Finance Committee on April 23rd, 2015

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is meeting number 76 of the Standing Committee on Finance. Pursuant to Standing Order 108(2), we are continuing our study of terrorist financing in Canada and abroad.

We are very pleased to have with us four witnesses in Ottawa. We are still expecting one. I think he's delayed in his travel. We also have a guest from the United Kingdom.

First of all, from the British Columbia Civil Liberties Association, we have the policy director, Micheal Vonn. From the Clement Advisory Group, we have the president and CEO, Mr. Garry Clement. From Fasken Martineau DuMoulin, we have Koker Christensen, who is a partner. We are expecting Matthew McGuire from MNP LLP to be here shortly.

By video conference from London, we have as an individual, Mr. Haras Rafiq from the Quilliam Foundation.

Welcome, all. Thank you so much for being here with us this morning.

You will each have five minutes for your opening statement and then we'll have questions from members. We'll begin with the British Columbia Civil Liberties Association.

[Micheal Vonn, Policy Director, British Columbia Civil Liberties Association]

Thank you, Mr. Chair, and good morning.

The B.C. Civil Liberties Association urges the committee to undertake a study of how Canada is addressing the issue of terrorist financing. In our submission, Canada's approach to this issue has long lacked critically needed oversight and review, and the urgent need for these will intensify with the passing of Bill C-51.

FINTRAC is of course a key component of Canada's strategy with respect to deterring and detecting terrorist financing. The Arar inquiry's policy phase is the most comprehensive analysis of national security accountability that Canada has ever undertaken. As I'm sure you know, the inquiry's recommendations included consolidated review processes for national security agencies, including FINTRAC. However, no review mechanism has been created. Meanwhile, audits of FINTRAC by the Office of the Privacy Commissioner of Canada, the OPC, have consistently demonstrated troubling over-collection and retention of personal information. While FINTRAC itself maintains that one of its primary safeguards for privacy is its independence from law enforcement, Bill C-51, if passed, would make such independence all but fictional.

As the Privacy Commissioner has just stated in his submission to the Senate committee on national security and defence, Bill C-51 would make available to 17 federal departments and agencies, including FINTRAC, the RCMP, CSIS, CSEC, and the CRA, potentially all personal information these departments hold on Canadians. All 17 of these departments would be in a position to receive information about any or all Canadians in interactions with government in an unprecedented blurring of the mandate of these 17 different institutions.

We anticipate a steady stream of legal challenges if these proposed powers are enacted, and these developments make very pressing indeed an assessment of FINTRAC's proper mandate and role in relation to other national security agencies. This of course necessitates a review of its efficacy.

The OPC audit reports echo the assessment on efficacy cited in the 2013 report of the Standing Senate Committee on Banking, Trade and Commerce entitled “Follow the Money: Is Canada Making Progress in Combating Money Laundering and Terrorist Financing? Not Really”.

There would appear to be a dearth of information to accurately assess whether the Canadian regime is meeting its objectives. No empirical evidence is being generated to suggest that the regime is successfully accomplishing its goals. To the contrary, what little evidence is available can only suggest either that there is considerably less terrorist financing than feared or that the regime is not very effective at addressing it. However, much of the response to the situation of genuinely failing to understand the need and efficacy of the regime is simply repeated urges for more invasive powers; broader disclosures of sensitive, highly prejudicial personal information; a more onerous administrative burden on the private sector; and more resources for FINTRAC and its partners.

FINTRAC, as part of our national security apparatus, works with some degree of necessary secrecy. But currently, that secrecy is inadvertently allowing for a failure of accountability. There is no dedicated review body that can tell us whether FINTRAC is operating properly, successfully, and lawfully.

At the B.C. Civil Liberties Association, we say that this is a critical juncture for a long overdue study and sober assessment of the genuine need and the most efficacious, accountable, and rights-protective means of addressing that need.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to Garry Clement, please.

[Garry W.G. Clement, President and Chief Executive Officer, Clement Advisory Group]

Chairman Rajotte and distinguished members, thank you very much for this kind invitation.

