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

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. I

n Canada, for example, millions of adults do that by using public wireless access routes, public Internet ISPs, Facebook, Twitter, dating sites, and WhatsApp and by continuing to use such services knowing that they are not private, and even after countless security breaches with WhatsApp and others. If we let the whole world invade our privacy on the Internet for social purposes, can we really complaint 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 – How ISIS is funded by sales of oil, captured women and taxes Christians must pay to stay alive; and how banks are used to support terrorist financing

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 Canadian lawyer, writer and frequent speaker on financial crime (including counter terrorist financing) and financial technology and innovation issues.

Updated October 18, 2014

When it comes to terrorist financing, the statement “no man is an island” is fitting except that in this case, it may be more accurate to say that ”no terrorist organization is a financial island”.

The financing of terrorism presently involves the use of our banks and the larger global financial system. Money and value goes in and out of Syria and Iraq for and from the Islamic State (“ISIS” or “ISIL” in the US) and their leaders, most of it attached in some way to accounts at financial institutions.

As a result, it may be easier both to detect and stop the flow of funding to IS if we are willing to invest in the technology and manpower to do so.

Here is a synopsis of what we know about terrorist financing involving the Islamic State and what financial institutions, governments and private enterprise actors can do to mitigate the risks of terrorist financing and the attendant threats to international security.

There are generally three significant baskets of terrorist financing taking place in respect of IS that engage external states and their financial institutions.

The first is the sale of crude oil from Iraq and Syria from oil fields acquired by the IS, sometimes referred to as terrorist oil;  the second is funding from individuals in developed countries to IS directly and indirectly; and the third 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.

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

How IS 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 particular from charities. In 2013, Qatari authorities apparently only filed one suspicious transaction for the whole country yet some of its richest individuals paid million of dollars in cash and via wire to IS. A fundraiser known as Tariq Al Tunisi is alleged to have arranged for IS to receive $2 million from Qatar in one transaction alone, which flowed through the financial system unimpeded.

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 list.

1. Terrorist oil sales

The bulk of the terrorist financing to IS is generated by terrorist oil sales, hence the impetus to destroy oil and gas infrastructure controlled by IS because it will remove the most significant source of revenues necessary for their operations.

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

According to US intelligence and Hisham Alhashimi, an IS 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 western financial institutions because both the vendors (IS) and the purchasers must use the modern 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 the ISIS

Breaking it down, the first point of contact would appear to be local banks operating in Istanbul who bank the IS, although likely under beneficial ownership structures or their accounts would be shut down. I’m surmising these bank accounts were set up years ago and as time went on, IS entities became the bank’s VIP customers as more and more wealth was deposited. As the IS and their agents likely determined, the best way to avoid bank 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. IS 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 proceeds of crime (specifically, from numerous terrorist acts).

Banking ISIS leaders

What about IS leaders? Historically speaking, state leaders who acquire power undemocratically have taken enormous pains to acquire great wealth and to preserve it by removing funds from domestic areas of conflict to overseas safe tax 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. The best way to preserve wealth in a war-torn conflict area is to move it to a more stable economy or a tax haven where beneficial ownership disclosure is protected.

We can expect, therefore, that the IS elite have moved or will move, vast sums of money to other jurisdictions in the world through close family members (PEPs). The money and its ownership will be more difficult to tie to IS leadership because, inter alia, it originates from a state over which they have effective control 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.

We have already started to see IS officials moving into Turkey with vast sums of money, renting or 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 in the UK with terrorist funds. According to news reports, IS has opened up its first consulate office in Ankara to issue official visas for defectors from other countries to enter Syria to fight for the IS. They have also opened several businesses in Ankara and Istanbul.

All of these activities, from purchasing houses, cars, consulates, and offices requires the constant use of bank accounts and banking relationships in Turkey. The IS move into Turkey to set up businesses is likely being done to establish bank relationships through commercial activities so that IS 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.

Banking oil sales agents

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 wealth. They need a bank with a good network of international correspondent banking relationships to ensure that can happen quickly and efficiently, with wealth management ties to tax havens. 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 also capture the indirect facilitation of banking or financial services for terrorist activities so financial institutions, including wealth managers in tax havens, all along the oil transactional chain of finance are exposed for providing services for these transactions.

