Canada introduces anticipated Protection of Canada From Terrorists Act

By Christine Duhaime | October 27th, 2014

New Anti-Terrorism Measures

Christine Duhaime, B.A., J.D., Certified Financial Crime Specialist

The Government of Canada released its proposed new anti-terrorism legislation today, entitled the Protection of Canada From Terrorists Act, Bill C-44 (the “PCFT“). The material part of the PCTF amends the Canadian Security Intelligence Service Act and is quite short. It does as follows:

  1. Clarifies that the Canadian Security Intelligence Service (“CSIS“) has the jurisdiction to perform its duties outside of Canada.
  2. Clarifies that CSIS may conduct investigations outside of Canada. The CSIS Act requires that CSIS collect, investigate, analyze and retain intelligence on activities if there are reasonable grounds to suspect that the activities may constitute threats to the security of Canada. It is important to note both that pursuant to the CSIS Act, CSIS must undertake these activities by law (namely, it must investigate all activities that may pose a security threat) and that the obligation arises if there is a possibility of a threat to the security of Canada – so, not if there is a threat but rather if there may be one - “may” being the operative word.
  3. With respect to (1) and (2), above, it is important to note that CSIS had this power already under the CSIS Act by virtue of its ability to enter into arrangements with foreign governments and foreign institutions, (and domestic ones) to do exactly that under the CSIS Act. The power to enter into foreign arrangements for CSIS to undertake its duties is permissive, however, suggesting that it is not required to have such agreements to undertake its duties overseas, otherwise the CSIS Act would have articulated that it must enter into such arrangements to undertake its duties overseas.
  4. With respect to (1) and (2), above, it is also important to note that CSIS has the legislative competence to assess security threats to Canada that (not within Canada) are foreign-influenced activities that are detrimental to Canada’s interests. It’s not possible to undertake that security assessment within Canada and before the Internet when the CSIS Act was brought into force, was certainly not possible thus the Legislature logically intended overseas activities. To suggest otherwise is inconsistent with basic statutory interpretation law.
  5. Makes it an offence to disclose the identity of a person providing assistance to CSIS for the purposes of a covert operation, or a potential one. That obviously is to protect the lives of informants in respect of terrorism.
  6. Requires that the identity of persons who provide information to CSIS be kept confidential for their protection and to remove inhibitions for the provision of that information. Even judges are required by law not to disclose the identity of informants and are subject to the offence provisions for doing so.
  7. Authorizes a Canadian Court to issue a warrant for enforcement outside of Canada to enable CSIS to conduct requisite investigations in cases where it may need to compel evidence. The enforceability of Canadian warrants exterior to Canada is not to be automatically assumed – such enforcement will depend upon the receiving jurisdiction and reciprocal agreements in place.

The terrorist-related incidents last week in Eastern Canada speak to the need for greater counter-terrorism efforts. The attacks were not from the Islamic State and that is of concern to CSIS and Canadians because that means that there are attacks headed our way and in that respect, time is of the essence to empower government agencies to get investigations underway to prevent the death of Canadians and damage to critical infrastructure.

We already know that according to statistics, Canada has proportionately more homegrown terrorists in Canada compared to some other countries. If we incubate more terrorists, there’s a lot more work to be done in mitigating the risks as a primary risk, then working on changing the environment that facilitates that incubation.

One Canadian who defected to join the Islamic State says there are 15,000 foreign nationals with the Islamic State and thousands upon thousands more who are getting ready for martyrdom attacks on our home turf. In an interview he gave as spokesperson for ISIS (yes, one of ISIS’ spokespersons is a Canadian defector) available on  YouTube, he says: “whatever regime attacks us – we will attack them.”

The video gained international prominence because in it, the former Canadian says that ISIS will stop only when their flag flies over the White House.

That particular Canadian burned his passport in an earlier ISIS video, renouncing his Canadian citizenship.

Canada’s Charter of Rights and Freedoms guarantees every citizen the right of re-entry into Canada, including the Canadian defector who is an ISIS spokesperson who says he wants to come back to be with his family, but that right is subject to limitations that are justifiable and consistent with democracy and the rule of law. Unless I am missing something in the YouTube videos, magazines and Tweets that ISIS propagates, there is nothing about the Islamic State that is reconcilable with our Charter, the rule of law as Canadians understand that term, and democracy. Separate and apart from that, the human rights atrocities and war crimes that are occurring by ISIS, mean that Canadian defectors who wish to return to Canada will be held in any event for prosecution as war criminals.

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Canada to adopt terrorism law to spy on homegrown terrorists – will it be challenged?

By Christine Duhaime | October 16th, 2014

New proposed terrorism surveillance law

The government of Canada will announce proposed legislation tomorrow to increase its counter-terrorism measures in response to the national security threats from the Islamic State.

The proposed law will give more power to CSIS agents in Canada to detect and track persons associated with, or suspected to be associated with, terrorism. According to the government, the new bill will:

  1. Allow CSIS to obtain information on Canadians fighting abroad with terrorist groups, including to obtain from and share information with the US, the UK, Australia and New Zealand.
  2. Let CSIS track Canadians engaging in terrorist activities overseas.
  3. Authorize the sharing of information in respect of suspected terrorists with the US, Australia, New Zealand, and the UK with a view to tracking and reporting the activities of suspected terrorists among this group of nations.
  4. Give CSIS informants protection from disclosure in the same way we give such protection to police informants.

The government is also, at a later stage, implementing laws to deal with homegrown terrorists in order to be able to surveil them more and to prevent their return to Canada if they leave. Austria has already taken such steps and will not permit the return to Austria of a number of teen-ISIS brides. A similar law in Canada may be challenged as potentially infringing the Charter of Rights and Freedoms, but quite likely will be unsuccessful because (hopefully if they argue it properly), it is entirely justifiable to preserve democracy and for national security. See more on that below in respect of the NSA case in the US.

Incubating homegrown terrorists in Canada

The measures come after it was revealed that Canada has a proportionately higher number of homegrown terrorists compared to the US or Australia (see our note on that point in the Globe & Mail here) in which we noted the unfortunately fact that Canada seems to incubate proportionately ten times more homegrown terrorists that the US. More than 130 people from Canada fled to the Middle East for extremist purposes, some to join the Islamic State.