I want to also thank you for allowing me to submit a fairly lengthy document. I obviously won't go through it, as we'd be here all morning, but I do want to cover some highlights, if you will permit me. I want to talk from an operational perspective on what I'm seeing. Having been in law enforcement for 34 years now, as well as more than seven years in compliance, I think I come with a unique perspective, seeing both sides of the world.

I think we have to accept that terrorists consider themselves at war, one with no rules or uniforms. Terrorists camouflage themselves in our civilian population in order to unleash their fury upon unsuspecting targets and symbolic structures. The reality is that they're out there, and I think we have to accept that. With Canada's recent expansion into Syria, I would suggest it also means that we have to be more alert than we were in previous times.

The reality is that for financial institutions, identifying suspicious activity, especially for terrorist financing, is extremely challenging. I would argue that there has to be a more concerted effort in a public and private partnership, where there's collaboration between law enforcement and the financial institutions. I know that some of this is sensitive information, but I firmly believe we can appoint somebody with security clearance to be a chief anti-money-laundering officer in a bank. We can have them appointed as a point of contact in, for instance, emerging situations.

I can give you an example. I just came back from the financial crime conference in New York. One of the bank chief anti-money-laundering officers spoke of being contacted by the FBI at three o'clock in the morning on a very serious matter. Because of the relationship that had been established, she went to the bank that had been previously arranged and was able to pull off the data about the financial flows, which were extremely valuable in the investigation. When we're dealing with terrorist situations, we're dealing with real time, and I believe that's something that's essential.

I think one thing we need to do is to be more efficient and effective in assisting financial institutions. The other thing I think we need to do a better job of is providing financial institutions with the typologies that FINTRAC is seeing so that the financial institutions can better serve the overall goal of what we're all trying to stop—terrorist financing and the financing of organized crime.

The other aspect I'd like to talk about is that when we put up sanctions against Syria, they were very laudable sanctions. I think we'd all agree with them. But what happened as a result is that all of the money services businesses that had Syrian clients were shut down by the banking community. The problem for us, and it is a problem, is that all of that money continued to flow in an underground economy. Neither law enforcement nor the intelligence agencies.... I can tell you that I have submitted a number of intelligence briefs on this, because I have a number of contacts in the Iranian community, and none of those have yet to be followed up on. I still get examples of where in the newspaper they're still advertising for their services.

This concerns me greatly, because this has been going on for a period of about four years. How much of that is related to terrorist financing? I suggest that if we're going to allow foreign students to come from Syria, we also have to accept that they have to have some vehicle to flow their money. I would suggest to this committee that the fact that we allow the MSBs and that they are monitored with independent reviews—the one that I was doing I was monitoring quarterly—is of value, because we know exactly what's going on and who the people are. I suggest that's far better than an underground economy.

The other area I'd like to speak to is the fact that this whole area requires expertise. I can tell you that I was very fortunate; I guess I was an anomaly in the RCMP, because I started in the proceeds of crime and money laundering area in 1983, at the embryonic stage, under the auspices of Rod Stamler. I helped developed the program. I can tell you that over the years, frustration crept in. I ended up leading the program at the end, and I watched expertise constantly going out the door because of our antiquated belief that we have to have a rank-based system. That is an 18th century philosophy when we're fighting 21st century crime. We have to get to the point where skill is an absolute requirement. We need to build up that expertise. I can tell you that when I left the RCMP, my average experience was 1.7 years.

[The Chair, Conservative, James Rajotte]

You have one minute remaining.

[Garry W.G. Clement]

Thank you very much.

The other thing I would suggest, which is of value, is that we need to look at biometric software. One requirement under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act is identification and often that is not face to face.

I've made a submission that we need to look at using even such things as Skype, with which you can look at the individual. There are biometrics out there now that can compare a passport with the individual in front; they compare the two photos. That also is something we need to look at on our borders. Biometrics and facial recognition software would serve us all well.

