The Anti-Money Laundering Lawyer’s Primer on Beneficial Ownership and Numbered, Shelf and Shell Companies

By Christine Duhaime | April 24th, 2016

Beneficial ownership … Shell companies … Shelf companies … What’s the Difference? 

Since the Panama Papers, there seems to be an increasing interest in, and a corresponding mis-understanding of the concepts of beneficial ownership, numbered companies, shell companies and shelf companies.

Most lawyers who have done large M&A deals, including me, have created for clients, shelf, shell and numbered companies and have created beneficial ownership structures. In my case, it was for legal purposes. Here is our primer on what these terms mean.

1. Shelf Companies – one that literally “sits on a shelf”

A shelf company literally means a company sitting “on a shelf.”

This is an area that few people know much about. That is because lawyers are the creators, holders and protectors – in essence the gatekeepers – of shelf companies.

The way it works is this – lawyers incorporate private companies in which the law firm typically is the incorporator (the first shareholder holding one share). The company undertakes no business activity and the Minute Book for that company sits on a shelf for a number of years, sometimes ten years, like a bottle of wine aging and increasing in value. Eventually, the law firm will have a client who needs or desires a pre-existing company and it will sell to the client, one of its shelf companies. Law firms often have many shelf companies. On the rare occasion, a person will create their own shelf company but very rarely. Once a shelf company is sold, it ceases to be a shelf company.

In case you did not know, most law firms that practice business law have a Corporate Records Department, which is like a library with the Minute Books for every company the law firm represents or acts as the Records and Registered Office (the “Library“). The Library has another important collection of books – those are deal books, sometimes called closing books, that have every single piece of paper signed in respect of a financing or M&A transaction involving any of the companies for which the law firm holds a Minute Book. The closing books are material in respect of beneficial ownership, described below, because they often contain the documents evidencing beneficial ownership.

Shelf companies are created solely for the purpose of selling those companies at a later date for large sums of money. While a person could incorporate a new company, often a person will want a pre-existing company to demonstrate corporate longevity. The so-called longevity is a fiction because a shelf company may be 10 years old but in terms of business activity, it has not even been born yet.

Why would a person want corporate longevity? There are negative and positive reasons. The positive reason is that more money can be raised for a shelf than a non-shelf company because of its fictional longevity.

I’ll let you guess what the negative reasons are.

Specifically in respect of financial crime, this is an area of significant concern that is never looked at by the FATF, FIUs, banks or regulators because they tend not to have expertise in respect of corporate financing or M&A law to be familiar with what shelf companies are, how they are used, and why and by whom. Moreover, they often confuse shelf with shell companies.

Unfortunately, transnational criminal organizations, including those from the Middle East that are engaged in terrorist financing, have been known to use shelf companies. I’m sure you can guess why. The good news on this front, is that an AML / CTF lawyer can tell after spending a minute of time on due diligence, if a company was a shelf or not.

Although law firms are the creators and gatekeepers of, shelf companies, once a shelf company transitions from shelf to non-shelf, it becomes a regular company to the outside world and lawyers are no longer the gatekeeper of such a company.

There are two misconceptions about shelf companies that are worth noting:

(a) It is not accurate that nominees are used for shelf companies – that is an example of where NGOs and people confuse shelf companies with shell companies; nominees are used in shell companies but not in shelf companies.

(b) It is not accurate that shelf companies are used when a person needs a company that is “ready to go”. In modern jurisdictions, it takes mere minutes to register a company online with a law firm. Obtaining a company that is “ready to go” is not the purpose shelf companies serve in 2016.

2. Numbered Companies – relax, they’re perfectly fine

Some jurisdictions, such as British Columbia, allow the incorporation of numbered companies, as opposed to a company that has a name. People object to numbered companies without any basis. There is nothing the matter with, or suspect about, a numbered company.

A numbered company in British Columbia, for example, looks like this – BC1568796. But every company in British Columbia, even those that have actual names, such as Ocean View Holdings Inc., also has a corresponding number and is legally also known as BC1568797, and therefore its legal name is Ocean View Holdings Inc., BC1568797. It is no different than the company that is a solely numbered company, BC1568796.

The reason people object to numbered companies is because it’s harder for them to recollect the name of a numbered company than a company without a number. In terms of purpose, structure, shareholders and organization, there is no difference whatsoever between a numbered and a non-numbered company, and there is moreover, nothing nefarious about any numbered company arising solely from the fact that it does not have a corporate name attached to its corporate number. There is also no evidence to suggest that numbered companies are used for financial crime in greater numbers than non-numbered companies.

3. Shell Companies – there are two meanings

A shell company has two meanings.

In the securities law context, it means a company that no longer has business activities, although it once did have business activities, hence it is now a “shell” of its former self, as in “an empty shell.” In the public company context and in the securities law context, a shell company is legitimately used for the listing or re-listing process, or when there is a change of material business activities. There is nothing the matter with this type of, or reference to, a shell company.