Another 80 travelled abroad for extremist purposes and have returned to Canada. The Department of Homeland Security says that less than 100 Americans have left the US to join terrorist groups overseas, mostly in Syria. Compared to Australia, Canada had more than triple the number of sympathizers leave our country to support terrorist groups overseas. CSIS said it was monitoring at least 60 of the 80 people who returned to Canada. No doubt the monitoring is similar to NSA monitoring and involves the monitoring of close associates and family, thus the group being monitored is likely much wider.

NSA – type of surveillance legal and necessary for terrorism says US Court

With respect to spying on Canadians, there are always concerns with striking the right balance between infringing civil rights and protecting our national security. The Charter of Rights and Freedoms in Canada guarantees freedom of association and expression, and the right not to be unreasonably searched or have property seized. National security level surveillance of terrorists and those associated with them will trigger discussions in this country on the nexus of these competing interests.

Courts in the US have ruled that the NSA program is legal and necessary to counter the threat of terrorism. The NSA collects telecommunications records including our telephone call records, texts, emails, photos and social media entries and categorizes them to create “rich profiles” of us when the information is culled. A number of NSA surveillance news stories speak to the effectiveness of the NSA program not only because the program successfully stops terrorists but also because of its salacious uses – for example, the extramarital affairs it has brought to light and countless other similar-type activities, which alarms people because of the fear that the program may be used for purposes other than for counter-terrorist efforts. For an analysis of the NSA litigation in the US, you can read our summary here.

In that case, the American Civil Liberties Union challenged the NSA surveillance program arguing that it exceeded the authority of the US Patriot Act of 2001 and violated the 1st and 4th Amendments of the US Constitution.

The case is a good analysis of the balance between privacy and national security, with the Court noting that we can have no expectation of privacy when we voluntarily provide personal information to third parties.

In Canada, for example, millions of adults do that by using cellular phones that all transmit on public wireless routes, use Internet ISPs that also go through tens of other IPSs, and use social media sites like Facebook, Twitter and WhatsApp and by continuing to use such services knowing that they are not private or secure, and even after countless security breaches with some of them. The argument is that if we let the whole world invade our privacy on the Internet for social purposes, can we really complain if the government does so for national security purposes?

Civil Rights Not a Suicide Pact

More importantly, the Court noted that the US Constitution is not a suicide pact and the right to be free from search, seizure (and surveillance) is not absolute. It also noted that liberty and security can be reconciled within the law without having to choose among them because terrorist activities imperil civil liberties (implying, as we can see with the activities of the Islamic State, that if we do not let national security trump, we won’t have any civil liberties left to protect).

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Islamic State – ISIS funded by sales of oil, captured women and taxes Christians must pay to stay alive; and how banks are used to finance terrorism

By Christine Duhaime | September 29th, 2014

Terrorist groups are not a financial island

Christine Duhaime, B.A., J.D., Certified Financial Crime Specialist

Christine Duhaime is a lawyer, writer and frequent speaker on financial crime and counter terrorist financing.

Published September 29, 2014; updated October 23, 2014 to include news that ISIS has set up businesses in Turkey.

As the threat of the Islamic State (ISIS or ISIL), increases globally, there will be enormous pressure to stop the financing of ISIS.

The goal of terrorist groups like ISIS is to create a state of tension in western states. In addition to violent acts, such as beheadings (which they say are coming on our soil), they aim is to cripple our industries by attacking critical infrastructure, draining our economies and bankrupting us to create chaos so they can achieve political control, eradicate existing culture and establish dominance. In the last 18 months, ISIS and its forefathers have promised to “drown us all in blood” and “bleed us dry.” And worse.

Importantly, they need money to do this, and most importantly, access to our financial system. This latter point is unfortunately lost in some circles. If we are willing, we could shut ISIS down in a month with a global denial to them of our financial system.

We should make no mistake about this fact – ISIS and its sympathizers and members use our banks and our global financial system. Money and value goes in and out of Syria and Iraq for and from ISIS and their leaders, most of which is attached in some way to accounts at financial institutions.

Financing of ISIS

Here is a synopsis of what we know about terrorist financing involving ISIS.

There are generally three significant baskets of terrorist financing taking place in respect of ISIS that engage external states and international financial institutions (described below).

The 1st is the sale of crude oil from Iraq and Syria from oil fields acquired by ISIS, sometimes referred to as terrorist oil; the 2nd is funding from individuals in developed countries to ISIS directly and indirectly; and the 3rd is self-funded activities such as ransom payments from the kidnapping of foreigners, taxes imposed on businesses, Christians and financial transactions in captured territories, stolen currency and gold from banks and the sale of looted goods. Governments underestimate by a wide margin the amount of money generated by this third basket which is a mistake – it is now by far their largest, sustainable and growing source of revenues.

According to experts, ISIS has over $2 billion in cash in the coffers and as well as an unknown amount in banks.

How ISIS initially was funded is another story but according to the US Treasury, a lot of it was from private donations from people in Qatar and Kuwait. In 2013, Qatari authorities apparently only filed one suspicious transaction report under anti-money laundering laws for the whole country yet some of its richest individuals paid million of dollars in cash and via wire transfers to ISIS. A fundraiser known as Tariq Al Tunisi is alleged to have arranged for ISIS to receive $2 million from Qatar in one transaction alone, which flowed, in part, through the financial system unimpeded. This was not the one SAR filed.

Another fundraiser from Qatar, Abd al-Rahman bin Umayr al-Nuaymi is alleged to have sent more than $1 million per month to an al-Qaeda group that morphed into the Islamic State. Al-Nuaymi was an advisor to the Qatari government and was placed on the US sanctions list in December 2013 and only recently placed on the UK sanctions list.

1. Terrorist oil sales

The bulk of the terrorist financing to ISIS until recently was generated by terrorist oil sales, hence the impetus to destroy oil and gas infrastructure controlled by ISIS because it will remove one of the most significant sources of revenues necessary for their operations.

It is not possible to traffic in terrorist oil without the involvement of, and support from, financial institutions whether unwittingly or not.