The last point I would make is about white-label ATMs. I have raised it a number of times; there seems to be a belief that they're properly captured and they're not a risk. I strongly suggest to this committee that white-label ATMs need to be brought under the regime.

Thank you very much.

[The Chair, Conservative, James Rajotte]

We'll go to Mr. Christensen, please.

[Koker Christensen, Partner, Fasken Martineau DuMoulin LLP]

Thank you, Mr. Chair.

I am a partner with the law firm of Fasken Martineau. My perspective on terrorist financing legislation is primarily as an adviser to financial institutions and others that are subject to this legislation. My comments today are not on behalf of any particular clients but simply reflect my own experience in this area.

The types of clients I would advise in relation to this would be banks, trust companies, life insurance companies, credit unions, and various types of businesses that would fall within the category of money services businesses.

A general concern of the financial institutions' clients I deal with is regulatory burden. A lot of that has nothing to do with terrorist financing; it's about other types of regulation and risk management requirements, but it does extend to anti-money laundering and anti-terrorist financing requirements.

Every few years, since the current form of the legislation was introduced, there have been significant changes to the legislation and an expansion of the requirements to include filling gaps and articulating the requirements. These have led to what is currently a fairly onerous regime.

I think there is a general recognition that terrorist financing is a problem. I think that taking that problem seriously entails requiring financial institutions to obtain a lot of information about customers and to do a lot of monitoring of transactions, but it needs to be kept in mind when examining these requirements that there is a real cost to the institutions.

In particular, there's a cost to smaller institutions. Larger financial institutions have large teams of personnel dedicated to this area. Smaller institutions don't have the resources to do that and can find themselves in a very challenging situation whereby they are subject to essentially the same requirements as big banks but without the resources.

The reason for that is that to a large degree the legislation is one size fits all. Elements of it are risk-based and the expectations of regulators such as OSFI will vary, depending on the nature of the institution, but a lot of the legislative requirements are minimum requirements. They have to be met regardless of the size of the institution, and doing that can present a significant challenge to an institution's ability to compete. I suggest that fact be kept in mind in any review of these requirements.

A related point would be that in examining the requirements and considering changing or introducing new requirements, we should give careful consideration to the business practices of the types of firms that will be affected. We need to make sure the requirements introduced are practicable, that they're workable in light of what the firms subject to these requirements are actually doing, so the firms won't need to greatly distort business models simply because the legislation was written in a particular way.

Finally, another area I encounter on a fairly regular basis involves businesses with some kind of fund transfer aspect as part of their models. They are being caught within the scope of money services businesses.

There are a lot of businesses doing various things in the payment space—a rapidly developing and growing area—that are caught or potentially caught by the definition of money services business, even though they're certainly not the traditional type of MSB.

Consideration needs to be given to these types of businesses to make sure that firms that are not intended to be caught by these requirements are not being picked up and caught by them, and to make sure there's an appropriate balance so that innovation in this area is not unduly stifled.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

Mr. McGuire, welcome to the committee. You will have five minutes for your opening statement, and then we'll have one more presentation and questions from members.

[Matthew McGuire, National Leader, AML Practice Investigative and Forensic Services, MNP LLP]

Terrorism is not new.

My name is Matthew McGuire. I'm the national anti-money laundering practice leader of MNP. We're the fifth-largest accounting firm in the country. My professional life involves developing risk-based approach, anti-money laundering, and counterterrorist frameworks for financial institutions and other reporting entities across the country. Thanks to this government, I've also helped the governments of Panama and Trinidad to develop their capabilities.

I really appreciate this opportunity to provide input into terrorist financing threats, harms, and countermeasures. I'd like to talk about two main themes. One is the existing framework and how it might be improved in terms of reporting entities and their responsibilities. Second is the accounting profession as it relates to terrorist financing.

The fight against money laundering and terrorist financing is really a battle against crime, and lawmakers across the world have decided that the best way to go about this is to encourage criminals to abandon their craft by taking away the financial incentive and by making it too hazardous to conduct their activities.

