Another Australian Bank De-Risks and Exits Remittance Business Over Terrorist Financing Regulatory Risks; Financial Inclusion and Shadow Banking Seen As Repercussion

By Christine Duhaime | November 20th, 2014

Fourth banks closes remittances businesses

Another bank in Australia, the Westpac Bank, has announced it will close its remittance business division next week over the impossibility of complying with counter-terrorism laws. By de-risking and closing its remittance division, the Bank is terminating the bank accounts of all of its business customers who operate money services businesses.

Westpac is the fourth major bank in that country to withdraw from remittances over reputational concerns and business risks. Those risks are mounting exponentially in the face of the realization that the civil and regulatory liability facing banks has the potential to bankrupt them (as a result, in part, of the Arab Bank case) for current and historical cases in which they participated in the funding terrorism by processing transactions that benefitted terrorist groups or persons, knowingly or not, or as a correspondent bank or otherwise.

Annually, 80 million remittances are sent from Australia worth approximately $30 billion and most of it goes to families in Asia and the Pacific region.  In the remittance business, banks in Australia, Canada and elsewhere provide services to money services businesses who deal with the clients directly. Then, larger banks, usually a correspondent bank, process transactions on behalf of the localized banks. In the money services business regime, banks must not only know their clients, but the clients of the money services business as well.

ISIS making banks more cautious

Banks are becoming more concerned with banking money services businesses, even those that are regulated and subject to anti-money laundering laws, and correspondent banks are typically refusing to bank the accounts that they know come from money services businesses because of the fear of terrorist financing involving the Islamic State. As the violence generated by the Islamic State spreads and as their sympathizers grow in number, all banks become more exposed and face greater risks by operation of anti-money laundering laws (its counter-terrorist financing component) and sanctions laws.

The remittance association in Australia noted that if another bank de-risks an entire sector of remittances, the movement of funds will move to shadow remittances, potentially causing more of a terrorist financing threat to national security and worsening the financial inclusion problem.

My opinion

This is my opinion only but I’m about 100% sure that global counter-terrorist laws and the politically exposed person regime in anti-money laundering laws are both incapable of being complied with as a matter of law and are therefore void ab initio - it would be less expensive by hundreds of billions of dollars in avoided fines and jury awards and loss of business revenues if a few global banks challenged the legislation instead of de-risking. Preferably in Vancouver where the Courts historically rule against supporting global anti-money laundering laws. By way of example, in the United States, terrorist financing (by the sale of cigarettes) for a listed terrorist group can carry a sentence of 30 years incarceration on conviction whereas in Vancouver a sentence of six months for terrorist financing (by charitable donations) on behalf of a listed terrorist group was determined to be appropriate because a Canadian Court felt that a longer sentence would interfere with a convicted terrorist financier’s ability to travel internationally.

You can read the original article on the Westpac Bank here.

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Is the ATM Global Network Unwittingly Used for Terrorist Financing?

By Christine Duhaime | November 19th, 2014

We’re pleased to announce that we’re giving a presentation on the topical issue of “How the ATM Network Globally is Unwittingly Used for Terrorist Financing & Ways to Prevent it” at the 2015 Interac Conference in Ottawa.

After a spouse of a member of the Islamic State Tweeted to the world from ar-Raqqah, Syria, about accessing the ATM network to finance their activities, financial institutions have become more concerned about how and where the debit and credit cards they issue are being used, and by whom, especially in the wake of the Arab Bank case. We will discuss those issues and more at the Interac session in April 2015.

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Seminar on Terrorism Risks in Canada & Stopping Funding of Terrorism

By Christine Duhaime | November 19th, 2014

On behalf of the Association of Certified Anti-Money Laundering Specialists in Canada, we’re pleased to announce a wine & cheese on the important topic of understanding terrorist threats in Canada and ways to stop terrorist funding on December 3, 2014 in Vancouver.