According to US intelligence and Hisham Alhashimi, an ISIS expert in Iraq, ISIS earns approximately $150 million per month from the sale of crude oil sold on the black market in Turkey or Kurdistan, mostly Turkey. This activity engages terrorist financing involving global financial institutions because both the vendors (ISIS) and the purchasers must use the banking system to effect the transactions equaling $150 million per month. Note that there are multiple daily sales transactions, that together, equal $150 million, ergo thousands of terrorist financial transactions going through banks.

Banking ISIS

The first point of contact for ISIS in banking in the west would appear to be local banks in Istanbul and Ankara who bank them, although likely under beneficial ownership structures. I’m surmising these bank accounts were set up a while ago and ISIS (the forefather group) became the bank’s VIP customers as more and more revenues were deposited. The best way to avoid detection for suspicious activities is to become a bank VIP and move to private banking under a beneficial ownership structure. Although private banking clients are more high risk for financial crime, many banks treat such customers preferentially in terms of identity, transaction monitoring and anti-money laundering reporting. ISIS is sufficiently sophisticated to issue corporate annual reports highlighting their financing activities; there can be no question they have corporate vehicles through which they launder their proceeds of crime.

The Qatari financiers referred to above who allegedly assisted ISIS with financing are no doubt bank VIP customers in Qatar; their transactions would be less scrutinized, not more. Recall, as noted above, that just one STR was filed in Qatar last year despite the multiple million dollar withdrawals in US funds allegedly for the benefit of ISIS. The one STR filed is not for these cash withdrawals paid to ISIS.

Banking ISIS leaders

What about ISIS leaders? Historically speaking, state leaders who acquire power undemocratically have taken enormous pains to accumulate wealth and preserve it by removing funds from domestic areas of conflict to overseas safe havens for future use by them or their families, usually their children. The reason we have a politically exposed person (“PEP“) reporting regime is to prevent this from happening. We know from the Ukrainian crisis, in which an alleged $70 billion was removed to offshore accounts by PEPs, that the PEP regime is ineffective. Again, because PEPs are VIP bank customers, they get preferential treatment. The PEP regime is not limited to those who acquire power democratically – it applies to financial institutions when they bank ISIS leaders as much as it applies to banking state leaders.

We can expect, therefore, that the ISIS elite has moved or will move, vast sums of money to other jurisdictions in the world through close family members (who are also PEPs). The money and its ownership will be more difficult to tie to ISIS leadership because, inter alia, it originates from a state over which they have effective control in some parts and in which they can create an endless number of new identities and passports to use for travel and to open and use foreign bank accounts.

If we are able to demobilize and degrade ISIS, we will see a greater push by their elite (the PEPs) to get their close family members to other countries under fake IDs with lots of money. Its basic human nature to take all necessary steps to protect the family. If they succeed, it will be further evidence of the whopping ineffectiveness of global AML/CTF/PEP regimes.

There is already such evidence – according to the Turkish media, ISIS officials are openly moving into Turkey with vast sums of money, buying luxury homes in Istanbul and Ankara with cash. The next step will be the purchase of luxury vehicles and sending their children to elite schools with terrorist funds.

According to news reports, ISIS opened its first consulate office in Ankara ostensibly to be able to issue official visas for defectors from other countries to enter Syria to fight for ISIS. I say ostensibly because the Turkey-Syria border is wide open for persons to enter Syria from Turkey. ISIS has also opened several businesses in Ankara and Istanbul.

All of these activities, from purchasing houses, cars, operating consulates, and running new businesses in Turkey require the constant use of banks, bank accounts and banking relationships in Turkey.

If true, the ISIS move into Turkey to set up businesses is likely being done to formalize their operations, part of which is to establish bank relationships through commercial activities so that ISIS can access financial institutions in Europe, an activity that is difficult from Syria or Iraq with significant sanctions in place. Unfortunately, some banks have no qualms about servicing terrorists. It is equally unfortunate that banks that do have such qualms, put very little effort and expertise in understanding and complying with counter-terrorism laws.

It may seem shocking to us in the west that Turkey is allegedly letting ISIS set up shop in their country but Twitter is full of pictures from concerned citizens in Istanbul and Ankara who Tweet pictures of stores in their cities that sell ISIS garb, flags, books, magazines, propaganda and other paraphernalia, and other pictures of ISIS armored vehicles driving through the streets, unimpeded in the operation of their newly established businesses.

This is pure conjecture but given the number of girls that are missing from Syria, it is likely that they were transported to Turkey for sale and that one of ISIS’ material businesses in Turkey is human trafficking. It would explain the need for large secluded houses, armed vehicles and a multitude of bank accounts. And of course, the need for a consulate to issue fabricated documentation to allow the export of trafficked girls from Turkey to the purchaser’s destination country.

Of greater concern is that they may be issuing purportedly official documents so that they can travel to other states under new identities to gain access to other countries for trade, including financial trade.

We should not assume that ISIS has not figured out that they need to secure reliable access to the global financial system for survival and that they know we could shut them out of it and bleed them dry (as they wish to do to us) if we elected to do so by strictly enforcing CTF/PEP/AML laws immediately and globally. We should assume therefore that they have secured that access in ways that will make it hard to detect (but not impossible).

Banking oil sales agents

Back to terrorist oil sales — the banks banking the agents and purchasers of terrorist oil are likely foreign banks in Istanbul. The reason why this is likely the case is because the entities and persons, particularly agents, purchasing terrorist oil have a pressing desire to move the proceeds of crime from the sale of the oil overseas to protect it, and hence protect their revenues. They need a bank with a good network of international correspondent banking relationships to ensure that can happen quickly and efficiently. These bank accounts are likely also structured in ways in which beneficial ownership is obscured.

Foreign banks, particularly in Dubai, Amsterdam, Paris, Vienna and London, should exercise extra due diligence to ensure that they do not violate sanctions and counter-terrorist laws by banking persons and entities dealing with terrorist funds. Entities or persons who have an unusual or extraordinary amount of cash dealings connected to conduit countries such as Kurdistan, Lebanon, Jordan or Turkey are a banking concern for terrorist financing. Sanctions and counter-terrorist financing laws globally capture the indirect facilitation of banking or financial services for terrorist activities so financial institutions, online payment processors and literally any other business all along the oil transactional chain of finance are exposed for providing services for these transactions.