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

2. Christian taxes; kidnapping and ransom

The second way in which IS 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. According to experts, IS earns $10 million per month in ransom payments and, unlike terrorist oil payments, ransom payments are made in US cash using external foreign banks. Under this method, agents bring the cash into Iraq, Syria or a conduit state in exchange for the prisoner. IS agents bring the cash back to headquarters but the agents liaising for the foreign governments bank their commissions in foreign banks, only in this case, they are likely using foreign banks in Europe which have ties to tax havens through wealth management firms or bank branches.

The IS has other internal funding methods such as taxes imposed on people in acquired territories and transactional fees for people to remove funds from their bank accounts that engage the local economy and do not likely 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.

Then there are the Christian taxes, which are taxes Christians must pay in occupied towns as a “tolerance” fee if they do not convert, or are not first killed. The Christian tax is paid for the privilege of life. If a Christian cannot pay or refuses to, they are killed.

There are also bank fees to pay to IS. 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 forfeited money held in their accounts to the IS. If a person is not within the prohibited group, in order to withdraw funds, a commission has to be paid to the IS.

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

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

Finally, the IS also traffics antiquities from Syria to western collectors. Payments for antiquities sales all involve foreign banks and are a form of terrorist financing that is obviously prohibited.

While initially, the self-funding methods (such as the sale of young teenagers into slavery) may not go through our traditional banking methods, those funds end up in the hands of the IS 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 requires banking relationships (see below).

3. Payments from foreign countries

In Iraq, the advance force of IS, 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 card holder.

Before stored value cards were invented, this was a preferred way of sanctions avoidance in places like Iran where family members could be financially supported through pre-paid credit card payments. Because funds cannot be sent among certain sanctioned countries, credit cards are used to buy goods and services instead as a way to transfer value undetected by the financial system. 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.

Several Tweet accounts of IS members have joked about how the US has tried to harm IS financially and noted that there are still ATM machines all around from which they readily withdraw cash from overseas.

4. Payments in the west

In addition to funding terrorist attacks on critical infrastructure and to individuals, terrorist financing will be used to support home-grown terrorist group 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 a group’s operations in western countries (e.g., travel, training, rent, social media activities, 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 the financing of terrorism

Financial institutions, and other financial service vehicles that assist terrorist financing, even unwittingly, negatively impact the integrity of the global financial system and threaten international security.

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

The government role is to provide greater and better education on terrorist financing to financial institutions and the population generally. Its role also should involve greater regulatory scrutiny over financial institutions for compliance with terrorist financing.

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:

  1. Funds involving the use of conduit countries to fund terrorism such as Turkey, Lebanon, Jordan and UAE and sanctioned areas.
  2. Use of the banking system by IS, 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.
  3. Co-mingling funds such as sending multiple wires in a bundle to hide the actual sender or recipient of the funds.
  4. 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.
  5. Online payment systems and stored value cards, particularly in conjunction with social media wherein the IS allegedly uses Twitter and WhatsApp to solicit requests for payments by PayPal and other online payment methods. Likely, such accounts are held in the names of multiple individuals in order to avoid detection.
  6. According to AUSTRAC, digital payment systems which are new, such as digital (or virtual) currencies such as Bitcoin, pose an emerging risk of terrorist financing which may increase as they grow in popularity, particularly given that they are by design, anonymous.

Domestic red flags

Terrorist financing involves raising the 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 IS (conduit countries such as Turkey, Lebabon);
  • 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.

We ultimately want terrorist organizations to be a financial island.

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Stopping the cash flow to ISIS from countries like Canada

By Christine Duhaime | September 28th, 2014

Islamic State: Stopping the cash flow from countries like Canada

Christine Duhaime

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

Christine Duhaime

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

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

By Christine Duhaime | September 25th, 2014

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

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

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

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

Precedent setting case

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

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

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

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

Banking can contribute to death or injuries in tort

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

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

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

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

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

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

Banks must do more than rely on listed entities

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

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

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

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

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

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

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

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

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

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

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

By Christine Duhaime | September 24th, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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Canada considering amending its counter-terrorist financing law

By Christine Duhaime | September 22nd, 2014

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

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

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

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

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

By Christine Duhaime | September 20th, 2014

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

The new anti-terrorism laws will, inter alia:

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

By Christine Duhaime | September 17th, 2014

AUSTRAC unregisters MSB

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

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

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

You can read more here.

Australian police arrests terrorist suspects

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

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

You can read more here and here.

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

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

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

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

Is Canada next?

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

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

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

You can read more here.