The session is aimed at providing guidance to financial institutions, money services businesses, insurance companies, casinos, brokers, electronic and other payment processors and digital financial services.

The 2 hour session will be led by a counter terrorism specialist from the RCMP with a wide range of expertise in this area in Canada and in other countries.

The session will be held at the Terminal City Club at 4:00pm. Registration is available here and space is limited.

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UK keeps its promise to jail officers for non-compliance with money laundering laws – likely world’s first incarceration over AML/CTF regulatory compliance failures

By Christine Duhaime | November 17th, 2014

In what may be a world first, a UK Court has jailed the officer and owner of a money services business essentially for failing to comply with regulatory requirements for anti-money laundering and counter-terrorist financing.

Paramjit Singh Sangha, who operated a money services business called PS Gold Exchange in England, failed to comply with the Money Laundering Regulations in the transfer of £400,000 to India on behalf of clients. The HM Revenue & Customs agency discovered that Mr. Sangha failed to verify the identity of his customers, failed to keep AML/CTF records and did not train staff at the money services business on how to detect suspicious transactions. For that he was charged in October 2013, and subsequently pleaded guilty to four charges of violating the Money Laundering Regulations. He was incarcerated for a term of 12 months on Friday.

In August, the HMRC revised its money services guidance to make officers personally liable for anti-money laundering compliance failures.

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Court in Canada says despite notice of surveillance, violent offender has expectation of privacy over texts in public casino

By Christine Duhaime | November 14th, 2014

Expectation of privacy

In an odd decision out of Canada, a provincial level Supreme Court has ruled that a violent offender gambling at a public casino has an expectation of privacy when using his cellular phone to text despite the fact that gamblers are notified of being under surveillance when entering casinos.

The decision may undermine the ability of casinos and law enforcement to detect and prevent not just financial crimes but serious non-financial crimes, and their ability to comply with gambling legislation and anti-money laundering and counter-terrorist financing laws when gamblers (including violent offenders) are on the premises.

The Court also held, as an aside, that an unsent text on a cellular phone is a communication because it is about to be sent and about to enter the transmission stream, effectively opening the door to the argument that an unsent communication is now a communication in Canada. That determination has almost unimaginable repercussions in criminal law, for example at the extreme end, it appears to mean that a person texting a death threat (let’s say) that they never send may be nonetheless convicted of communicating that threat because the text was on their phone “about to be sent” and enter the transmission stream. In other words, a draft text or email that is never sent is sufficient to establish a factual communication.

Integrity of gaming

Casinos in Canada are conducted and managed by the government and they are required, pursuant to the Gaming Control Act, to ensure the integrity of all aspects of gambling. As part of the requirement to preserve integrity, casinos must take action to monitor gamblers on the premises 24/7 to ensure they are not engaging in criminal conduct (such as loan sharking) and to detect and report suspected money laundering and terrorist financing offenses.

In addition to ensuring the integrity of the gaming industry, casinos have a duty to ensure the safety of their employees and of gamblers. One of the ways in which they do this is by the use of video surveillance.

PTZ cameras

Since the TV series CSI and a host of casino-related movies, the whole world knows that casinos use PTZ cameras that can capture minute details of activities from the ceilings 30 feet above. The Gaming Control Act and gaming policy require that casinos monitor and remove gang members and other violent offenders from gaming premises. Often, the PTZ usage is what alerts them to the fact that a person is on site that will affect the integrity of gaming. PTZs are now used for many other businesses from retail stores, infrastructure and banks.

Facts

The judgment is not particularly clear, partially because the Judge said he would not take a technical approach to the law in some of his analysis, but the facts of the case seem to be as follows:

In June 2012, Dean Michael Wiwchar was arrested and charged with the first-degree murder of John Raposo in Toronto. Six months earlier, a man was murdered at the Wall Centre Hotel in Vancouver and police apparently suspected Wiwchar of having committed, or having been involved in, that murder. In the course of their investigation, the Vancouver Police located 16 guns and ammunition at two of Wiwchar’s apartments in Greater Vancouver. After the arms were located in the ostensible possession of Wiwchar, the police began surveilling him.