Some theorists have hypothesized that hawalas and money mules are being used for payments of terrorist oil. Hawalas and money mules are prevalent in many ISIS transactions but not for terrorist oil transactions – there is too much money in terms of bulky volume and its too impractical.

2. Christian taxes; kidnapping and ransom

The second way in which ISIS is financed is by self-funding methods such as taxes Christians must pay to remain alive and ransom payments from foreign governments for kidnapped foreigners.

ISIS recently confirms it earns $10 million per month in ransom payments. Unlike terrorist oil payments, ransom payments are made in US cash using external foreign banks. Under this method, foreign brokers bring the cash into Iraq, Syria or a conduit state in exchange for the prisoner. ISIS brings the cash back to headquarters.  The foreign brokers liaising for the foreign governments, bank their commissions in foreign banks in Europe.

No matter how you slice it, the payment of ransom for ISIS by insurance companies or governments is terrorist financing. So too is the commission earned and banked by the foreign brokers who transit the funds to ISIS. The litigation exposure for governments, agents and brokers is enormous for all the consequently deaths and injuries sustained globally as a result of ISIS-inspired terrorist acts.

Insurance companies and agents and possibly governments, who make, broker or facilitate ransom payments for ISIS are knowingly financing terrorism and their liability is absolute if ever sued or prosecuted. In due course, they will be sued. If this wasn’t clear before it is now crystal clear after the Arab Bank case.

ISIS has other internal funding methods such as taxes imposed on people in acquired territories and transactional fees for people to remove their own funds from their bank accounts that engage the local economy and do not initially flow through the modern banking system.

For example, they have set up sex slavery businesses in most towns and cities in which they occupy using primarily teenage girls that they refer to as the so-called “spoils of war” to work in such businesses. They also sell captured women and children (those that are Christian or Yazidi women) in the local marketplace. According to human rights agencies, there are websites in which captives are priced and listed for sale from $8 to $12 per girl.

Then there are the Christian life taxes, which are taxes Christians must pay in occupied towns as a “tolerance” tax if they do not convert, or are not first killed. The Christian life tax is paid for the privilege of life. If a Christian cannot pay or refuses to, they are killed. Some Christians are killed immediately after paying the tax. On videos on YouTube, ISIS is quite open about the Christian tax and its justification, in their view.

There are also bank fees to pay to ISIS. They have taken over banks in towns in which they occupy and in order to withdraw funds, account holders must go through a 3-person committee to prove they are the account holder and are not Christians, Yazidis, Shiite Muslims or members of the government. This group of prohibited persons has automatically forfeited money held in their accounts to the ISIS. If a person is not within the prohibited group, in order to withdraw funds, a hefty commission has to be paid to the ISIS.

As for Christians and Yazidi workers, the ISIS has already confiscated their salaries and about 5% is being deducted from everyone else’s salary by ISIS.

The ISIS taxation system on people, businesses and services should not be underestimated as a significant source of growing and sustainable revenue. Not surprisingly, banks under the control of the ISIS are being used for tax collection purposes for the ISIS, including the Raqqa Credit Bank which now apparently collects municipal taxes for the ISIS, circumventing the government.

Finally, ISIS also traffics antiquities from Syria to western collectors. Payments for antiquities sales all involve our banks and are a form of terrorist financing that is obviously prohibited. A western collector found in possession of such antiquities can expect a long jail term if ever detected for deliberately financing ISIS. No doubt these transactions are being looked at by governments (wires from western countries to Turkey; corresponding shipments from the Middle East to the payee).

While initially, the self-funding methods (such as the sale of young teenagers into slavery) may not go through our banking system, those funds end up in the hands of the ISIS elite, whose close advisors and family members are branching out to Turkey and Lebanon (perhaps other places as well) to set up businesses and buy houses, all with terrorist funds which require banking relationships.

This week, people in the Middle East Tweeted pictures of toddler ISIS soldiers dressed in their new winter combat gear. From a terrorist financing perspective, the pictures were noteworthy because the children were wearing factory-made ISIS-logo headdresses. However, factories in Syria were destroyed according to the Syrian Economic Forum. ISIS must be ordering combat gear with their logos emblazoned on them from foreign factories. Apart from the shocking fact that a foreign factory would accept the order, foreign banks had to have been used to pay for factory goods outside of Syria.

3. Payments from foreign countries

In Iraq, the advance force of ISIS, called the House of Islam, is dominated by foreigners, including several hundred Europeans, Australians, Canadians and Americans. They land in places like Turkey then cross over to Syria and join ISIS where they are put at the front lines to fight. They leave places like Germany, the UK, Canada and the US with debit cards, value added cards and credit cards linked to bank accounts in their home countries. Those cards are used when defectors arrive overseas. Their friends and families are then called upon to fund their activities by loading up bank accounts so that funds can be withdrawn in the Middle East. One preferred method of terrorist financing in the credit and charge card world is to over-pay, or pre-pay charge cards in one country so that there is a large credit balance on the account that can be used in another jurisdiction by a supplementary cardholder.

Financial institutions, money services businesses and other remittance services are unwittingly used to finance terrorism by facilitating payments and funds transfers for use in terrorist hot spots.

All financial institutions can know with the push of a computer button, the extent to which their customers are undertaking financial transactions in hot spots. Credit and debit card issuers also know in real time when their products are used and precisely where by virtue of the card magnetic strips that generate an electronic message to the issuer through the merchant’s POS machine or ATM machine.

Western wives of ISIS members have Tweeted about how the US has tried to harm ISIS financially and noted that there are still ATM machines all around from which they readily withdraw cash that comes from their home countries. Although it seems inconceivable, many western banks, including in Canada, support terrorism by providing financial services to defectors in Syria and Iraq through the ATM network. They likely haven’t thought about it in that way but it’s time that they did. I can’t see there being any less exposure for them arising from injuries sustained by victims of ISIS terrorist acts regardless of where situated in the world. A $1 ATM network fee paid to a western bank for processing a transaction in Syria for a western cardholder may end up being a $1 billion miscalculation if it later emerges that the withdrawal was made by a defector who became an ISIS member.