In the corporate law context, a shell company has a different meaning. A shell company in this context means a company created to obfuscate ownership of shares (the beneficial ownership issue) and the purpose may be criminal or not.

If a person sets up a company in the Cayman Islands, a well-known tax evasion and money laundering jurisdiction, it is not necessarily a “shell company.” It all depends upon how the company is organized in a structural sense and what it is used for.

The key to determining whether a shell company was established with a criminal intent, or is used criminally or to obfuscate ownership for a criminal intent, is to look at beneficial ownership. Not all companies created to obfuscate ownership are criminal either – many people who run companies purposely use nominees to protect their privacy.

4. Beneficial Ownership

Beneficial ownership refers to the beneficial owner of the shares of a private company, as opposed to the legal owner of shares of a company, namely the de jure versus de facto ownership of shares.

To be technical, beneficial ownership is a common law concept used to distinguish rights held by persons with a beneficial interest in property from those who hold those interests legally (i.e., in name only). In the case of shares, a person can hold shares legally (in their name) or beneficially (as a nominee shareholder – meaning for the benefit of another person).

Canadian corporate law protects both de facto and de jure ownership of shares of private companies because it is not possible to find out the legal or beneficial owner of the shares of a private company. That information is held and maintained by law firms and are in the Library, both in Minute Books (where the legal owners of shares are listed) and deal books (where beneficial owners may be recorded in financing documents, such as in a pledge of shares).

It is not just companies – this is also the case with LLPs, partnerships, funds, charities and trusts.

In addition to the fact that in Canada, the shareholder records are maintained in law firms, they are further protected by privilege which only the client is entitled to waive for access. Canada has the strongest privilege protection laws compared to anywhere else in the world. Coupled with the fact that in Canada, lawyers are exempt from anti-money laundering law compliance, beneficial ownership has another layer of unintended protection.

Beneficial ownership confusion

The term beneficial ownership is widely misused.

Here’s why; groups are calling for legislative changes around the world to solve what is called the “beneficial ownership problem” by eliminating corporate secrecy by requiring the disclosure of the names of the shareholders of private companies on public registries. But if governments do that, all they are doing is requiring the public disclosure of the legal owner (e.g., the person whose name is on the securities register) of the shares of private companies. It does nothing to help determine beneficial ownership. You can only determine beneficial ownership of private companies by accessing the records of law firms where such records are held. And protected.

It would be more clear for NGOs to say they are seeking the establishment of public registries of private companies, which will yield the name of legal shareholders and to refrain from using the term beneficial ownership altogether since the public registries they are seeking will not yield the names of beneficial owners and does not advance financial crime mitigation.

The Offshore Company Problem

The offshore problem is that people set up shell companies with beneficial ownership structures and obfuscate their connections to those companies to stash or move money illicitly, in which nominee directors and nominee shareholders are paid to act as fake directors and shareholders, when in reality, the real owners of the shares and the real control persons behind the companies are usually politically exposed persons chilling in places like Vancouver, Hong Kong or New York buying up expensive real estate.

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Brazil’s former President, his wife and son charged with money laundering

By Christine Duhaime | March 13th, 2016

Brazil’s former president, Luiz Inacio Lula da Silva, and his wife and son were charged with money laundering and identity fraud in connection with real estate purchases. According to Brazil’s prosecutor, the former president used proceeds of crime to acquire real estate in Guaruja for he and his family that was destined for regular families in Brazil.  Prosecutors believe that the real estate was part of a bribery scheme to kick back benefits to, da Silva, a politically exposed person.

A spokesman for Lula da Silva admitted that he and his wife invested in the real estate but said they decided not to exercise an option to buy it entirely.

Brazil continues to undergo a massive corruption and money laundering investigation involving the state-owned oil company, Petrobras, and has implicated the current president, Dilma Rousseff. Brazilians think its a matter of time before she is ousted from power over the financial crime issues circling the government.

According to Brazilian news, the ruling party of Brazil is considering offering Lula da Silva a ministerial position to make him more immune from the charges.

 

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Summary of the 2016 US Threat Assessment

By Christine Duhaime | February 20th, 2016

The Worldwide Threat Assessment of the US Intelligence Community (the “Report“) prepared by the Director of National Intelligence on February 9, 2016, is a very interesting read from a counter-terrorism perspective, and essential reading for any bank in respect of assessing client and regional risks.

Generally, the Report is dead on in respect of the connection between the refugee crisis, international terrorism and global instability.

Pursuant to the Report, the main focus of the US, however, appears to be on Iran, Russia and China, and emerging technology.

Here is a summary of the the most interesting parts of the Report:

The Danger of Tech

The Report identifies increased reliance on artificial intelligence (“AI”) for decision making as a security risk, such as in stock markets. It also notes the risks from the prospect of mass unemployment caused by AI, machine functions and risks of other countries becoming better than the US at artificial intelligence and having the capacity to compromise and take control of US based AI systems.