In March 2012, Wiwchar gambled at the Edgewater Casino in Vancouver. The police followed him into the casino. While on the premises, he used his cellular phone to send and receive text messages. The police went to the casino surveillance room to monitor Wiwchar on PTZ cameras. They directed casino surveillance personnel to zoom in to read Wiwchar’s texts and to screen capture the messages. In particular, they obtained screen shots of texts that Wiwchar was composing, or had composed, but had not yet sent. The police did not have a warrant.

Four days later, the police obtained the video footage and screen captures of the incident above involving Wiwchar from the Edgewater Casino with a court order.

Violent history

Wiwchar was subsequently charged with arms-related offenses in British Columbia and murder-related charges in Ontario. According to his parole record he, inter alia, is a violent offender; threatened to kill correctional officers; once deliberately flooded his prison cell; slashed a man in a home “from his ear to his lip”; beat victims he was robbing with a baseball bat; and stabbed a person.

After he was charged in British Columbia, Wiwchar’s lawyer moved to have the casino text messages excluded as evidence on the basis that they were illegally obtained by violating Wiwchar’s right not to be subject to an unreasonable search and seizure under §8 of the Charter of Rights and Freedoms. His lawyer argued that Wiwchar had a reasonable expectation of privacy in the casino vis a vis the content of his text messages.

The Crown argued that no one can have a reasonable expectation of privacy in a casino and further, as we all know, the texts were not private because anyone sitting beside us can see and read our texts when they arrive if one’s cellular phone screen is visible and watch as you compose texts.  Wiwchar’s texting was obviously fairly visible because the surveillance staff were able to zoom in to read the messages for several hours. A PTZ camera does not have x-ray capabilities and cannot record anything other than objects and people that are in plain and public view.

The Court said that based on the evidence presented to it, the primary purpose of video surveillance at casinos is to detect cheating. That is not completely inaccurate and minimizes the role and purpose of video surveillance. The primary purpose of video surveillance at casinos conducted and managed by government agencies, as mentioned earlier, is to ensure the integrity of the gambling sector and ensure the safety of persons at casinos as required by the Gaming Control Act, including to detect and report financial and other crimes as required pursuant to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, §86 of the Gaming Control Act, and pursuant to several sanctions laws in effect in Canada.

According to the judgment, the Court appears not to have considered whether the alleged infringement was justifiable under §1 of the Charter of Rights and Freedoms, and as a result, that whole requisite analysis is absent. The Court also appears not to have considered the Gaming Control Act as the basis for authority to undertake video surveillance.

A Communication now includes texts not sent

Most oddly, it took the position that viewing a violent offender’s texts using PTZ cameras at a casino is an “interception” of a communication. With respect to solely the interception issue, PTZ cameras at casinos are no different than similar passive cameras at street intersections, toll bridges, or shopping centres that record license plates or other activities that are used as evidence.  If the latter are not illegal interceptions, it’s hard to see how the former is just because its in a casino. All that a PTZ camera does is zoom in to an object or a person in a pubic place for surveillance or a picture to record that which is in plain and public sight.

The Court held that a PTZ screen capture of a composed draft text chilling on a cellular phone before it is sent to the intended recipient (before you push the send button) is an interception of a communication because it was acquired in the course of the communication process, which it held meant a text that was “about to be sent” and enter the transmission stream.

This seems to mean that a draft email, text or social media post that is composed on a device or a computer and “about to be sent” is now a communication for the purposes of the Criminal Code irrespective of whether it is in fact sent. In other words, a non-communication in a text message format is now a communication. Does this mean a person can be convicted of an illegal communication in a text message that is never communicated? In Canada, notwithstanding the Charter of Rights and Freedoms and notwithstanding that such a communication is never actually communicated, it would arguably appear to be the case.