4. Payments in the west

In addition to funding terrorist attacks on critical infrastructure and to individuals, terrorist financing is used to support homegrown terrorist attacks in places like Canada, France, Germany, Australia and the US. Terrorist financing supports the violent aspects of terrorism but it also supports the non-violent activities such as paying for operations in western countries (e.g., travel, training, rent, social media activities, Internet access, cellular phones, phone plans and credit card expenses).

Terrorist financing in this area involves payments from the exterior to lone wolf-types persons or larger groups and it also involves internal payments or funding (domestic) whereby persons fund a lone wolf or another group’s activities in furtherance of terrorist activities that are domestic. The numbers are significantly lower than other types of terrorist financing but are just as significant because an attack to domestic critical infrastructure unfortunately requires much less in the way of an economic investment by terrorists. Domestic monitoring by financial institutions and money services businesses in the west is critical to detecting and preventing domestic terrorist financing.

Stopping ISIS financing

Insurance companies, financial institutions, and other financial payment methods that assist terrorist financing, even unwittingly, negatively impact the integrity of the global financial system and threaten international security.

Insurance companies, and banks risk reputational damage to their organization and may harm NGOs that provide humanitarian and other aid to hotspots for engaging in terrorist financing. Obviously, as well, they are exposed to litigation claims for terrorist financing, sanctions avoidance and regulatory action for doing so, both institutionally and for their directors and officers individually.

The government role is to provide greater and better education on terrorist financing to financial institutions and the population generally. Its role also should involve greater regulatory scrutiny over financial institutions, money services businesses and online payment processors for compliance with terrorist financing laws.

In order to protect the financial system from being used for the financing of terrorism and minimize the risks to international security, there are six key areas with which banks should be careful in addition to those that arise from the foregoing:

  • Funds involving the use of conduit countries to fund terrorism such as Turkey, Lebanon, Jordan and UAE and sanctioned areas.
  • Use of the banking system by ISIS, its agents, terrorist oil purchasers and others to move funds to and from terrorist organizations and in many cases to tax havens through wealth management companies using beneficial ownership structures.
  • Co-mingling funds such as sending multiple wires in a bundle to hide the actual sender or recipient of the funds.
  • Sending funds to known hotspots using remittance services and banks, between individuals in home jurisdictions and the hot spots, mostly from western states to conduit countries.
  • Online payment systems and stored value cards, particularly in conjunction with social media wherein, according to media reports, ISIS allegedly uses Twitter and WhatsApp to solicit requests for payments allegedly by PayPal and other online payment methods. Banks providing services to online payment service companies should be exceedingly cautious in respect of unwittingly facilitating (by transferring and providing banking services) payments to ISIS.
  • According to AUSTRAC, digital payment systems which are new, such as digital (or virtual) currencies like Bitcoin, pose an emerging risk of terrorist financing which may increase as they grow in popularity, particularly given that they are by design, anonymous and it is not possible to know, in every case, who the transactor is behind transfers of digital payments.

Domestic red flags

Canada is more at risk of terrorist attacks in my estimation for two reasons: (a) we have a greater proportionate share of homegrown terrorists than some western nations[1]; and (b) although I don’t believe it is entirely accurate, we are noted for having relaxed financial crime controls[2] (a key component of which is counter-terrorist financing expertise and implementation).Terrorist financing involves raising funds, transferring them and then using the funds. Different private enterprise participants have different roles to play in each of those aspects. The difficulty in this area is drawing a link between the activities and terrorist financing.

Some indicators that may raise a red flag domestically for financial institutions in the west include:

  • Wiring funds to high risk jurisdictions in close geographical proximity to ISIS (conduit countries such as Turkey, Lebanon);
  • Use of debit cards in high risk jurisdictions, particularly in cases where the client is in the west but the card is being used in the Middle East;
  • Multiple beneficiaries in a wire being sent from one sender to the Middle East;
  • Multiple low-value transfers domestically and internally without any reason or obvious connection;
  • Sudden activity in an account that is inconsistent with customer profile; and
  • Multiple parties using the same telephone number or address to conduct wire transfers.

 

If we want to stop terrorist financing, we have to make a greater effort to require that financial institutions of all types, including money services businesses, quit providing banking services to terrorist organizations and their sympathizers wherever they may be in the world, including in the west.

It will require building the public-private partnerships necessary to do that and investing in counter-terrorist financing compliance regimes that are actually effective. Financial institutions that do not do so are imperiling themselves on the basis of the Arab bank case[3]. It is not the time in the history of financial services to take shortcuts in the quality and effectiveness of counter-terrorism efforts. Apparent dollars saved in compliance will be paid ten times over in liability costs for terrorist-related compliance failures.

 


[1] See “Canada vs. Islamic State: Its Time We Pull the Plug on Terror Funding”, Globe & Mail, September 24, 2014.

[2] There are a multitude of examples but see: (a) “Follow The Money: Is Canada Making Progress in Combatting Money Laundering And Terrorist Financing? Not Really”, a Report of the Senate of Canada, March 2013. See: (b) 2014 “International Narcotics Control Strategy Report” in which Canada is listed as a major money laundering country, March 2014. See:  (c) “Canada’s Diamond Trade being used for Money Laundering and Terrorist Financing, Report Finds” here in which the FATF reported that jewelry businesses are engaged in terrorist financing in Canada. See: (d) “FATCA Regime may have Unintended Consequences”, South China Morning Post, August  4, 2014 (at the end on how routine it is to transport hundreds of millions of dollars into Vancouver unimpeded in suitcases).

[3] In the Arab Bank case, a global bank was found liable potentially in the hundreds of billions of dollars for the deaths and injuries sustained by victims of terrorist acts for providing banking services to persons associated with terrorist organizations who were unlisted at the material time.

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Stopping the cash flow to ISIS from countries like Canada

By Christine Duhaime | September 28th, 2014

Islamic State: Stopping the cash flow from countries like Canada

Christine Duhaime

Great conversation about the sources of terrorist funds to the Islamic State (IS or ISIS) on CBC News Now in Toronto yesterday which touched on a wide range of interesting counter-terrorism finance topics including the role of financial institutions, money services businesses, potential attacks on critical infrastructure in Canada, stored value cards, Bitcoin and liability under the Arab Bank case for banks whose customers commit terrorist acts that cause harm.