The Report believes that the growth of tech with minimal security requirements could lead to widespread vulnerabilities in US government systems and critical infrastructure.

ISIS

The Report discusses the threat of ISIS and notes that home grown terrorists pose the most significant Sunni terrorist threat to the US.

In respect of Syria, the Report believes that the Syrian government lacks the resources to defeat ISIS on its own.

It notes the growing number of ISIS countries such as, through Boko Haram, Nigeria, Cameroon, Niger and Chad. ISIS is also a threat in Bangladesh, Afghanistan, Tunisia, Egypt, Lebanon and Yemen. In the latter country, the Report notes that 80% of the population needs humanitarian aid – a whopping 17 million people.

In Libya, the ISIS presence poses a continuing threat to regional stability and is deteriorating Libya’s economy. After Syria and Iraq, Libya represents the most well developed branch of ISIS.

Iran

The Report believes that Iran is a threat to the US because of its support of the Assad regime in Syria and its advanced military capabilities. The Report notes Iran’s engagement in Syria to battle terrorists and similarly in Iraq and Yemen but it does not make it clear whether it considers Iran battling ISIS to be a positive or negative thing. Presumably, a positive thing.

The Report notes that Turkey has angst in respect of Russia and Iran because they are eroding Turkey’s leadership role in the region.

The Report noted Iran’s advanced tech capabilities such as in space launch vehicles. Interestingly, although the Report covers the risks of tech in relation to general risks, it avoids mentioning Iran’s significant lead in all things tech-related, in particular because it has the most highly educated STEM population.

Syrian Refugee Crisis & Global Insecurity

In Syria, the humanitarian situation continues to deteriorate. According to the Report, refugees are putting significant strain on countries around Syria and in the EU. Turkey, for example, has 2.2 million Syrian refugees. About 50% of Syria’s pre-conflict population is gone – 4 million are refugees and 6.5 million are IDP. The EU has 500,000 Syrian refugees and expects 1.5 million migrants to arrive in 2016.

The EU will face political, economic and security challenges from the refugee crisis and terrorist threats, as well as a slow economic recovery.

Lebanon is facing security threats from the civil war in Syria and faces security, political, economic and humanitarian challenges. The Syrian conflict has negatively impacted Lebanon in all aspects of life and is straining its political balance. Its most immediate threat is trying to keep ISIS terrorists out from the north and controlling Sunni extremist retaliation against the Hizbollah for intervening in Syria. There are more than 1.1 Sunni refugees from Syria in Lebanon which has “burdened the economy”. Regional tensions are growing as a result of Syrians entering Turkey, Jordan, Lebanon and the EU.

The US believes that there is a risk of the displaced refugee populations becoming violent extremists because of assimilation problems.

Funding for the refugee crisis continues to be a problem. In 2015, the UN received less than 50% of the money it said it needed. Increased refugee issues will mean that 2016 will be under-funded as well.

Insufficient capacity to respond to the refugee crisis and terrorists are contributing to global insecurity, and there is a real risk of waning support for human rights. In all, over 60 million people are IDPs or refugees, and half of them are children.

The refugee crisis will fuel an increase in human trafficking as refugees will be trafficked for sex, forced labour, debt bondage and will allow terrorist organizations and gangs to exploit the situation for revenues. Specifically, Boko Haram and ISIS are engaged in human trafficking and use this activity for terrorist financing.

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Our most popular reads in 2015 in counter-terrorist financing and anti-money laundering

By Christine Duhaime | February 13th, 2016

What do people read on Duhaime’s Financial Crime site? 

Do you ever wonder what banks, law enforcement agencies and government agencies around the world are most interested in when it comes to financial crime (money laundering and counter-terrorist financing)?

Duhaime”s AML Law is quite widely read around the world. Every bank, financial institution, government agency, intelligence agency and other companies regularly read our articles and the most popular topics may surprise you. Here are some of our annual statistics for 2015:

Most popular story –> the story we wrote comparing how Chinese foreign nationals who move funds to Vancouver use a well-known money laundering technique called smurfing, which is similar to drug gangs. That article spawned numerous articles in the international media and brought the term “smurfing” out from use as a money laundering term into general use in the media.

2nd most popular story –> our story on HR158 involving the new US Visa Waiver Program Amendment restricting access to the US for foreign nationals or visitors who were in Iran, Iraq, Syria or Sudan. This story, which spawned a similar article in Quartz, resulted in humanitarian aid agencies and journalists taking up the issue of HR158 and had an impact in the Middle East, including in Iran.

3rd most popular story –> Our story on how China is hunting down assets and money launderers in Vancouver.

4th most popular story –> Our next most popular story was on the “Twitter Terrorist” and how ISIS engages social media to lure people to the caliphate, as well as a showcase of how ISIS uses social media. The story spawned numerous conference topics and further media attention to the story of how ISIS was using Twitter for terrorism.

