Finance Committee on April 30th, 2015

[The Chair, Conservative, James Rajotte]

So that would be obviously a legislative or regulatory change that we'd have to look at.

In terms of FINTRAC itself and its activities, though, other witnesses before the committee have recommended having some kind of an enhanced oversight review with respect to FINTRAC. Would the two of you share that view, or do you have a view on that matter?

[Ron King]

So a separate body to oversee the activities of FINTRAC?

[The Chair, Conservative, James Rajotte]

Is there a way of having more insight into what FINTRAC is doing, as to whether FINTRAC is actually doing an effective job respecting the privacy concerns that the Privacy Commissioner raised? Are there ways to do that, then?

[Ron King]

As I've said before, these risks of money laundering and terrorist financing are evolving continually. As opposed to necessarily an oversight body, I believe the regime is subject to periodic parliamentary review, and I think as part of that review we should have a comprehensive, third-party, independent analysis of the entire regime to identify potential areas for improvement that would include perhaps FINTRAC as well as others.

[Michael Donovan]

I would just like to add that FATF, the Financial Action Task Force, also does a major evaluation of Canada, and part of that major evaluation is also looking at FINTRAC as a financial intelligence unit. They recently changed their methodology to include an effectiveness component to the way they assess different countries' regimes. So that also would give us an indication of the overall effectiveness of FINTRAC and the regime as a whole in Canada.

[The Chair, Conservative, James Rajotte]

Thank you.

I only have a minute left and I did want to follow up on information sharing between different financial institutions. I see the sense of that; I think many Canadians have different accounts with different institutions so it makes sense to track that, but then it obviously raises the flag of concern about an individual's privacy in moving information about in a very legitimate manner. Again, it's a longer question than 30 seconds, but how would you ensure that you are respecting privacy if this committee recommended greater information sharing between different financial institutions?

[Ron King]

I think the industry would be looking to the government to provide parameters that would define in which circumstances and precisely what type of information could be exchanged, and requirements as well for the participants in those information-sharing activities to be legally bound to protect the additional information that comes to their source. We already gather an awful lot of information about our customers on an ongoing basis that is highly confidential, including where they are sending money and activities of that nature. So the financial services community, banks in particular, care very deeply about protecting the confidentiality of our customers' information. That's part of what we need to do to foster trust in the system. I think appropriate checks and balances would be some of those ones that I've indicated.

[Michael Donovan]

Agreed.

[The Chair, Conservative, James Rajotte]

Thank you, I appreciate that. I wish we could continue this discussion, but we have another panel coming forward. I want to thank all of you on behalf of all the committee members. If you have anything further for the committee to consider, please submit that to the clerk and she will ensure that all of us get it.

Colleagues, we'll suspend for a few minutes and bring the next panel forward.

[Michael Donovan]

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you.

[The Vice-Chair, NDP, Nathan Cullen]

Committee members, I'll ask you to take your seats, and we'll get started. We're a few minutes late.

I would like to welcome our witnesses, both here in Ottawa and those appearing by video conference from London and Milan.

To all our panellists, I'll have to make some apologies initially. It seems that we are setting up for some votes in the House of Commons, but what we've decided as a committee is that rather than interrupt our process here—because time is precious—some of the committee members will remain and some will have to return to the House to vote. We'll get as much of your testimony and the questions and answers as we can.

Let's start with witnesses here in Ottawa, for up to five minutes, and then we'll turn to our guests via video conference.

Perhaps we'll start with you, Mr. Hunter.

[John Hunter, Hunter Litigation Chambers, As an Individual]

Thank you, Mr. Chairman, and thank you for the invitation to appear today.

I have to confess that I was a little surprised to get the invitation, because unlike the rest of your invitees I'm not an expert in terrorism or terrorist financing. I am assuming that I was invited because I have had a little experience with your statute, because I was counsel for the Federation of Law Societies of Canada in challenging provisions of that statute related to the impact on lawyers.

What I've done is prepare a brief for you, which I hope you have, that summarizes the litigation that has taken place. It really took place over about 15 years and ended a couple of months ago with a judgment from the Supreme Court of Canada that struck down certain provisions of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act) and read down other provisions.

What I thought I might usefully do—and hopefully it will be of assistance to you—is to discuss briefly what happened there and why it happened, so that this could be avoided in the future.