Christine Duhaime

This week both Prime Minister Stephen Harper and US President Barack Obama highlighted the importance of stopping the flow of funds to extremist groups like ISIS. In this interview, we discuss ways in which that is happening and how it can be mitigated and on the need for a greater dialogue to take place with the private sector in Canada for national security purposes to counter terrorist financing.

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Crystal ball theory of liability – How banks and financiers became liable for terrorist acts of their non-terrorist listed customers

By Christine Duhaime | September 25th, 2014

Arab Bank case pushes anti-money laundering law off the liability deep end

Christine Duhaime, B.A., J.D., Financial Crime and Certified Anti-Money Laundering Specialist

In a weird twist of law, our global anti-money laundering laws (that include counter terrorist financing) that were designed to bankrupt terrorist organizations, and prevent the flow of illicit funds, may bankrupt many of our banks instead.

Early this week, in Linde v. Arab Bank, the Arab Bank was found liable in a civil proceeding in US Federal Court for providing banking services to terrorists and terrorist groups, and faces a jury award potentially in the hundreds of billions of dollars in triple damages.

Precedent setting case

The case is precedent-setting because it is the first case where a bank was found liable for supporting terrorism by acting as a bank, namely providing banking services.

More importantly, this is the first case where a bank was held liable for providing banking services to persons who were unlisted or undesignated terrorist organizations or persons.

In this case, the Arab Bank, among other things, processed wire transactions and provided banking services to, inter alia, 12 charities that were not listed or designed as terrorist organizations in the US, or by the UN or EU. Some of the charities paid out a type of life insurance policy payment to the families of martyrs injured or killed in terrorist attacks they committed (such as suicide bombers). The payments came from the US and other countries and were wired halfway across the globe where they were received by the charities.

The verdict has wide-reaching repercussions for the financial sector because it makes foreign banks in the US (or Canada) liable for the terrorist acts of their customers that bank at a branch location halfway around the world.

Banking can contribute to death or injuries in tort

Lawyers will no doubt be wondering how a causal connection was established in tort  to tie banking services to personal injuries sustained in order to find liability. In other words, how can wiring funds to another continent cause a person’s death by a terrorist organization? The answer is that the jury was instructed that liability could be found in tort if there was proof that banking services were a substantial contributor to the plaintiffs’ reasonably foreseeable injuries from terrorism. The jury affirmatively found that banking an undesignated terrorist organization, or a terrorist person, can substantially contribute to foreseeable injuries.

Banks need a crystal ball to comply with counter-terrorism law

It may sound reasonable but it is not. Here’s why. At the material time of a wire transaction, the foreign bank in the US (or Canada) does not know the customer in another continent is a terrorist organization or person because the customer is unlisted. Even the government, with its greater intelligence resources (with access to NSA for example), does not know that the customer is a terrorist person or organization, or has such a propensity. Logically, if it did the person or entity would be listed. So then how can bank executives possibly possess that knowledge in order to foresee that banking that unlisted customer will lead to a terrorist act which would lead to injury? They can’t. Unless they have a crystal ball.

And yet, the decision places limitless liability on banks because they do not have a crystal ball to be able to foresee (foretell in this analogy) which among their unlisted customers will cause an act of terrorism that will harm innocent people.

Banks may be liable in the billions of dollars for not knowing that which they cannot know. But not all banks, just foreign banks in the US or in Canada which has substantially similar legislation. And not just banks – any foreign entity providing designated financial services in the US is exposed including private equity funds.

The way anti-money laundering law works on the counter-terrorist financing side is that a government agency (such as OFAC) identifies certain persons or groups as terrorists based on intelligence and after a due diligence process, designates those persons or groups on public lists in respect of which financial and other transactions are strictly prohibited. Banks establish compliance regimes to ensure that services are not provided to prohibited or designated persons and face strict liability for errors they make over designated persons.

Banks must do more than rely on listed entities

As a result of the Arab Bank decision, banks may no longer be able to rely solely on lists provided by government agencies for counter-terrorism efforts. They must now theoretically treat every customer as a potential terrorist organization or person and make a judgment call on whether they may pose a terrorist risk and whether to bank them. If the judgment call is wrong and the bank provides services to a customer who later commits a terrorist act that causes harm, the bank may be liable for substantially contributing to those injuries by banking the customer.

Additionally, there will be cases where a bank wrongly brands a customer a terrorist organization or person, and in those situations, bank executives may be exposed to due process, discrimination and defamation claims from those to whom they wrongly branded and denied services.

You see the point that foreign banks may be doomed if they do and doomed if they don’t in cases of unlisted terrorist organizations that they bank or refuse to bank.

Not enough money in the bank(s) to pay existing claims

Consider the ISIS situation. Many thousands of men who are undesignated and whose identities are not known to banks, have defected to Syria from places like Germany, the UK, France, Australia and Canada to fight with the ISIS for an Islamic State. While they are in Syria or before they arrive, they may receive funds from friends and family in their home countries through banks, electronic payment systems, money services businesses or other remittance services. If those men commit terrorist acts that cause the death or injury of Canadians or Americans, any foreign banks that provided banking services, such as wiring of funds, to them may be liable.

There are over 100 more cases similar to the Arab Bank case against foreign banks pending in US federal court in which plaintiffs are seeking compensation for injuries arising from terrorists acts that were committed against US citizens. There may be hundreds more if the ISIS situation deepens and terrorism around the world against Americans or Canadians increases.

There is insufficient money in the bank, quite literally, to pay out all those claims. The US Antiterrorism Act of 1990 was intended to bankrupt terrorists, not the banking industry.

In my view, the two things the jury should have heard were that  ruling against the Arab Bank would: (a) impose what I call “crystal ball liability” (i.e., if a bank does not have and make use of a counter-terrorist financing crystal ball, liability may attach) to routine wire transfers; and (b) cause millions of people to be unbanked as a result of bank de-risking, driving up banking costs for all Americans and exacerbating the global financial inclusion problem.

Following the decision, banks would be well advised to invest in legal advice on counter-terrorist financing risks and mitigation, and how the Arab Bank case should be factored into their operations to protect not only the bank, but their officers and directors as well.