Most popular search term –> The most popular search term on the site in 2015 was “HSBC” and the second was the author, Christine Duhaime. Next in line was “money and crime” followed by “what is terrorist financing?” In previous years, “money laundering” was the most searched term but it has dropped down the list. We had over 1,500 search terms entered in 2015.

Most visitors came from –> Canada, then the US, UK, India, Hong Kong, Australia, Singapore, Germany, Italy, France and then, surprisingly,  Iran. Most people from Iran visited us to read the story on HR158 as it relates to Iranians. Not surprisingly, the most read story in the US was also about HR158 but in Canada, the most popular story was about how Chinese foreign nationals move money to Vancouver by smurfing. Visitors from the UK came mostly to read about Iran and HR158. Russians who visited our site almost all went to learn about terrorist financing whereas people from China all went to read about money laundering.

Demographics –> Most of our readers were male between the ages of 25-34. The banks with the most visits were Bank of America, Bank of Montreal, TD Bank, Royal Bank, followed by global US banks. In terms of law enforcement agencies, American law enforcement visited our site more than any other country and they read mostly about ISIS.

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Canada and the fake refugee passport issue

By Christine Duhaime | January 27th, 2016

Fake refugees — A crisis within a crisis

It is becoming clear that it is not reasonably possible to rely on the identity documents of any persons who claim Syrian or Iraqi refugee status from 2014 onwards, the time in which the Islamic State acquired the capacity to create authentic passports.

Since at least April 2015, the Islamic State has said that they will send their members back to the West with fake or no identity, pretending to be refugees so that they are admitted into the EU or Canada or the US. It’s no surprise, therefore, that this is happening. For law enforcement, immigration officials and intelligence agencies to not be able to ascertain the real identity of certain persons from Iraq and Syria is a growing problem of international security.

Al Baghdadi’s wife and daughter moving to Turkey

The first known instance of a person with ties to the Islamic State who was a fake Syrian refugee, is al Baghdadi’s ex-wife, Saja al Dulaimi, who although an Iraqi foreign national, had a fake Syrian passport that she used to transit from Syria to Lebanon, allegedly to move money for the Islamic State with her children. In 2014, she lived in a Syrian refugee settlement in Lebanon, among Syrian refugees and humanitarian aid workers. In this story of her court martial in 2015 in Lebanon, she admits that she lied about being a Syrian refugee and used fake documents.

Her story is quite surreal from a security perspective. She was arrested by the Lebanese in December 2014, and although she is alleged to be one of the more infamous and well-connected terrorist financiers, and the former spouse of al Baghdadi, was released in a prisoner swap exactly one year after being arrested in a Qatari-brokered deal. At the time of her release, she said that part of her release deal gave her permission to move to Turkey with al Baghdadi’s child and that she would be living in Istanbul.

Her brother is a member of al Nusra. Allegedly, $48 million was paid as part of her prisoner swap. An unanswered question is how it will be possible for the unemployed former wife of al Baghdadi, who is connected so closely to the heart of those two groups, to move to Turkey and have bank accounts in the context of anti-money laundering law, counter-terrorist financing law and basic counter-terrorism policy.

There are other instances of course, of fake passports being used by  people to enter other countries.

Some of the perpetrators of the Paris attacks used fake – real passports issued by ISIS to enter the EU. As Frontex head, Fabrice Leggeri, noted in this article, it is not possible for intelligence officials to detect whether a person is a fake refugee or a member of ISIS when they carry passports from areas controlled by ISIS.

Importantly, he also notes that in Syria, which has no effective government infrastructure remaining, it is not possible to confirm the identity of anyone. Even if that was possible, the ID system in Syria is localized so who will they call – ISIS?

Some agencies refer to the Iris scanning conducted by UNHCR as a way of reassuring and confirming identity. As is evident in this video, the Iris scanning that is alleged to be capable of confirming ID of a refugee is merely a an internal UNHCR scanning system to ensure that the person who appears for an interview is the person who registered with UNHCR – it does not confirm the actual identity of the person against government databases and it is inappropriate to suggest that comfort can be obtained by the Iris scanning system in the context of international security. The proper answer is what Frontex noted above, that there is no available system.

Canada has promised to air lift 25,000 Syrian refugees in an expedited process that actually does call into question the extent to which Canada can confirm the identities of the refugees it is bringing to Canada. Canada does not have greater intelligence resources than Frontex and moreover, unfortunately, Canada has invested quite little in tech for counter-terrorism efforts.

The government of Canada has said that it will locate refugees mostly from Lebanon and Turkey for removal to Canada and UNHCR has said that the refugees will be processed only once they are in Canada, meaning that who they are will be determined after they arrive.

The government of Canada said here, though, that it will be “confirming” the ID of refugees beforehand. It seems unclear which process it is following.

