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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US-Canada drug enforcement plans to disrupt drug imports from British Columbia, scrutinize Bitcoin, MSBs and intercept more texts

By Christine Duhaime | September 13th, 2014

US cross-border drug strategy to cover new ground in British Columbia

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

Let’s Talk Bitcoin has an interesting article here on the US drug initiative to reduce the cross-border drug trade between Canada and the US with a focus on targeting the use of Bitcoin and other digital currencies for laundering proceeds of crime. The announcements on the focus on Bitcoin in drug enforcement initiatives involving Canada seems to centre around illegal drug manufacturing and exports in and around British Columbia, the drug capital of Canada.

US plans to reduce drug trafficking from Canada

On August 19, 2014, the Obama Administration issued a press release announcing the 2014 National Northern Border Counternarcotics Strategy (the “Strategy“) to reduce illegal drug trafficking across the Canada-US border.

The press release says that this years drug plan will, inter alia, focus on eliminating public corruption in the Canada-US drug regime and target digital currencies, electronic payment devices and trade-based money laundering used in Canada-US drug trafficking.

The Canada-US drug problem

According to the Strategy, transnational criminal organizations (“TCO“) exploit the Canadian border to smuggle illegal drugs and proceeds of crime. The key drugs are marijuana, ecstasy (MDMA), methamphetamine (crystal meth), and cocaine.

The Strategy aims to disrupt TCOs to curb the flow of proceeds of crime across the Canadian border and the trafficking of drugs. Part of the Strategy involves addressing critical infrastructure and cybersecurity, trade facilitation and protection of jobs, all  of which are threatened by illegal and gang activities that are international in nature.

According to the Strategy, Canada is a high risk jurisdiction for the production, distribution and trade of illicit drugs. It notes:

  • British Columbia is the primary source of ecstasy in North America, supplying Mexico as well as the US.
  • Illegal drug production in Canada mostly involves ecstasy and marijuana, produced both for Canadian and US trade.
  • Ecstasy and marijuana are the two most significant drug threats facing the US from Canada.
  • Cocaine is transited through the US and destined for Canada.

Transnational criminal gangs

In terms of TCOs:

  • They are generally Vietnamese-Canadian, Indo-Canadian, Irish-Canadian and Italian-Canadian.
  • So-called outlaw motorcycle gangs (“OMG“) are also key TCOs of concern in drug manufacture, distribution and trade with the US.
  • Most of the criminal activity is concentrated in British Columbia, and to a lesser extent in Ontario and Quebec.
  • Ethnic Chinese groups from British Columbia are primarily manufactures and traders of ecstasy to the US.
  • Vietnamese-Canadian TCOs in British Columbia have the market share of marijuana production and trade and have moved to the US to reduce border crossing scrutiny.

Funds transported to Canada for laundering

According to the Strategy, funds from drug trade sales are laundered frequently at Canadian banks and money services businesses (“MSB“). Drug traffickers that are American, travel to Canada deliberately to deposit bulk cash and proceeds of drug crime into Canadian financial institutions, the implication being that it is easier to do so in Canada because anti-money laundering compliance is not as robust compared to US financial institutions.

Maritime smuggling to the US from Vancouver docked boats to Washington State is a concern for law enforcement.

Intercepting texts, emails

According to the Strategy, an important goal is the increased sharing among the US and Canada of emails and texts obtained from their respective citizens. Those records are obtained from electronic communications service providers (in Canada, such as Rogers Communications, Bell, Cogeco, Shaw) and social media service providers (such as WhatsApp, Facebook, SnapChat).

The Strategy also calls for expedited sharing of financial information for those persons suspected of criminal involvement so that investigations can proceed quickly and assets forfeited where warranted.

Targeting AML compliance at MSBs

The Strategy calls on Canada and the US to target the financial infrastructure of TCOs in Canada, where mostly MSBs in British Columbia are used for money laundering purposes. It also calls for greater enforcement of MSBs and increased fines for AML non-compliance.

We earlier wrote about the surprising decision from a drug enforcement and anti-money laundering law perspective by a Vancouver Court dismissing criminal charges against Vietnamese-Canadians who owned and operated a MSB in Vancouver here, who funnelled an incredible $24 million in unaccounted-for and unexplained cash through their MSB, one of whom previously had a drug trafficking conviction and all of whom were unemployed.

One of the legacies from that decision is that the MSB appears to have thus far escaped criminal and civil prosecution for non-compliance with federal anti-money laundering laws, a result that is no doubt frustrating to regulators and to law enforcement agencies involved in cross-border strategies to stop drug trafficking. If there is no deterrent for laundering proceeds of crime, there is no motivation to curb behaviour.