On the public policy side, we need to have a renewed dialogue on balancing the risks both of money laundering and terrorist financing and the implementation of anti-money laundering and counter-terrorist financing law within global banking operations to ensure that at the end of the day we do not bankrupt our banks and our people by creating less financial inclusion.

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Canada vs. Islamic State: It’s time we pull the plug on terror funding

By Christine Duhaime | September 24th, 2014

Our thoughts on terrorist financing in respect of the ISIS as appeared in the Globe & Mail.

It seems that no one is ready to push the panic button on terrorism in Canada. So I will.

Left unchecked, Islamic State, IS, has the potential to expand its reign of terror and cause massive and debilitating effects on the Canadian economy, let alone our democratic way of life. Canadians, including Canadian businesses, are smack in the line of terrorist fire because we appear to have a disproportionate number of homegrown terrorists compared to some other Western countries.

More than 130 people from Canada fled to the Middle East for extremist purposes, some to join IS. Another 80 travelled abroad for extremist purposes and have returned to Canada. The Department of Homeland Security says that less than 100 Americans have left the U.S. to join terrorist groups overseas, mostly in Syria. Given that Canada has 1/10th of the population of the U.S., we incubate proportionately ten times more homegrown terrorists than the U.S. Compared to Australia, Canada had more than triple the number of sympathizers leave our country to support terrorist groups overseas.

Terrorist groups like IS say they intend to make us bleed, physically and financially. The financial hit is the key part of their plan to harm businesses, cripple industries, drain economies and bankrupt governments in the West in order to create chaos so they can forcibly eliminate the rule of law and our values – to establish their own.

To harm significant numbers of businesses and cripple industries, terrorists target critical infrastructure and the financial systems.

Once Canadian businesses understand that, wherever they operate, they are the targets of terrorist groups like IS, they can – and will – provide a vital contribution to both the national and international effort against terrorism.

Canadian businesses not only have the deepest and most immediate connections to homegrown terrorists as employers, bankers and other service providers, but they also have well-established ties to trade partners in other countries facing similar threats which can be leveraged for counter-terrorist measures.

Terrorists, including homegrown ones in Canada, cannot survive without access to financial services. More than any other sector, financial services businesses in Canada need to protect the financial system by preventing the financing of terrorism within Canada and externally by preventing the movement of funds to overseas terrorist hotspots. Thus far, they have not done a good enough job in Canada at stopping terrorist financing, particularly businesses that remit funds for hefty fees to countries that are known terrorist-financing safe havens, and the handful of banks that service those remittances overseas. That will have to change because there is too much at stake with an apocalyptic group like IS.

This week, Australia is introducing legislation to identify and prohibit financial transactions overseas to homegrown terrorists who join IS and groups like them and Canada should do the same.

But we also need to close loopholes in the law that exempt modern Internet-based payment methods from our counter-terrorism laws because they allow value and funds to be sent from Canada to terrorist organizations without detection, reporting or supervision.

I’m pushing the terrorism panic button because I know that when our greater proportionate number of homegrown terrorists come home to Canada from fighting alongside IS, they will be more radicalized, more dialed in to their global network and more committed to cause us significant harm.

Christine Duhaime is a lawyer and a financial crime and anti-money laundering specialist with the law firm of Duhaime Law with a specialized practice in counter-terrorism and financial crime law. She practises in Toronto and Vancouver and is establishing the Financial Crime Centre in Toronto to start the public-private partnership dialogue to mitigate financial crime in Canada.

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Canada considering amending its counter-terrorist financing law

By Christine Duhaime | September 22nd, 2014

Canada is apparently considering amendments to its counter-terrorist financing laws after ISIS apparently released an audio recording ordering its followers to kill Canadians in Canada (among others), and blow up their homes.

The US State Department today said that there is a threat from persons who left the US to fight for terrorists groups overseas and have returned to the US; apparently 100 of them.

As we noted earlier, Canada has proportionately ten times more homegrown terrorists compared to the US and three times more than Australia.

Canada also announced plans to revoke the passports of permanent residents of Canada (foreign nationals who have not become citizens of Canada) who left Canada to fight with ISIS. The concern is that they are typically more motivated to do significant harm when they return because they tend to be more radicalized.

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Australia proposing sweeping new counter terrorism laws that would make it an offence to travel to terrorist-impregnated regions

By Christine Duhaime | September 20th, 2014

The government of Australia is set to announce sweeping new counter-terrorism laws early next week according to several news reports.

The new anti-terrorism laws will, inter alia:

  • Authorize police to secretly search the home of suspected terrorists.
  • Allow the incarceration for up to five years of persons convicted of preaching radical extremists acts (presumably related to violence).
  • Allow the government to deem foreign regions or cities that are known or suspected terrorist locations as “proscribed” destinations for the purposes of permitting greater anti-terrorism measures to apply.
  • Travelling to, or remaining in, a proscribed location would be an offence under Australian law.
  • Law enforcement will be authorized to conduct covert searches on the property of terrorist suspects without notice of a search warrant until six months after the issuance of the warrant.
  • It will be an offence to promote a terrorist act, or to advocate such an act even it it never occurs.
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Australia faces ISIS terrorist threat; closes MSB over suspect terrorist financing

By Christine Duhaime | September 17th, 2014

AUSTRAC unregisters MSB

Australia’s financial intelligence unit, AUSTRAC, has suspended the registration and activities of a money services business (MSB) in Australia over questions arising from potential terrorist financing. It is the first time AUSTRAC has suspended a reporting entity.

The MSB, operating under the trade name Bisotel Rieh Pty Ltd., failed to report all of the funds it sent overseas or to inform AUSTRAC who the beneficial owners of the funds were. According to AUSTRAC, the firm sent $18.8 million to Turkey and Tripoli in 8 months of 2014 and it posed a terrorist financing risk, particularly combined with the fact that the firm had admitted that it smuggled cash from Turkey to Tripoli when it could not open a bank account in Lebanon.

The MSB is co-owned by the sister of a person from Sydney who was convicted of a terrorist offence.

You can read more here.