In the context of international security, it would be preferable to adopt a balanced approach to the issue of refugee intake to ensure that Canada accepts that number of refugees that it is capable of caring for whose identities it can confirm using, inter alia, SIM downloads and other more modern tech before they arrive in Canada. That would require Canada to create tech solutions for counter-terrorism, a desirable move for Canada. It would reassure other countries that Canada gives the requisite importance to counter-terrorism and invests an amount equal in such tech as the amount it is spending on the refugee intake process to ensure the safety of Canada (and its neighbors to the South).

The US will undoubtedly apply pressure to Canada to slow down the immigration process in respect of Syrian refugees because the risk to them is far greater than it is to Canada because ISIS is more motivated to harm the US  than Canada. If Canada does not protect its borders, the US will do it for us by clamping down on the admission of Canadians to the US, a move that would significantly harm trade and commerce between the two countries.

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FinTech and Terrorist Financing – a major RegTech issue

By Christine Duhaime | January 27th, 2016

The news last month that the couple responsible for the San Bernadino shooting had received a P2P loan for $28,000 from an online lender, Prosper Marketplace, was cause for concern among financial crime regulators. There are some regulators who have believed that a topology of terrorist financing when it comes to ISIS sympathizers, is the liquidating of assets but we know that is not accurate. Would be terrorists actually do the opposite – they borrow funds to complete acts of terrorism but they will only borrow from institutions or FinTechs that are owned by persons they view as unsympathetic to the cause.

Other forms of FinTech have been used for terrorist financing – a crowdfunding platform called GoFundMe was used by a Canadian man to raise funds purportedly to free captives held by ISIS in Iraq. GoFundMe shut down the campaign but only after $502,000 was paid by people around the world who may not have realized that the law prohibits fundraising for terrorist groups, regardless of the reason.

Australian and French police have noted the increased use of store-value cards, lines of credit, small loans and credit card use as prevalent for foreign fighters to fund terrorism. In Australia, the cases of terrorist financing increases 300% in 2015, most of it from FinTech.

There is a growing problem of the lack of financial regulatory understanding on the part of FinTechs, which leads to failure of financial crime compliance which in turn places our financial system at risk. Other RegTech issues include privacy law compliance and consumer protection.

You can learn more about RegTech and FinTech at FinTech 2016 on April 14, 2016 in Vancouver.

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New US law brands journalists and humanitarian aid workers as terrorist risk

By Christine Duhaime | January 9th, 2016

In this story in Quartz, we explore how a new US law, HR158, the Visa Waiver Program Improvement Amendment Act 2015, will result in journalists and humanitarian aid works, and many others being branded a terrorist risk for visiting Iraq, Syria, Iran and the Sudan, and how the new law will affect the ability of Iran to engage in trade with members of the EU.

“A new US law brands journalists and humanitarian aid workers as terrorist risk” –> Quartz article.

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France’s top lawyer says there’s no reason to be optimistic on terrorism front

By Christine Duhaime | January 8th, 2016

Francois Molins, France’s top prosecutor, says that the risk of terrorism is becoming larger, more multi-faceted and complex. In this interview (en francais), Maitre Molins talks about the threat of terrorism in France and some of the investigation and prosecution challenges in respect of counter-terrorism.

No reason for optimism in terrorism

Mr. Molins said that there is no reason to be optimistic about the end of terrorism because the threat from ISIS is enlarging and multi-faceted and while it may be hard for people to hear that, the better policy is to be honest about the threat and to inform the public that this is a new phenomena that will last many years.

Risks to high profile politicians, lawyers, law enforcement

In the interview, Mr. Molins notes the risks from attacks by ISIS to high profile politicians, law enforcement, lawyers and judges and that is one area in which France is now taking into consideration in its counter-terrorism efforts.

Fake identity documents

In part of the interview, Mr. Molins discussed yesterday’s incident in Paris where a man wielding a knife and wearing a fake vest of explosives was killed by police. He said that the person remains unidentified but that he was in the country illegally with fake identity documents. The police recovered his smartphone and are attempted to crack it open for identity and affiliation purposes. Although the man claimed to be from Tunisia and later from Morocco, his smartphone had a chip from Germany.

He also talks about the prosecution of persons who are creating and trafficking fake identity documents for terrorists.

November 13 attacks involved fake refugees from Syria

With respect to the November 13, 2015 attacks in Paris, he says that they were planned, organized and coordinated from ISIS in Syria and involved ISIS teams in France and Belgium with the participation of persons who entered France from Greece through the Island of Leros, clarifying  that at least two people behind the November 13 attacks in Paris were fake refugees sent by ISIS (it has promised to send its people to the West guised as fake refugees to commit acts of terrorism).

Every terrorist has an encrypted smartphone

He notes that every ISIS terrorist has a smartphone which is vital to carrying out their activities that are locked and encrypted. Law enforcement is having difficulty unlocking terrorists’ encrypted smartphones when they cannot get the passwords to the phones. France is working with investigators  in New York, Spain and London on ways to decrypt smartphones for access to terrorists’ communications but the issue is the valuable loss of time that takes – time that could prevent further terrorist attacks. There are 8 smartphones belonging to terrorists that France still cannot unencrypt, leaving them “blind.”