Conclusion

In the result, the Court held that a violent offender in a public place does not abandon his right to privacy with respect to his text messages and that the police violated Wiwchar’s expectation of privacy by reading the text messages on the PTZ cameras. That evidence was ordered excluded from Wiwchar’s trial.

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Islamic State creating its own currency – may it consider digital currency next?

By Christine Duhaime | November 13th, 2014

The Islamic State (ISIS) has issued a statement by its “treasury house” that it is issuing its own currency as the next step in its move to statehood. The currency will be represented by gold, silver and copper coins only and its use will be mandated by the Islamic State in the territories in which it controls. The statement and drawings of the coins are available on social media platforms operated by ISIS.

Separate social media accounts of ISIS terrorists: (a) show a picture of the coin in gold held in someone’s hand (although it may be Photoshopped): and (b) state that the coins are already in existence. In an EU social media Q&A platform, a British ISIS terrorist in Syria wrote that the ISIS currency is being used now. If that’s the case, its likely only marginally used at this point.

ISIS calls other currencies issued by governments a tyrannic monetary system that contributes to poverty and said that issuing its own currency would emancipate it from the global economic system. Apparently, ISIS has experts that have advised it on circumventing the global monetary system and how to create its own monetary system.

As we have noted elsewhere, ISIS has been exceptionally capable at convincing global and local financial institutions to violate counter-terrorist financing, anti-money laundering and sanctions laws by being able to maintain banking relationships from Syria and Iraq, tap into the ATM system unimpeded, collect ransom payments, buy uniforms and military equipment, sell petroleum products, set up businesses from Ankara, buy houses in Ankara and traffic humans from Turkey to the Gulf States.

Eventually, financial institutions that facilitated terrorist financing in respect of ISIS will be prosecuted by US regulators who have jurisdiction by virtue of correspondent accounts, or sued civilly in the US by victims of terrorism, but that will take years and in the meantime terrorist financing appears to be continuing.

The problem with issuing coins is that they are heavy, bulky, x-rayable and difficult to export or exchange beyond the borders of ISIS controlled territory. Given the technological and intellectual investment ISIS has made to adopt its own monetary policy, now with a new centrally controlled state-issued currency, will it also move to create its own centralized digital currency? It may be possible. The recognition by ISIS of the annexation as “provinces” of land purportedly controlled by ISIS-sympathetic groups in Saudi Arabia, Yemen, Algeria, Libya, and Sinai raises another interesting question of how one develops a currency for a medium of exchange and use internationally and in secret.

Digital currencies are a technology wonder but they are also the world’s most perfect tool for transferring value quickly, anonymously and internationally in a way that escapes regulatory detection and oversight. For a terrorist organization to create its own currency that it forces others to use, and in a digital form, may unfortunately be the best formula for terrorist financing imaginable.

Ideologically speaking, issuing digital currency, like Bitoin, may appear to be inconstant with ISIS’ move backwards in time to the 8th Century. However, as we have seen with their use of social media, cellular phones, electricity, vehicles, and weapons, ISIS only makes symbolic moves backwards. If a coin-based historical currency is too impractical for trade and commerce, or to obtain financing from the exterior, it is not inconceivable that they may move to a digital platform as global banks start to shut them out of the financial system.

How unfortunate would it be for the legacy of Bitcoin if the first so-called ‘state’ issued central digital currency was from ISIS.

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US veterans file billion dollar claims against global banks over terrorist financing and sanctions avoidance and claim that the conduct continues today

By Christine Duhaime | November 11th, 2014

Anti-Terrorism Act filing against global banks

Yesterday, symbolically the day before Remembrance Day, several plaintiffs filed suit against a number of global foreign banks based in the United States under the Anti-Terrorism Act (the “ATA“), including HSBC Holdings Plc, Barclays, Standard Chartered Bank and the Royal Bank of Scotland. The plaintiffs are seeking damages that could run in the billions of dollars for alleged acts of terrorism committed by the defendants in Iran and Iraq. The case is Freeman v. HSBC et al. and was filed in New York.