Australian police arrests terrorist suspects

At the same time, Australian police carried out a massive raid to flush out homegrown ISIS supporters in Sydney who threatened to publicly behead a random person in Sydney as part of the commencement of the campaign of terror ISIS intends to carry out in the Western world.

Australia is on heightened alert amid concern attached to members of ISIS who have returned to Australia after fighting in Iraq and Syria. Australia’s Attorney General told the media that if the raids had not taken place, the planned beheading would have likely occurred. He said that ISIS supporters in Australia have been given instructions to behead people in Australia and videotape the killings. Instructions have also been given, says the government, to attack Australia’s Parliament. The Australian government believes approximately 60 Australians have gone to fight overseas with the ISIS.

You can read more here and here.

Australia boosts AUSTRAC budget & sets up new counter-terrorist financing unit

Days earlier, the federal government in Australia allocated an additional $20 million to AUSTRAC and announced a new national intelligence team to address terrorist financing whose mandate would be to:

  • Prevent persons who have left Australia to fight with terrorist groups overseas from receiving financing or material support from Australia;
  • Identify opportunities to disrupt terrorism; and
  • Monitor financial transactions that are associated with, or tied to, foreign conflict hot spots.

Thus far, Australia appears to be the only country that has taken steps to prevent terrorist financing of individuals who have left its shores to assist overseas terrorists. The reality is that those persons are typically funded by family and friends before they leave and when abroad.

Is Canada next?

Unfortunately, there’s no reason to believe Canada is immune from the plans ISIS and other terrorist groups have identified in their quest to take over Western economies and make us “bleed”, both economically and physically.

Statistically speaking only, Canada may be more at risk because it appears to have an out-of-proportion number of persons connected to Canada who have left to fight in Iraq and Syria in support of ISIS. According to government figures, 130 Canadians or Canadian-connected persons have left Canada to fight with the ISIS and similar groups whereas the US, with ten times the population of Canada, had approximately 100 persons and Australia had approximately 60 such persons.

The government in Canada held an emergency debate in its Parliament earlier this week and surprisingly, few members of Parliament attended. Without much foundation, Canadians still seem to believe that they are immune from terrorist attacks, a risk in and of itself for everyone because they will not be alert to suspicious activities around them that could prevent an attack from coming to fruition.

You can read more here.

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ISIS puts terrorist financing back on global political agenda and financial institutions can expect significant scrutiny and fines for non-compliance

By Christine Duhaime | September 16th, 2014

“Money is the oxygen of terrorism” Colin Powell, Former Secretary of State.

The recent ISIS actions in Syria and Iraq have put counter-terrorist financing back at the top of the global political agenda.

The key issue at the Paris “International Conference on Peace and Security in Iraq” today was terrorist financing – how the ISIS got to be financed thus far and how to disrupt its financing.

The Conference, convened by the President of the French Republic and the President of the Republic of Iraq, was convened to discuss ways to deal with the growing threat of terrorism from ISIS. Several countries attended the Paris Conference including Canada, China, Bahrain, Belgium, France, Germany, Italy, Jordan, Kuwait, US, UK and Russia.

In an official statement, Conference attendees recommitted to abide by the UN Security Council Resolutions in respect of counter-terrorist financing and went so far as to agree to ensure that Resolution 2170 is correctly implemented into domestic law and properly enforced to have its intended effects.

Security Council Resolution 2170 requires countries ensure that their organizations, companies and citizens prevent terrorist financing and the provision of any support to terrorists, directly or indirectly including the provision of any services that benefit terrorists or their affiliated organizations. It also requires countries to implement sanctions in respect of the Resolution and to look at social media vehicles that allow terrorists to obtain financing. The latter arose because of news reports that Twitter and WhatsApp are being used for terrorist financing.

As a result of the Conference, every global and national financial institution and entity that reports to a financial intelligence unit, seems to have been effectively put on notice that there will be incredible scrutiny on the flow of funds to and from the Middle East, likely focussing on Turkey and Jordan, which are the alleged key destinations of smuggled ISIS controlled crude oil.

If Turkey and Jordan are the destinations, they are also the payment locations – e.g., where oil smugglers and their agents are compensated in the tens of millions of dollars for purchases of ISIS smuggled oil. In the world of modern finance, those payments cannot be facilitated or made, absent some involvement of Western financial institutions. And in the world of modern anti-money laundering law, that means those transactions are traceable from their origins to their destinations at every point in which they are in the traditional banking/financial system.

The scrutiny for terrorist financing involving, inter alia, payments for smuggled oil and other support to the ISIS will be retroactive to determine how property, assets and funds were and continue to be supplied to terrorist organizations in Syria and Iraq or that benefit terrorist organizations operating in those regions. It’s probably safe to assume that the scrutiny will be led by the Department of Homeland Security.

Separate and apart from oil sales, economists estimate that economic activity related to supporting financial infrastructure for terrorism accounts for $1.5 trillion, or 5% of the global annual output. Those funds flow ordinarily through the banking system. Other sectors besides banks are often targeted for terrorist financing. The investigation of UK resident Younes Tsouli showed that offshore online gambling websites can be one such source for terrorist financing. Tsouli, now incarcerated in the UK, developed a network of terrorist sympathizers in Canada, Denmark and Bosnia and allegedly used, among others, Absolute Poker and Paradise Poker sites, to fund terrorism.

Investigating terrorist financing in respect of the ISIS is a top political priority of many governments at this juncture and enormous financial resources will be used to follow the money in traditional anti-money laundering ways. Once facilitators are identified, they will be the subject of specific sanctions in the months to come. The exercise will have to involve private financial institutions globally.

With respect to private financial institutions, their counter-terrorist financing components of AML plans will have to be completely compliant with federal laws and the UN Security Council Resolutions that address counter-terrorism efforts to pass muster, otherwise they may face significant fines of the type not previously seen. That’s because we are likely to see a response of zero-tolerance for terrorist financing non-compliance as the violence from the ISIS against the West escalates.

Moreover, as the Arab Bank case and the several more hundred such cases in the pipeline in the US  appear to demonstrate, global banks will face exposure on the counter-terrorist financing front from plaintiffs harmed by ISIS terrorist attacks.

Financial institutions of all sizes and types should take steps now to ensure their counter-terrorism strategies are legally compliant, effective and up-to-date.

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