To maintain a hostile environment, countries have adopted measures such as establishing financial intelligence units and dedicated law enforcement. They've also deputized reporting entities. They've asked reporting entities, such as banks, to maintain their own hostile environments. Because money launderers and terrorist financiers take refuge in anonymity and opaque and complex transactions, the environments in which they're required to surrender their identities and in which their transactions create trails and are subject to scrutiny are hostile to them.

International standards were leveraged, of course, after world events that highlighted the significance of the threats of terrorism. In the case of terrorist financing measures, they're principally designed to increase public safety by depriving terrorists of the means to support their wrongful aims and acts. Rather than diminishing financial incentives, these measures are designed to deprive terrorists of the means to pursue their objectives. More importantly, they provide intelligence into the networks, ways, and means of terrorists.

Deputized reporting entities, those that have responsibilities and have to create the hostile environment, have three main responsibilities. They have to screen names. They have to assess and manage terrorist financing risk. They have to report and freeze terrorist assets and transactions.

Continuous name screening is required of certain reporting entities because of the United Nations Act and the Criminal Code. It's arguably the most significant counterterrorist financing tool in a reporting entity's arsenal, but it's not well forged and it hasn't been all that effective. The lists that must be referenced lack sufficient details, have few details on associates, or are out of date, and the guidance is seriously wanting.

It's wanting because the legislation is ambiguous, and there's no comprehensive authoritative guidance on the frequency of screening. There is no identification of fields against which we should screen, of the algorithms that might be used, or of appropriate means for resolving false positives. Reporting entities therefore have inconsistent and uneven responses and, as Garry mentioned, there's no requirement for certain reporting entities, such as money services businesses, as financial intermediaries to conduct continuous monitoring of their transactions for terrorist financing.

I was glad to see that economic sanctions were one focus of the recent budget. I would suggest that those funds could be allocated to improving the quality of available data.

In terms of assessing and managing risk, reporting entities are universally required to assess and manage their risk of terrorist financing. To do that, they have to understand the threats they face and the significance of the realization of those threats. In our experience with reporting entities, they do not meaningfully assess and manage their risk of terrorist financing. At best, the topic is dealt with superficially. Neither do regulatory examinations draw attention to these weaknesses.

An understanding of these threats comes from experience and knowledge transfer. Reporting entities understandably have very little experience and, therefore, they depend on knowledge transfer. The financial action task force calls on us as a country to provide a threat assessment in order to be able to inform our assessment of risks and the tools we design. Without that information, it is nearly impossible to design the tools we need for this fight.

As I say, terrorism and terrorist financing are not new. Knowledge transfer must begin and must continue unabated.

I'd also like to comment on the remarks of Professor Bill Tupman to the committee on March 31. For reference, he suggested that accountants were instrumental in terrorist financing operations. I agree that any large organization could benefit from accounting skills, but let's go after the bad apples, not the tree.

To conclude, terrorism is not new: think Belfast, Oklahoma City, Air India. The maturity of our regime of countermeasures cannot be blamed on the novelty of terrorist financing and should not continue to be arrested. For the contributions of reporting entities to be meaningful over the long term, they must benefit from rigorous education and intelligence regarding the threats that face us; comprehensive guidance to identify risk, detect nefarious actors, transactions, and assets; and intelligence sharing.

[The Chair, Conservative, James Rajotte]

We'll now go to Mr. Rafiq.

[Haras Rafiq, Quilliam Foundation, As an Individual]

Mr. Chair, good morning. Good morning to you as well, my fellow panellists and everybody else there.

My name is Haras Rafiq, and I'm the managing director of the Quilliam Foundation, one of the world's major think tanks looking at combatting extremism and terrorism. I want to bring to this gathering today anecdotal, academic-based research, and evidence-based research, as well as observational research and analysis as to why this study into the impact of terrorist financing is not just important but vital and crucial.