Financial support allegations

The allegations are not specifically that the banks committed direct acts of terrorism; rather that they provided financial support to listed terrorist groups in violation of sanctions laws and counter-terrorist financing laws which were a significant factor in the chain of events that led to the kidnapping and subsequent death and injury of American soldiers in Iraq from 2004 to 20011. In short, but for the alleged provision of financial services to Iranian entities in violation of sanctions law, terrorists would not have been capable of committing acts of terrorism that harmed the plaintiffs.

Allegations that conduct is continuing

According to the complaint, starting in 1987 and continuing today, the defendants are alleged to be conspiring with Iran to alter, falsify or omit information from payment messages (known as “stripping”) that involve Iran or Iranians to ensure the payments are shielded from detection, scrutiny or monitoring by each of law enforcement, regulators and other depository institutions in the US.

In addition to stripping, the plaintiffs are alleged to be converting MT103 SWIFT codes into MT202 SWIFT codes allegedly so that the transmitting bank does not have to disclose the originator, beneficiary and counter-parties of the financial transactions to disassociate the transactions from Iran for sanctions avoidance.

Billions allegedly transferred to Iran

As a result of the  alleged conspiracy, it is alleged that Iran was able to transfer billions of dollars in US currency through the US; transfer to terrorist organizations, millions of dollars used in terrorist acts; and acquire weapons of mass destruction. The funds enabled terrorist groups to commit acts of international terrorism that caused the death or injuries of the plaintiffs. From 2002 to 2006, at least $100 million allegedly was provided to terrorists through the Bank Melli and $50 million was provided to Hezbollah.

Other banks in the line of fire

The complaint also alleges that other banks aid the defendants in the conspiracy to evade US sanctions and they are named as John Doe Banks because through the discovery process of the litigation, their identity will be revealed as financial transactions are traced to Iran.

Such alleged conduct by the alleged defendants are, if proven, acts of terrorism and terrorist financing pursuant to 18 USC §§2331, 2339A, 2339B and 2332d that caused the injuries and if proven, will render the defendants liable civilly pursuant to 18 USC 2333(a) of the ATA.

Transfers from London 

Most of all of the financial transactions are alleged to have occurred from London but in ATA cases (and indeed all financial crime cases), jurisdiction is established by virtue of a correspondent banking relationship in the US, or by virtue of licensing by a US state.

The litigation is not a surprise, given the Arab Bank case, but what is a surprise given that case, is the allegation, if true, that the defendants are still today allegedly engaging in terrorist financing and sanctions avoidance. That is unlikely.

As we have indicated elsewhere, banks and their insurers do not have enough money to pay out ATA claims coming down the pipe and on the other hand, have spent years not taking counter-terrrorist financing and sanctions law seriously with adequate legal compliance programs.

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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 may be enormous for all the consequential deaths and injuries to Americans or Canadians sustained  as a result of ISIS-directed terrorist acts.

Insurance companies and agents and possibly governments, who make, broker or facilitate ransom payments for ISIS are knowingly financing terrorism and funding the commission of terrorist acts that they not only know will harm and kill people, but that are designed to topple democratically-elected governments. My prediction is that they will be sued in due course. If this wasn’t clear before it is now crystal clear with 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. One of the many disturbing videos recently circulating on YouTube is allegedly of ISIS men casually getting ready for an auction to buy captured Yazidi girls for a few dollars or a pistol in which they discuss that one over the age of 15 is worth less (than a younger one), and comment on their lack of rights as slaves.

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. The same is true for all of the money services businesses and funds remittance services who transfer funds to Syria and to terrorist controlled areas in Iraq irrespective of sanctions and with the knowledge that those areas are under the control of ISIS.

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.

Financial institutions and remitters 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 with certainty 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. 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).

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