report alleged that during Saddam's reign, Iraqi agents used an HSBC account in Amman as a home for money to fund their operations.Reuse content