Within the organization, we have tens of years of experience on the part of people who have been on the other side, people who have been jihadists and terrorists in the past, have done their time in prisons, and have now come out disavowing the whole ideology and theology that drove them there in the first place. From that, we know what these terrorists are doing from an Islamist-terrorist perspective and how they're doing it. I want to touch a little on that today.

The other part of the experience that I bring today is that after the terrorist attacks of 7/7, I was on the U.K. government task force that came up with preventing violent extremism, which is now our old strategy of combatting radicalization and extremism and terrorism, which in North America has been adopted by the U.S.A. and Canada. Whether that will be effective or not is a different issue.

I want to talk about two main things. First is individual pathways and why finance is important to them, and second is strategic radicalization and why finance is important to that as well. If we just focus purely on terrorist financing and ignore the financing of recruiting and facilitating people to become terrorists, as well as those who may have sympathy and empathy for terrorists, we're only doing a partial job, so I urge the committee to widen the scope of this study it's undertaking.

In terms of the personal pathways, there are pathways that involve grievances that may be partial, genuine, or perceived. These individuals need to be looked at through a lens of extremist recruiters to Islamist ideologies that are operating. Those include groups such as the Muslim Brotherhood, which have now declared combative jihad in places like Egypt, and others that are operating to a large extent within Canada and North America and around the world with support from many people who may not consider them to be terrorist organizations. They ultimately provide people with solutions to become terrorists through this belief in the utopian Islamist caliphate and the theological justification that underpins that. Only by looking at this whole process and at how finance is used to take individuals through this grievance-based process and this ideological change can we really combat terrorist financing and understand the impact it has on Canada and around the world.

The other thing I want to touch on is strategic radicalization. In order to move a society as a whole, and in this case it will be Muslims in the west, people who have an Islamist agenda must teach individuals that their parents practised a particular version of Islam that is no longer legitimate and that the society doesn't want them there, and that therefore they must fit into a different society and change their practices. The way they do this is no different from the way fascism or communism has been spread. They build a number of entities within different spaces in our society, whether they provide education or pastoral care, and so on. Then by building their own individual capacity and education, they persuade them to come and join their gang or their club. They then, obviously, move them along through the grievance-based process.

Open-source documents available from certain intelligence agencies around the world say that certain countries have spent hundreds of billions of dollars so far helping this strategic radicalization, which ultimately leads to terrorism. All this now requires funding, so we have NGOs and charities and a whole number of other organizations that will fund these activities through other shell companies. One way we identify these organizations is by looking at the directors and the trustees and their ideological values. What do they aspire to? I think that has to be part of the study if you're going to be effective.

The last thing I'd like to say is that this is something that needs to be done more, not just in Canada, but around the world as well. There is very little work and research being undertaken in terms of the Islamist extremist organizations that will ultimately fund terrorism. We know there are cases from Canada. We know there are cases from North America, in Britain, yet we still, as governments, are dragging our [Technical Difficulty—Editor] and I urge the committee to undertake this study, this research, as a matter of urgency. If the Quilliam Foundation or I as an individual can provide any assistance or play any role or part, we'd be more than happy to do so.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Colleagues, we'll have time for seven-minute rounds.

We'll start with Mr. Dionne Labelle.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

Thank you, Mr. Chair.

I'd also like to thank the witnesses for joining us today.

My first question is for Mr. Rafiq.

I found your opening remarks quite relevant. You said that if the committee looks only at financing and doesn't examine the motivation that leads to terrorist financing, we're only dealing with half the problem. I share your concerns in that regard. These days, we're putting a lot of focus on combatting terrorism through intelligence gathering and repression measures, but we aren't paying much attention to “deradicalization” or the reasons that lead people to become radicalized. What methods would you suggest to address that aspect? How could Canada be effective on that level?

[Haras Rafiq]

First of all, thank you for agreeing with me on the fact that this may well be a partial inquiry—we don't look at everything—and I really value your support in looking at this from a holistic perspective.