It's obviously tempting to try to bring in legislation that will enlist lawyers to obtain information from their clients that could be used to combat money laundering and terrorist financing. But of course that comes into conflict with constitutional principles in this country, both the principle, which has been said to be a principle of fundamental justice, of solicitor-client privilege, the privilege of information and confidentiality of information from clients to their lawyers, and also, as the Supreme Court of Canada has just pronounced in this decision a couple of months ago, the principle that a state must not undermine the lawyer's commitment to the client's cause. In other words, a lawyer has a duty to his or her client, and it has to be an undivided duty, subject to ethical principles, and the state must not undermine that duty.

The additional problem in the legislation had to do with the search and seizure provisions that provided for warrantless search, which the courts are frankly never going to allow on a law office.

There are a couple of messages, it seems to me, out of that litigation. If you're contemplating new legislation with respect to terrorist financing, I'd urge you to be cautious with respect to any efforts to enlist lawyers in that effort against their clients. The legal profession is very sensitive about these matters, and the courts have been pretty protective too of client confidentiality. These are important principles in our constitutional structure, and it seems to me that one of the messages out of the courts pretty consistently is that those confidences will be protected by the courts. The lawyers have a role in the administration of justice, and this all fits together in respect of that role.

The second message, I would suggest, that comes out of this process is that law societies can play a role in this process. Law societies—and I use that term generally for all the legal regulators in Canada, which are provincially and territorially based—have regulation-making powers. As you'll see from the brief, law societies have stepped up in the course of the last 10 to 15 years with regulations that minimize the prospect of lawyers being used as dupes for their clients by, for example, forbidding lawyers from taking large amounts of cash that could be used for money laundering and things of that nature.

There may well be a collaborative role that law societies can play, if the results of your inquiries conclude that there are some additional steps that lawyers could take to ensure that they're not being used inadvertently to assist clients in activities they shouldn't be engaged in.

Thank you.

[The Vice-Chair, NDP, Nathan Cullen]

Thank you very much, Mr. Hunter.

Mr. Amicelle, you have five minutes, please.

[Anthony Amicelle, Criminology Professor, Department of Criminology, Université de Montréal, As an Individual]

Thank you, Mr. Chair.

Members of the committee, in light of the research that I have done and that I continue to carry out in Europe and Canada on countering terrorist financing, I would like to take the few minutes I have to address a point of tension that defines the fight against terrorist financing.

As you know, the fight against terrorist financing—the financial aspect of counterterrorism—was promoted as being built around two officially complementary strategies.

The first strategy is to publicly identify individuals or entities suspected of terrorist financing activities or of supporting those activities and to freeze their financial assets and bank accounts, in the hope of reducing the resources of groups considered to be terrorist and thereby reducing their ability to act.

This strategic assumption deserves to be discussed and may be highly nuanced. I am at your disposal during questions to point out the controversies and challenges related to the specific and practical implementation of this strategy.

The second strategy looks at, or seeks to see, the money and the financial trail as a source of information. The final objective of this second strategy is not so much to freeze financial flows, but rather to track them in order to produce financial intelligence on individuals or on financial relationships between individuals.

I would really like to stress this second strategy that brings together funding and security. In other words, financial intelligence and surveillance practices are, to some extent, the meeting point between very different players who, even a few years ago, were not at all accustomed to working together or even speaking to each other. This means that, on the one hand, there are people from the economic and financial world—starting of course with banks—and on the other hand, there are people from the security and intelligence world, starting with the financial intelligence unit, FINTRAC, in Canada, and law enforcement and intelligence agencies.

Such cooperation exists. It produces effects, but I think it indicates a point of tension, or balanced tension, even a misunderstanding crystallizing completely around the concept of risk. In fact, the fight against terrorist financing and money laundering is based on risk and a risk management approach. All the players I mentioned share this terminology and speak the language of risk. However, this does not necessarily reflect a common view of the risk being managed.

In other words, if I may say so, the players agree on the use of the same word, which is the concept of risk, but they are not necessarily talking about the same thing. Depending on the mission entrusted to them, police and intelligence officers, when they talk about the concept of risk in relation to terrorist financing, refer primarily to the risk of violence or attack on society and the public.

In contrast, when bank compliance officers talk about the concept of risk in relation to terrorist financing, they refer primarily to the risk to their financial and legal reputation for themselves, their employers and their institutions. So some refer to societal risks while others are more focused on institutional risks.

To some extent, there is a convergence between the two. There is some cooperation, but it comes at the cost of a misunderstanding, or at least a difference of interpretation of this idea of risk in relation to terrorist financing.