Bitcoin and online payment processors

The Strategy calls for targeted efforts by US and Canadian law enforcement on online payment processors and digital currencies that facilitate money laundering. There is a stated concern in the Strategy that digital currency exchanges are operating without registration and therefore outside the scope of regulatory oversight.

A second report, the Congressional Budget Submission from the Office of National Drug Control Policy, noted that TCOs use MSBs to launder proceeds of crime from drug trafficking, and that Bitcoin is likely to emerge as a “major money laundering tool” for traffickers. The report also noted the connection between prostitution and drug trafficking in the Northwest. Investigations into drug trafficking usually result in prostitution charges and vice versa. The same is true for interceptions and monitoring of texts (as noted above) in the sense that monitoring prostitution communications usually leads law enforcement to illegal drug trafficking activity, and vice versa.

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Bankrupting the banks? Historic trial may find financial institutions liable for the terrorist acts of customers

By Christine Duhaime | August 25th, 2014

Banks and financial institutions around the world are closely watching the Linde v. Arab Bank case unfold in New York City. It’s the first civil trial against a bank for alleged violations of the AntiTerrorism Act of 1990 (“ATA“), 18 USC 2331. The litigation seeks to hold the Arab Bank, a third party, liable for injuries resulting from acts of terrorism. Liability, potentially in the billions of dollars for financial institutions, may come down to whether the Arab Bank had a competent anti-money laundering compliance regime in place to assess terrorist financing risks, including from non-listed entities.

Whether we like it or not, unfortunately every terrorist organization at some point uses financial institutions, directly or indirectly. Many are unlisted or undesignated. And the numbers keep increasing. Unfortunately, acts of terrorism increased 69% from 2011 to 2012 and then a further 43% from 2012 to 2013. From a risk perspective, that equates to significantly more exposure for banks. We’re not seeing is a corresponding change at financial institutions to address increased risks by improvements to counter-terrorist financing programs.

Close to 300 victims of terrorist attacks committed in Israel, Gaza and the West Bank from 2001 to 2004 are suing the Arab Bank under the ATA for damages for injuries caused by terrorism, alleging that the Arab Bank provided terrorist financing by, among other things, providing wire transfer services to non-listed and listed organizations some of whom, in turn, paid terrorists and their families for committing terrorist acts. The Arab Bank says that it processed wire transfers in the normal course, consistent with its AML policies and procedures and did not knowingly provide financial services to persons affiliated with terrorism.

If the plaintiffs are successful, banks around the world may face exposure for similar claims in the tens of billions of dollars for dealing with funds that ultimately benefit terrorists or terrorist organizations (whether listed or not), not just in the Middle East but wherever terrorists receive financial services in the world, including the Middle East, Canada and the EU.

How perfect does your counter-terrorist regime have to be?

The litigation will focus minutely on wire transfers processed by the Arab Bank and on the steps the Arab Bank took to mitigate against terrorist financing activities to non-listed entities. Generally, under anti-money laundering and sanctions law, banks cannot provide financial services to listed terrorist groups, or deal in funds directly or indirectly controlled by a listed terrorist group. It’s the detection of the indirect provision of financial services and indirect ownership of funds that is often difficult for banks to reconcile within their compliance regimes. In this case, a novel aspect is the alleged provision of services to non-listed entities.

The Arab Bank’s anti-money laundering compliance regime will either be a billion dollar liability or a billion dollar defence, depending upon the extent to which it adequately addressed preventing terrorist financing.

$50 million for not doing look-backs

In 2005, the Arab Bank New York, which acted as a correspondent bank, was penalized by FinCEN for, inter alia, clearing funds for beneficiaries or originators that were listed entities even though at the time of the processing of the funds, they were not listed. The Arab Bank failed to complete a “look-back” program. A “look-back” is performed by a financial institution after a person, group or entity is sanctioned or listed and it involves the financial institution completing a retroactive review of recent activity to identify potential suspicious activity. FinCEN found that if the Arab Bank had undertaken a look back, it would have discovered that it had cleared funds for persons that were subsequently listed and would have filed suspicious activity reports. It did neither and was penalized for failing to retroactively monitor transactions for sanctions and terrorist financing.

The litigation has already raised many areas of concern for international banking including:

(a) Liability for providing financial services to a non-listed entity

The Arab Bank is being sued for providing financial services to an organization named the Saudi Committee that was not listed as a terrorist organization but that allegedly had, as one of its purposes, the payment to families for completion of acts of terrorism. The Arab Bank allegedly permitted that organization to maintain bank accounts, receive funds from banks overseas and to make payments from its accounts for acts of terrorism. The Arab Bank argued that it properly screened clients and wire transfers and it is not liable for the downstream use of funds deposited and processed if it later emerges those funds were used for terrorism.

