Finance Committee on April 30th, 2015

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you very much, Mr. Chair. My thanks also to all our witnesses for joining us today.

I will turn to Mr. Hunter first.

Thank you for telling us about the problems caused by the disclosure requirement imposed on the legal profession subsequent to the Supreme Court decision.

Perhaps I misunderstood what you said in your presentation, but I am wondering about one thing. Does the mandatory disclosure relate to a bill dealing with countering terrorism or with combatting crime?

[John Hunter]

That's right. The existing statute, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, contained some provisions initially, which were then withdrawn, with respect to lawyers. Regulations were then added in 2008 that required lawyers to gather information from clients and prepare reports. That's what the litigation was directed to.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

I have had the honour of sitting on the Standing Committee on Finance since the beginning of the year. I was also a member in 2013. At that time, the committee was studying a huge bill, Bill C-48. It was a very technical bill amending some parts of the Income Tax Act. That bill also created problems in terms of the disclosure of tax information. Have you dealt with that bill? Can you tell us about it?

It seems there is a trend in wanting to make lawyers breach their duty of confidentiality or to no longer honour it, in order to fight against tax evasion, crime or terrorism. I would like to hear what you have to say. Are you concerned about that approach?

[John Hunter]

Yes. I'm not familiar with the bill, but I've certainly encountered in the past—not so much personally but through involvement with the regulators—an approach by CRA, which I understand the need for at a certain level, that's directed towards lawyers and that seeks to require lawyers to provide information that, on its face, is protected by solicitor-client privilege. CRA can be fairly aggressive in this, and the profession has pushed back.

I'm not aware of any particular current issues. They tend to be one-offs, but more than a few of them have occurred. It is an issue that seems to recur.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you.

Ms. Napoleoni, I followed your testimony only in part. It is always a challenge for parliamentarians to find references given the limited time that we have. I sort of lost the thread of your testimony and I apologize.

You talked about the problem with the approach of governments using armed interventions to directly fight against the Islamic State. This has been a long-standing debate in the House of Commons. The government found itself quite alone with that approach.

What are your concerns? What consequences do you fear in this approach that consists of investing a lot of energy and resources so that western countries take military action in Iraq or Syria to fight against the Islamic State?

[Loretta Napoleoni]

Well, the reason I said that military intervention is not going to work is that, if we look at the model of terrorist financing that Islamic State has developed, it is based upon war, in this case a civil war that has degenerated into a war by proxy. Within these environments, it is very easy for an organization such as Islamic State to seek very good sponsors, but also to use the money of the sponsors, instead of fighting the war by proxy, to establish control over the enclaves I discussed earlier, where there are strategic resources, and then to establish its own state.

These enclaves today trade—illegally, of course, as we're talking about smuggling—with neighbouring regions that are not necessarily part of the Islamic State but are still plagued by war and in a situation of political anarchy. The smuggling of oil is one example of the many such products traded; another strategic trading item is agricultural products, which are sold regularly to neighbouring regions. Often these regions have no other choice. This is the situation also for Syria, of course: it's either buying electricity, buying oil from the Islamic State, or not having any at all.

A better strategy would be to pacify these areas and so to encircle the Islamic State. Instead of working from inside, go around and cut off all of the financial structure that is based upon illegal trade by improving the economic condition of this region. This, of course, requires a political solution at an international level. A part of the region in which the Islamic State is particularly strong is the north of Syria, and of course it's trading with the south.

I think if we continue with military intervention, we're just empowering this model, which was born through military intervention, through war; it would just empower the Islamic State. It will expand, as we are seeing happen. We bombed them in the north of Iraq, we managed to reconquer strategic positions, and they moved south. So the borders also move. They move in relation also to the strategic resources that the state needs to maintain itself.

[The Vice-Chair, NDP, Nathan Cullen]

Thank you, madam.

Thank you, Mr. Côté.