 Counter-terrorism jurists

The interview is newsworthy, not just for the counter-terrorism content but also because it’s an important example of why France leads in counter-terrorism on many fronts globally, namely that unlike other countries, it has counter-terrorism specialists, including jurists and counter-terrorism judges, who work as a team with law enforcement in counter-terrorism efforts. The advantages, he explains, of having specialized terrorism judges in France for rapid, competent judicial responses, is explained here.

He also explains, in the interview, why it is necessary and desirable for the public prosecutor to speak to the media regularly to give information and balance and to ensure there remains confidence among the public with the counter-terrorism judicial and enforcement process.

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US approves law limiting access to the US for people who visited or are from Iran, Iraq, Syria & Sudan

By Christine Duhaime | December 9th, 2015

Original December 9, 2015; updated December 19, 2015

A “Terrorist Risk”

Following the terrorist attack in San Bernadino on December 2, 2015, an 11-month-old relatively dormant bill to amend an American law to impose visa restrictions on select foreign nationals entering the US gained traction when it was rapidly enacted in the US.

US Bill H.R. 158, the Visa Waiver Program Improvement Act 2015 (“HR 158“) amends the US Visa Waiver Program to:

  • Effectively deem 4 countries as a “terrorist risk”;
    • Iran
    • Iraq
    • Syria
    • Sudan
  • Effectively deem persons from the 38 countries that participate in the Visa Waiver Program, a “terrorist risk” who have been in Iran, Iraq, Syria or Sudan at any time since 2011;
  • Effectively deem anyone who is a national of Iran, Iraq, Syria or Sudan as a “terrorist risk” for the purposes of the Visa Waiver Program;
  • Deny entry to Iranian nationals, and the nationals of Iraq, Syria and Sudan who are also citizens of the 38 Visa Waiver Program countries to the US under the Visa Waiver Program;
  • Deny entry to foreign nationals from 38 countries that participate in the Visa Waiver Program to the US if they have been in Iran, Iraq, Syria or Sudan;
  • Require that the 38 countries that are part of the Visa Waiver Program improve the timeliness and quality of the information required to be provided to the US pursuant to the Passenger Information Exchange Agreement; and
  • Allow the Secretary of Homeland Security to suspend a country from the Visa Waiver Program if that country fails to provide information to the US consistently or fully.

Background on Visa Waiver Program

The Visa Waiver Program was established in 1986 to allow people in 38 countries, such as France, the UK, Germany, Italy, Australia and Belgium, to visit the US visa-free for 90 days in a reciprocating arrangement.

The US Visa Waiver Program is 8 US Code §1187, and it is that Code that HR 158 is amending.

Under the Visa Waiver Program, rather than apply for a visa, foreign nationals from 38 countries apply online for a travel authorization to enter the US. Under HR 158, that process will remain the same except that applicants will be required to report whether they have been to Iran, Iraq, Syria or Sudan or are nationals of Iran, Iraq, Syria or Sudan.

Once a person reports having been to Iran, Iraq, Syria or Sudan, their travel authorization request will be denied because they are deemed to be a “terrorist risk” for the purposes of the Program. Such persons will now have to apply for a visa to visit the US, instead of a travel authorization. That process is much longer and requires a review of the person from a terrorism risk perspective.

With respect to Iranian nationals, and nationals of Iraq, Syria and Sudan, the same applies — pursuant to HR 158, they are a “terrorist risk” for the purposes of the Visa Waiver Program, and will be denied entry to the US under that Program.

Background on Terrorism Threat from ISIS in Context of HR 158

US politicians who proposed, endorsed and voted for HR 158 have said that the only intent of HR 158 is to prevent individuals who are terrorist sympathizers from the EU who defected from their own countries to join the Islamic State (“ISIS”) and subsequently returned, from entering the US under the Visa Waiver Program. The US estimates there are 5,000 such persons from the EU. In reality, there are a lot more, probably  closer to 40,000. The vast majority, if not all, went through Turkey to join ISIS in Syria or Iraq.

The inclusion of Iran in HR 158 is markedly notable because no defectors from any foreign country in the EU or elsewhere who joined ISIS went through or were radicalized in Iran. There is no such thing as ISIS in Iran, and Iran has zero tolerance for ISIS. Iran is mostly a Shi’a country; ISIS is a Sunni group that is, as part of its raison d’être, anti-Shi’a. Pursuant to the stated intent of the law, HR 158 should have exempted Iran purely on the basis of a counter-terrorism perspective. The inclusion of Iran was a last-minute decision made days before the Bill was voted on by the US Congress in early December.