We might think and assume that these two concepts of risk can go in the same direction, converge and overlap. However, our empirical studies on these issues rather show the opposite: compliance officers, in banks in particular, take action in a context of organizational defence, with a view to defending their institutions. As a result, a lot of compliance officers tend to make what are called complacent or defensive statements. This means that they will tend to turn any small doubt into sufficient suspicion to declare and report any unusual transaction.

In the name of institutional risk aversion, they prefer to report the transaction, at the risk of doing harm and reporting it in an abusive manner to the competent authorities, including the financial intelligence unit. Ultimately, this may well produce more information noise than useful financial information. Of course, this institutional risk management can be useful to protect financial institutions. Whether this is productive or not in terms of managing the risk terrorist financing poses to society remains an open-ended question.

The debate is therefore about that misunderstanding, the concept of risk and the cooperation based on this misunderstanding in terms of what the fight against terrorist financing needs to be.

To conclude, we could say that this cooperation to counter terrorist financing is effective in the sense that it produces effects; there is some daily cooperation. However, determining whether this cooperation is efficient in addition to being effective is a question that triggers debate and is still open today.

[The Vice-Chair, NDP, Nathan Cullen]

Thank you very much, Mr. Amicelle.

We will continue by videoconference with Ms. Napoleoni for five minutes.

[Loretta Napoleoni, Author and Economist, As an Individual]

I think we should analyze what has happened with the Islamic State, which has developed a new model for financing terrorism. I think the greatest risk is that this model will be emulated by other groups and then taken from country to country. The most important elements are the territorial control of areas with strategic resources, in regions which are plagued by war and political anarchy; constitution or joint ventures with the local population in order to seek consensus but also to maximize revenues; and finally, the creation of a fiscal structure whereby the Islamic State levies taxes upon the population for the use of infrastructure, and services such as electricity and water, but also for access to the judiciary system.

This is a system which is very difficult to alter when it comes to terrorist financing because it's completely self-funded. If we look at how it is structured, it is a closed economy that does not tread internationally. There is no movement of funds going through the Islamic banking system or the traditional banking system. Everything takes place at a local level. Often, the population of the neighbouring areas with whom most of the smuggling and trade takes place has no other choice. These are people who are not part of the Islamic State but they are, to a certain extent, conditioned by its economy. The only possible way of intervening in this new model of terrorist financing is through the small donations from the west that are still taking place, mostly from families and friends of the jihadists who have joined the Islamist State, or even the jihadist brides.

We can call these a sort of micro sponsorship. Transfers take place through the informal banking system, Western Union, the hawala, and from friends travelling to neighbouring countries. The transfers are always in very small amounts. We're talking about amounts below the $500 limit. Another way of micro financing is through electronic currency. This is something that Hamas has also used in the past. It is very difficult to monitor this kind of transaction because every single day there are so many taking place around the world. There are often communities that live on transactions of this kind from the diaspora of their own nations.

In conclusion, I have two recommendations.

The first one is that we absolutely prevent the success of the Islamic State model, because if it is successful, it is going to be the model for the 21st century. War or military intervention is not going to help, because as we've seen, this is a model that blossoms within that kind of environment. It would be much more effective to offer a choice, an alternative to the communities which are interlinked economically with the Islamic State, for example, those communities that trade and bordering countries. This of course requires a pacification of those regions. As long as we are in a war and there is political anarchy there is very little we can do about that.

The second recommendation is the screening of these micro sponsorships. This screening should take place through profiling. Many people regularly to send money to their families and friends. Through profiling we can create a database that will help us pinpoint when somebody is sending money for reasons unrelated to their family, but rather for sponsoring jihadists, or people joining the Islamic State or any other organization..

Thank you.

[The Vice-Chair, NDP, Nathan Cullen]

Thank you very much, Ms. Napoleoni.

Let me pause for a moment before we turn to our next witness. Committee members, I'll need unanimous consent to continue the meeting beyond this point. Votes are now 28 minutes away.

Do I have that consent?

[Some hon. members]

Agreed.

[The Chair, Conservative, James Rajotte]

Thank you.

[The Vice-Chair, NDP, Nathan Cullen]

Mr. Keatinge, you have up to five minutes for your testimony.

[Tom Keatinge, Director, Centre for Financial Crime and Security Studies, Royal United Services Institute]

Thank you very much.

Good morning, everybody. I'm delighted to have this opportunity.