(b) Ruling that foreign banks cannot rely on national privacy laws 

The Arab Bank was prevented by its national privacy laws in Jordan from providing documents it was ordered to produce in the litigation. It sought Jordanian Court approval to provide customer account documents to the plaintiffs, which was denied. The failure to produce documents resulted in a US Court sanction order that will allow the jury to make a negative inference on the failure to produce, namely that the Arab Bank provided financial services to listed terrorist organizations and distributed payments to terrorists for the Saudi Committee.

The plaintiffs maintained that the Arab Bank had previously disclosed some of the same documents that were part of the orders for production and it was unwilling, not prohibited, from producing them. Some of those documents were provided to the Department of Justice in connection with an investigation of another entity.

(c) Relevant to FATCA

The decision is relevant, win or lose, to the implementation of FATCA in places such as Canada where privacy laws do not trump anti-money laundering laws. The Arab Bank unsuccessfully appealed to the US Supreme Court on the issue of a foreign financial institution’s ability to rely on sovereign privacy laws to avoid producing documents. The US Treasury weighed in the debate arguing that foreign banks could not rely on bank secrecy laws to trump certain activities such as the global efforts to combat terrorism or tax evasion. Tax evasion (FATCA), like anti-money laundering law, appears to trump privacy law.

(d) By implementing anti-money laundering laws, countries have subordinated other legal interests

The US Courts held that countries such as Jordan and Lebanon have “subordinated” the privacy rights of their natural and legal persons (banks and their clients) to their national interest in fighting terrorism by adopted the FATF Recommendations, and entered into agreements in respect of anti-money laundering laws in which they renounced reliance on bank secrecy as a basis for refusing MLA assistance of other governments in terrorist investigations. Fighting terrorism through private rights of action under the ATA is the greater protected interest. This would apply theoretically to any foreign bank sued in the US advancing the foreign privacy legal impediment versus terrorism argument.

II. Terrorist financing litigation against Canadian banks may increase in & outside Canada

Litigation in US

The decision will cause an increase in litigation against Canadian banks with branches in the US in cases with similar facts, namely an international act of terrorism with a US connection in which a Canadian correspondent or branch processed financial transactions that benefitted the terrorist organization that injured the victim.

The use of correspondent accounts in a US state is sufficient to assert personal jurisdiction over foreign financial institutions for terrorism-related injury claims by victims. The inability of foreign banks to rely on criminal and civil penalties imposed on them for disclosure of confidential client information as a result of the Arab Bank case, further erodes defences available to foreign banks in the US.

Litigation in Canada

Banks (Canadian and foreign) can also expect an increase in claims in Canada pursuant to the Justice to Victims of Terrorism Act (the “Act“) implemented a year ago because Canadian plaintiffs will similarly look to banks in Canada for recovery of damages for acts of terrorism.

The Act creates a cause of action that allows victims of terrorism to sue natural and legal persons and certain foreign states, in a Canadian court for loss or damages suffered as a result of acts or omissions that are punishable under Part II.1 of the Criminal Code (the terrorism offences). The cause of action is available to victims who are Canadian, permanent residents or if none of those, to a person who can demonstrate a real and substantial connection between their claim and Canada.

Although any “person” (such as a bank, law firm, association, corporation, broker, private equity fund) is a potential defendant under the Act, the threshold is seemingly high in that claimants have to establish that the defendant committed one of the following acts or omissions:

  • Knowingly collected or provided property for terrorist activities (such as financing);
  • Knowingly possessed property to facilitate terrorist activities;
  • Knowingly dealt in property owned or controlled by a terrorist group;
  • Knowingly facilitated a transaction in respect of property controlled by a terrorist group;
  • Provided financial or other services in respect of property controlled by a terrorist group;
  • Failed to disclose property (assets, bank accounts, funds, etc.) in which the person has possession or control to the RCMP or CSIS; and
  • Relevant to brokers, banks, financial institutions, trust companies, or any other deposit taking institution, failed to report to the RCMP that it is (or is not) in control of funds or other property controlled by a listed entity.

US courts have established on language substantially similar to Canadian provisions, above, that providing financial or other services to a terrorist group is an act of international terrorism.

Claims are available whether the loss occurred inside or outside Canada after January 1, 1985, however, if the loss occurs outside Canada, there must be a real and substantial connection to Canada. With respect to prospective defendants, under the Act a defendant is presumed to have committed the terrorist act if the listed entity caused or contributed to the loss or damage and the defendant committed the act for the listed entity.

The Act also suspends limitation periods where the victim is incapable of commencing an action because of physical, mental and psychological conditions, or when the victim is unable to ascertain the identity of a perpetrator.