The concern of American legislators is that ISIS has said that they are sending trained defectors back home to Western countries to pretend they became disenchanted with ISIS in order to regain entry to their countries of origin. ISIS believes that Western countries will welcome their defectors back (who are ISIS terrorists but who are trained by ISIS to look and sound like they are not) without prosecuting them for any or all of gang activity, war crimes, crimes against humanity, membership in a terrorist organization, terrorist financing, money laundering, providing material support for a terrorist organization or promoting terrorism. Rather, ISIS believes that Western countries will give defectors a “get-out-of-jail-free” card, treat them as victims, de-radicalize them and set them free, at which point their true identities will emerge so that they can complete their mission to harm us and our democratic way of life.

ISIS has said officially that Mexico is the route by which they will send their people to the US. This is information we all know in counter-terrorist financing law but we also know that if ISIS claims that Mexico is the preferred route, it also means they are looking at the opposite route – unfortunately that suggests Canada. Neither Mexico nor Canada invest in adequate counter-terrorism efforts, including counter-terrorist financing efforts compared with most other countries. Canada, in particular, has said that as its rushes in 25,000 Syrian refugees, it is relying on the UNHCR Iris scanning system for its ID verification (see here) of refugees, but that system is just a UN internal ID system which confirms that Refugee X who registers with UNHCR is Refugee X when they receive humanitarian aid, and for other purposes. It is not a system that verifies identity of a migrant or refugee with their national government. That would be impossible in Syria and UNHCR does not have the resources to confirm identities of refugees. This is not an ID verification system that is up to the standard of any bank for on-boarding a client, let alone a country for the intake of foreign nationals.

The US is understandably concerned about the prospect of ISIS entering their territory, particularly since we have known for about a year that ISIS has the ability to make real, but fake, passports from Syria and Iraq. These are passports that are machine readable, purportedly issued by the governments of Syria and Iraq with real government paper and tools, but that are issued by ISIS for their people, especially family members, high-ranking officials and sympathizers. The latter is to infiltrate the West, as described above. In 2015, the EU said that they detected 340,000 migrants and refugees in their space with fake ID – many more they did not detect.

Law enforcement will not be able to detect who is a member of ISIS versus a non-member, and which passports are legitimate versus illegitimate when dealing with ISIS generated passports involving nationals from Syria or Iraq from 2013 onwards, and thus that is the difficulty with Syria and Iraq.

There is no parallel concern in respect of Iran.

Significant Issues with HR 158

Entering a country as a visitor is a privilege, not a right and as a matter of law, the US may deny entry to whomever it wishes. That’s not to say, however, that HR 158 is not without legal and other concerns, especially in respect of Iran because its inclusion is inconsistent with the stated purpose of the law.

No Exceptions for Journalists, Lawyers, Doctors or Humanitarian Aid Workers 

HR 158 exempts the visa requirement for foreign nationals who visited Iran, Iraq, Syria or Sudan if they were there for military purposes or for government purposes but not for any other purpose. That is a significant problem.

Routinely, many lawyers go to Syria and Iraq as part of human rights observation missions and lawyers go to Iran to work in the normal course – this activity does not make them a terrorist risk that requires that they be added to a database as part of a watch list for the purposes of reporting under HR 158.

Journalists from the EU routinely travel to Syria and Iraq to cover the conflicts in those countries, and other journalists travel to Iran to cover its emergence following the nuclear deal and those visits will render those journalists from the EU a terrorist risk for the purposes of the Visa Waiver Program. HR 158 will interfere with the ability of members of the press in the EU to do their jobs because if they travel to Syria, Iraq or Iran for the news, they will not be able to enter the US at all, or without applying for a visa and in addition to which they will be entered in a database as a “terrorist risk” (see below) for being in Iran, Iraq, Syria or Sudan.

Doctors and humanitarian aid organizations also routinely travel to Syria and Iraq to deliver humanitarian aid or humanitarian solutions, none of whom will be exempt and all of whom will now be deemed a terrorist risk for the purposes of the Visa Waiver Program. NGOs, including American humanitarian NGOs, are usually international with workers and volunteers from many countries, including many from the 38 Visa Waiver Program countries. These are people who put their lives at risk to save other people who are victims of the very terrorists that the US is aiming to keep out of the country. Assisting victims of terrorism will make foreign nationals who do humanitarian aid work in Syria, Iraq or Sudan a terrorist risk merely because they delivered aid in Syria and Iraq – the two jurisdictions where humanitarian aid is most needed.

Equally important, the United Nations, especially UNICEF And UNHCR, have hundreds of employees in Syria, Iraq and the Sudan engaging in humanitarian aid work – because no UN agency is a “government”, none of its workers or employees will be exempt from being included in a database of persons who were in Syria, Iraq or Sudan and all are now a “terrorist risk” for the purposes of HR 158 if they visited Syria, Iraq or the Sudan for their work.