My name is Tom Keatinge, and I'm director of the Centre for Financial Crime and Security Studies at the Royal United Services Institute, a defence and security think tank in London. Prior to this I was an investment banker at J.P. Morgan for 20 years.

At the centre, we are dedicated to researching matters related to finance and security. We focus on two themes. One is financial crime policy, such as developing the relationship between governments and private sector banks in the fight against money laundering and terrorist financing. That includes enhanced information sharing. Then there are topical matters, such as ISIS financing, the role of financial intelligence in identifying foreign fighters travelling from the U.K., and the like.

Terrorist financing as it relates to ISIS has become mainstream news. The way, as has been indicated, that ISIS finances itself is from taxation, extortion, oil, and looting of antiquities. It has really become a mainstream news topic, but of course it's not a new phenomenon; it goes back for many years. Immediately following 9/11, the first shot that President Bush fired in his war on terror against al-Qaeda was to announce a strike on the financial foundations of the global terror network. From the U.K. perspective, obviously further back, the Provisional IRA created impressive financing models prior to that.

Those groups that want to move from a hand-to-mouth existence to a more planned and organized model need finance if they are to achieve their objectives. Finance is their lifeblood, but it's also their main vulnerability. Whilst individual attacks are cheap, building and maintaining an infrastructure and an enabling environment is not.

Global CTF policy, as I'm sure we know, is set at a multi-lateral level through the recommendations of the Financial Action Task Force, along with the raft of CTF-related UN Security Council resolutions, such as 1267, 1373, and the range of ISIS financing-related resolutions that we've seen in the past 12 months.

In general, terrorists can draw financing from two primary sources: internal and external. Internal financing occurs in places in which groups control territory and population. Funds are generated by taxing businesses, people, and transport, operating smuggling routes, and profiting from trade. As has been pointed out, ISIS is excelling in this regard.

Funding may also be provided from external sources: from donors, be they wealthy supporters such as those we've seen from Gulf countries, members of a diaspora community, or simply those who are inspired to support a particular cause.

Stemming the flow of external funding is clearly easier than disrupting internally generated funds, but even external disruption is challenging, if the international community fails to unite. Witness the extent to which the charcoal industry continued to finance al-Shabaab, despite international condemnation and UN Security Council resolutions to the contrary. Kidnap for ransom is another external source when international coordination has failed.

But if terrorist groups are to establish themselves, survive, and thrive, they need to develop reliable sources of financing based on the territory, population, and resources where they operate. Al-Qaeda in Iraq recognized the critical importance of finance. A declassified "lessons learned" document captured in Iraq following the 2003 invasion revealed that poor money management and irregular income were viewed as critical contributors to the group's failure.

But reporting regularly brings into question how effective global CTF efforts are. Donors fund more money to Syria; ransoms continue to be paid; trade flows, such as of oil, narcotics, and charcoal, continue to finance terrorist groups; and despite the evaluation work of the FATF and other multi-lateral organizations, the CTF regimes of many countries fall short of expectations. The extent to which terrorist groups appear to be proliferating suggests that groups are adapting to take advantage of what Osama bin Laden referred as the cracks in the western financial system.

So national and international CTF architecture must be constantly reappraised. Unlike money laundering, which represents a relatively consistent and static risk, terrorist financing risk fluctuates and evolves with geopolitical developments. It's not long ago that companies and banks were investing heavily in Turkey and Libya. Now they are exposing themselves to terrorist financing through those investments.

[The Vice-Chair, NDP, Nathan Cullen]

You have just one more minute, Mr. Keatinge, if you wish.

[Tom Keatinge]

Sure.

There have been a number of questions raised in the previous session and in this session that should be considered and that we can come back to. But perhaps the most important and valuable issue to consider, and something that has gained significant focus in the U.K., is an emphasis on greater public-private partnership and information sharing between the authorities and the banks.

Banks have been heavily criticized and heavily penalized, but governments rely on banks to defend the national and international financial borders. This can only be done if constructive partnerships are developed between public and private sectors. David Cohen, formerly CTF lead at the U.S. Treasury, has noted that the private sector has the potential to be a force multiplier for a nation's CTF efforts. That's something that I recommend the committee study closely.

Thank you. I look forward to your questions.

[The Vice-Chair, NDP, Nathan Cullen]

Thank you very much, Mr. Keatinge.

Committee members, I think with the reduced membership here we can have rounds of up to seven minutes.

We will begin with Mr. Côté.