State Immunity Act

The Act amends the State Immunity Act to create a new exception to state immunity, the general rule that prevents states from being sued in Canada’s domestic courts. The exception removes state immunity only if the state in question has been placed on a list established by Cabinet on the basis that there are reasonable grounds to believe that it has supported or currently supports terrorism.

The relaxation of state immunity is controversial. Under international law, states have customarily enjoyed complete immunity from being sued in the domestic courts of other states. This arises from the international law principle of the sovereign equality of states, which includes the principle that no one state be subject to the courts of another. This principle has been modified for years in the context of maritime law as a result of commercial necessity.

Questionable constitutionality

The Act is of questionable constitutionality because it allows victims to recover for tortious conduct which is a matter purely of provincial, not federal, competence under §92(13) of the Constitution Act, 1867.

No doubt the first bank defendant in Canada will challenge the constitutionality of the Act, although for policy reasons, it would be arguably better for a banking association to challenge it in advance of the filing of a claim.

From an anti-money laundering perspective, it is advisable for global banks to ensure that the counter-terrorist financing components of their procedures are consistent with, inter alia, the FATF, the UN Security Council resolutions and sanctions laws and that, from the top down, their personnel have been adequately trained on terrorist financing counter measures.

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Casino employee fined by FinCEN over anti-money laundering compliance issues

By Christine Duhaime | August 21st, 2014

The Financial Crimes Enforcement Network (“FinCEN“) has fined a former manger of a US casino over anti-money laundering compliance violations. According to the Wall Street Journal, George Que, a former manger of VIP services at Tinian Dynasty Hotel & Casino, assisted high rollers at the casino to gamble outside of the Bank Secrecy Act reporting regime by agreeing not to file suspicious activity reports and currency transaction reports for the players.

During an undercover operation, Mr. Que allegedly promised a representative of a Russian businessman that if his client brought large amounts of cash to the casino, he wouldn’t file money laundering reports.

According to the Wall Street Journal, FinCEN has stated that it plans to focus its attention on the casino industry and registered gaming employees who fail to undertake the requisite anti-money laundering compliance obligations. In casinos in the US that involves, inter alia, reporting suspicious activity, terrorist financing activity and currency transaction reports; having an adequate compliance regime in place with an appointed qualified compliance officer; and providing training on the requirements of the BSA.

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FINRA ramps up anti-money laundering compliance actions at securities firms

By Christine Duhaime | August 18th, 2014

The Financial Industry Regulatory Authority (“FINRA“) announced today that it filed a  Complaint against Wedbush Securities Inc. for alleged egregious and systemic anti-money laundering compliance infractions. According to the Wall Street Journal’s Risk & Compliance Journal, FINRA has made enforcement of securities anti-money laundering a priority. According to securities firms in Toronto, so have Canadian securities regulators.

Wedbush is one of the largest independent securities brokerage firms in the US.

According to the Complaint, Wedbush allegedly failed to develop and implement written anti-money laundering policies, procedures and internal controls that were risk-based to its market-access business and that could achieve compliance with the Bank Secrecy Act.

Apparently, it also failed to investigate suspicious activity in financial transactions or to file many SARs as and when required.

According to the Complaint, no one appears to have been in charge of the firm’s AML compliance function. That function apparently was delegated to an AML officer and a Senior VP of Correspondent Services who allegedly was not adequately trained on AML and whose department was understaffed to perform the AML function. This latter person allegedly sub-delegated the AML function to another untrained person who then delegated the task to a fourth untrained analyst.

You can read the Complaint here.

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PwC settles with New York bank regulator over anti-money laundering and sanctions advice

By Christine Duhaime | August 18th, 2014

The New York Department of Financial Services (“NYDFS“) has announced that it has entered into a settlement with the advisory firm of PricewaterhouseCoopers Regulatory Advisory Services (“PwC“) over anti-money laundering and sanctions compliance advice it provided to the Bank of Tokyo Mitsubishi (“Bank of Tokyo“).

PwC is suspended for two years from accepting consulting work with financial institutions regulated by the NYDFS. Pursuant to the settlement, PwC will make a $25 million payment and undertake a remediation program.

The regulatory involvement stemmed from a look-back assignment undertaken by PwC for the Bank of Tokyo which involved a historical review of wire transfers completed by OFAC listed countries and entities. According to the announcement, the Bank of Tokyo had a policy of falsifying wire transfer information. Under pressure from the Bank of Tokyo, PwC removed information in a report to regulators regarding the wiring practices, including references to business with “enemy countries” in the U.S. Moreover, a partner apparently informed employees that Bank of Tokyo attorneys would get “all twisted up” about OFAC alerts language in a memorandum to the client.

The Settlement Agreement is available here.

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