Entities and persons who provide humanitarian aid to refugees, displaced persons and others who are victims of ISIS in Syria or Iraq are not likely to be defectors of ISIS who would pose a terrorist risk. But labeling them as such may materially adversely impact the willingness of foreign nationals from the Visa Waiver Program countries from engaging in humanitarian aid work going forward.

Surprisingly, not one NGO or UN agency that engages in refugee relief work has objected, formally or otherwise, to HR 158 or sought an exemption of behalf of humanitarian relief agency work before its passage or subsequently.

Legal Concerns

For the reporting system to work in the way desired by HR 158, the 38 Visa Waiver Program countries will have to collect and retain the traveling activities of their citizens, and red flag those of its citizens who have been to Iran, Iraq, Syria and Sudan retroactively since 2011 on the basis that such persons pose, by virtue of their travel, a “terrorist risk.”

Some of this red flagging already occurs in respect of visits to Turkey, Syria and Iraq between airlines and law enforcement but now it includes Iran and is retroactive to 2011. Countries in the EU that are part of the Visa Waiver Program may have privacy law impediments that prevent them from sharing information of this nature with the US.

More importantly, countries in the EU may have constitutional law impediments that prevent them from treating, as a matter of law, their citizens as a “terrorist risk” simply for having been in Iran, Iraq, Syria or Sudan or being a foreign national of Iran in particular, which is not an ISIS safe haven.

The law is overly broad because it paints nationals from four countries and anyone who has been there in the last five years as a “terrorist risk.” Iran has almost 80 million people and another 10 million that live outside Iran based on their laws of nationality. Syria has mostly a displaced population of 13 million – together, just those two countries combined equal 100 million people – they cannot possibly all be a “terrorist risk” irrespective of anything else.

Trade with Iran Will be Impacted from EU

It seems likely that some countries in the EU will be resistant to red flag their citizens who have traveled to Iran as a “terrorist risk” because of the growing number of countries in the EU engaging in lucrative commercial deals with Iran. Equally, EU citizens will not want to be flagged as a “terrorist risk” in government databases simply for having visited Tehran for trade and commerce, and be prevented from ever going to the US. It isn’t just the inclusion in government databases as a terrorist risk that is of concern for foreign nationals – some airlines also report to law enforcement when people book travel to certain destinations such as Turkey, Syria or Iraq. The airline reporting will now include Iran. As a result, a person visiting Iran for business purposes from a Visa Waiver Program country in the EU will be double-flagged –> first by the airline and then by a law enforcement agency for reporting purposes pursuant to HR 158 (and other security programs).

HR 158 will put a freeze on the willingness of business people in the EU to engage in trade with Iran.

HR 158  will also contravene at least three clauses of the Joint Comprehensive Plan of Action (“JCPOA“) with Iran, and will cause the EU to contravene at least one clause of the JCPOA.

It would not be surprising if the real purpose behind adding Iran to the list pursuant to HR 158 is to discourage corporations in the EU from engaging in trade with Iran in order to delay EU-Iran trade to give American corporations a level playing field in trade with Iran, which suggests Iran will be removed from HR 158 just as most US sanctions are lifted.

Pursuant to HR 158, the only four material countries whose citizens can engage in trade with Iran without being labelled a terrorist risk are Canada, China, India and the US.

Iranian Nationals

HR 158 is particularly impactful for Iranians. That is because under Iranian law, all children of Iranian fathers are Iranian nationals unless they have formally renounced Iranian citizenship. Not many have and consequently, people in the EU who have Iranian parentage are, under HR 158, a terrorist risk and do not qualify for admission in the US under the Visa Waiver Program. HR 158 is specifically designed to capture this so-called dual citizen class of Iranians. The same applies for Syrians, who are no less impacted, however, they are less numerous and less spread across the EU or able to finance travel to the US.

A Change of Heart?

I suspect two things will happen in respect of HR 158:

(1) Iran will react negatively over HR 158 and will take some action to protect its trade relationship with the EU, including seeking support from the EU; and (2) some members of the US Congress will (i) change their minds about voting for HR 158, particularly if journalists from the EU become concerned regarding the implications of HR 158 and how it impacts their freedom to report the news in conflict zones like Syria and Iraq, without fear of being branded a “terrorist risk” under the Visa Waiver Program; and (ii) change their minds in respect of the fact that they failed to exempt humanitarian aid organizations and workers because it is inconsistent with US foreign policy in respect of supporting humanitarian aid delivery by the private and NGO sectors.

You can read our article in Quartz here on the issue of HR158. 

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Towards redefining financial inclusion

By Christine Duhaime | December 7th, 2015

Financial inclusion continues to be an important part of the dialogue on anti-money laundering and counter-terrorist financing law, because the latter results in a greater number of people being de-risked out of financial services or denied banking services altogether. In this piece in American Banker, we explore the issues that arise with the way in which we define financial inclusion and suggests a redefinition that is more inclusive.

“Let’s Put the Inclusive Back in Financial Inclusion.” –> American Banker.

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