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

By Christine Duhaime | September 16th, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Germany lists ISIS as terrorist group; ISIS planning cyber attack on critical infrastructure

By Christine Duhaime | September 14th, 2014

ISIS Listed as Terrorist Group & readies for critical infrastructure attack on West

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

On Friday, Germany  listed ISIS as a terrorist organization. The listing bans all activities that support ISIS in Germany, including displaying the organization’s flag. In terms of anti-money laundering and counter-terrorism law, the listing, more importantly, makes it a criminal offence to finance directly or indirectly, the ISIS, or to provide any material or other support to ISIS. Part of the German action involves the power to shut down social media in Germany, used by ISIS for propaganda and terrorist financing efforts. The Wall Street Journal reported that Twitter and WhatsApp are used by ISIS supporters to solicit wire transfers for terrorist financing.

According to the German Interior Minister, the listing of ISIS is intended to enable German law enforcement to react to ISIS financing or other activities in Germany without involving the “cumbersome judicial system.” The German Government believes that more than 400 Germans have left to support ISIS and approximately 100 jihadists are in Germany that support ISIS.

German calls on International Effort to Act on Counter Terrorist Financing

German officials called for international efforts to stop the flow of funds to ISIS – essentially to find a way to make global counter-terrorist financing laws effective.

Clearly, despite the activities of the Financial Action Task Force, global adoption of anti-money laundering and counter-terrorist financing laws, increased scrutiny of financial institutions for terrorist financing and significant fines for non-compliance, efforts to financially harm terrorist organizations does not appear to be effective enough. The laws are strong enough but there are gaps in regulatory oversight and enforcement, particularly with certain types of payment systems such as online payment systems that are unregulated in places like Canada, and certain money services businesses.

Attack on Critical Infrastructure Imminent

More worrisome, however, is the news on Fox here, that extremists are planning a massive cyber attack on Western critical infrastructure, likely to energy or the financial system. In order to accomplish that, several terrorist hackers (a hackorist) in the UK have relocated to Syria to spearhead cybersecurity attacks aimed at the West.

We wrote here on how the West should be pushing the panic button on the threats to critical infrastructure by terrorists. As noted therein, the goal of terrorists is to cripple certain industries and create havoc. They accomplish this by targeting critical infrastructure – the systems and assets, physical or virtual, that are so vital that the incapacity or destruction of them would have a debilitating impact on our national security, national economic security, national health or safety, or any combination of them.

Terrorists are interested in three areas – energy infrastructure, transportation infrastructure and in the context of cyber-terrorism, the financial system because the inter-dependency of these forms of critical infrastructure on others and between governments, means that targeting these assets will create the most disruption to the most amount of people and significant economic damage. A cyber-terrorism attack can be just as disruptive on energy or transportation infrastructure assets than a physical attack because those assets run on computer systems that can be susceptible to hacking. The ISIS can unfortunately wreck havoc on our infrastructure systems without leaving Syria.

In addition to finding ways to have a concerted international effort to make counter-terrorist financing laws effective, as Germany is seeking, it would be expedient to take steps to ensure that critical infrastructure assets are hack-proof and physically secure. Such steps are significantly less expensive, harmful and disruptive than ultimately dealing with a successful attack on critical infrastructure by terrorists.

Canadian sympathizers in Syria

Canada has not yet listed ISIS as a listed entity and does not have announced plans to compel the closure of social media platforms that facilitate terrorist financing on an emergency basis. There may be enough teeth in the Criminal Code and Combating Terrorism Act, however, to accomplish the latter in Canada once ISIS is listed.

Canada has said that by early 2014, more than 130 persons connected to Canada have travelled overseas to participate in terrorist activities, including terrorist financing and planned terrorist violence in Iraq and Syria. In contrast, the US Attorney General estimates that 100 Americans have gone overseas to fight for terror groups abroad. Statistically speaking, that means Canada has a significant home-grown terrorism problem given that it has 1/10 the population of the US.

A number of news reports a week ago reported that at least three Canadians who had joined an al-Qaeda group in Syria interrogated kidnapped American journalists and engaged in terrorist financing by using their credit cards to purchase computer and electronics on eBay from Syria. However, Syria was a prohibited country in both Canada and the US. Providing a service to Syria is prohibited (i.e., how did an account get opened involving Syria or to a Syrian destination of a known kidnapped person located in Syria; a financial transaction from Syria subsequently get processed; and an eventual shipment occur to Syria of electronic equipment destined for terrorists).

Al-Qaeda and Jabhat al-Nusra are listed in Canada and al-Qaeda has identified Canada as one of its targets for terrorist attacks.

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