There are a number of studies and factors we can take into consideration. We done some reports looking at front organizations and looking at the way groups such as the Muslim Brotherhood set up shell companies, shell organizations, in order to actually undertake some very nefarious activities. We know that in Canada there have been activities. There is great report by somebody I respect and hold in the highest regard, Tom Quiggin, who has looked into organizations in Canada that deal in corruption, drug trafficking, kidnapping, manipulation of individuals, fraud and tax evasion, organizations that will, once successful, move into other organizations.

But in order to look at who these organizations are, I agree with you that the processes of radicalization really need to be taken into consideration rather than necessarily de-radicalization. I would rather the committee consider getting to individuals before they are radicalized, before they become sympathizers, before they become supporters of terrorism. If we are really going to combat and prevent “violent extremism”, we have to combat the ideas first.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

The government's current mindset is such that, under this bill, police would be tasked with that mandate. Do you think the job of preventing youth radicalization is best placed in the hands of police?

[Haras Rafiq]

One of the worst things the Canadian government can do is to make the mistakes we've made in the U.K., which have been, first of all, to look at this problem purely through the lens of criminality and legislation. By doing that, we as a government have tried to legislate our way out of these problems. There are some things that require legislation. There are some things that require bills, and there are some things that require governments to take direct action. One of the biggest mistakes our government has made in the U.K. is to fail to recognize that the battle of ideas is not best placed in the hands of the police and agencies.

I [Technical Difficulty—Editor] that the police force, the agencies, and bills are not best placed to actually prevent our youngsters from being radicalized. The best way we can do this, and perhaps finance can play a key role in it, is to counter the civic society engagement of youngsters by radicals and extremists to terrorism, and to promote, support, and empower a civic society response. This is something that needs to come from our society, but it needs empowerment and support from government.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

Thank you, Mr. Rafiq.

Ms. Vonn, I have a few questions for you.

In your presentation, you talked about the privacy commissioner's concerns about the wide availability of information, the lack of oversight with respect to that information and FINTRAC's lack of independence.

What accountability measures would you recommend to ensure the appropriate use of all that information? Do you have any recommendations?

[Micheal Vonn]

I would suggest a couple of things. First, I would echo my co-panellists in terms of guidance to entities. There is vast over-reporting of suspicious transactions, in part because, as the financial institutions have said to other committees, there is so little guidance and such an onerous burden on reporting entities should they miss anything.

Over-reporting is absolutely to be predicted given that you have criminal jeopardy should you not report effectively. There is no guidance as to what constitutes effective reporting, and so we have massive over-reporting of suspicious transactions, thereby not advancing security because we are getting things we don't require. Yet we're not taking them out of the system once they are in the system. FINTRAC retains them, and in fact it's more cost-effective if they don't have a person extract them.

These are some of the things that the OPC does simply because it's more cost-effective to just warehouse the data than it is to cleanse it of the things you don't need. These are the kinds of problems that guidance would fix.

Concerning oversight, we have heard about a number of models.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

As far as accountability is concerned, do you have any clear ideas on how to make sure the information is subject to adequate oversight? Is there a model you could suggest?

[Micheal Vonn]

Certainly. The model we endorse is the Arar model, in terms of review. In terms of oversight, we would like to see the kinds of evidence-based policy-making that we say constitutes good accountability.

I'm sorry, does that answer your question?

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

I'm going to think about that.

The people at the RCMP who deal with money laundering stay on the job for only a year and a half. In your view, expertise is being lost. Why is it that people leave so quickly? Is it the culture?

[The Chair, Conservative, James Rajotte]

We have about 10 seconds, Mr. Clement, if you want to address it very briefly. We'll come back to it later I'm sure.

[Garry W.G. Clement]

Very briefly, I can tell you we constantly monitor expertise. When you bring an investigator in, first of all they have to have the skills. We have monitored them, and their experience varies from an average of 3.8 years across Canada to as low as 1.2 years.

[The Chair, Conservative, James Rajotte]

Mr. Saxton.