We'll now turn to Mr. Saxton for up to seven minutes, please.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Chair. Thanks to our witnesses for being here today.

Ms. Napoleoni, I want to continue on that train of thought, because I'm trying to get my head around where you're coming from with regard to military intervention.

First of all, you said that ISIS is selling oil—on the black market, I presume—to fund its activities, as probably one of the major sources of funding for its activities. Then you're saying that military intervention isn't going to help.

Well, surely you realize that military intervention is going after those oil fields that they are using to finance their activities. So I'm trying to understand where you're coming from. Perhaps you could explain yourself on that.

[Loretta Napoleoni]

Military intervention has gone after those oil fields, but it has not produced what we wanted to happen, to detach the larger population from the Islamic State. Islamic State is actually benefiting from a consensus among the population because of this joint venture created through the tribal leaders with the larger population in the running and exploitation of these resources. The population, to a certain extent, is benefiting from the advent of the Islamic State in those particular regions. If we bomb them, the population will look at us and will say, these are the enemies, while Islamic State is actually protecting us.

We must understand that we are fighting an armed organization that has morphed into a state. This state has control of the territory, and it has control of the resources. The population is looking at that as a better option than the one they had before, when they were in the hands of warlords, criminal gangs, a dictatorship.

Of course, this is not democracy, this is not the ideal situation, but it is better than what they had before. This is why I say that military intervention can actually be a boomerang.

Also, from the point of view of support, we're never going to win unless we have the support of the local population.

[Andrew Saxton, Conservative, North Vancouver, BC]

I have to interrupt, because I have a brief period of time to ask questions.

I take your point, but I think what you're neglecting to point out is the targets of the bombing, and if the targets are to reduce the capability of the Islamic State to sell oil and to make or store armaments, then surely this is going to have an impact on their ability to make war against their own people and against the coalition as well.

So I take what you're saying about the local population and winning over the minds and hearts of the local population, but I think you're neglecting to point out that military intervention also severely weakens the Islamic State's ability to make war, by cutting off its resources and by destroying its weapons. In any case, that's our understanding.

I'd now like to go to Mr. Keatinge.

Mr. Keatinge, in your opening remarks you talked about, as one of the sources of funding for the Islamic State, the sale of antiquities. But I thought they were destroying most of their antiquities. Can you explain that?

[Tom Keatinge]

They certainly have made plenty of videos of destruction, but it's clear that there are smaller pieces that are being sold for gain. So on the one hand they are destroying sites, but on the other hand they are also peddling pieces that are taken from these sites, particularly in Syria.

[Andrew Saxton, Conservative, North Vancouver, BC]

Could you expand on their sale of oil as a source of income for the Islamic State? Who's purchasing this oil? How is it getting to market?

[Tom Keatinge]

We have to remember that there are smuggling routes in this region that have been there for several decades. The question is who is using them and controlling them at any given time. When Iraq was under sanction from the western world in the 1990s, those smuggling routes were being used by the Saddam Hussein regime.

So those smuggling routes into places such as Turkey have existed for many years. The question is, who benefits from them? Right now, to a great extent, it's Islamic State that is benefiting from those smuggling routes, moving the oil into the border region of southern Turkey. Also, there's plenty of evidence to show that there is an accommodation between the Assad regime and Islamic State when it comes to the sale of oil. So there are buyers of the oil in the region that Islamic State can tap in to.

[Andrew Saxton, Conservative, North Vancouver, BC]

These are mostly transported through tanker trucks or ships; is that right?

[Tom Keatinge]

Yes, tankers, and then there are make-shift pipes that cross the border in certain places as well.

[Andrew Saxton, Conservative, North Vancouver, BC]

I found it quite alarming that you're saying that the Assad regime, which appears to be fighting the Islamic State, has an accord to purchase oil from the Islamic State.

[Tom Keatinge]

I think many people would question the statement that the Assad regime is fighting the Islamic State. I think, as I said, that there is an accommodation, which at times means that it's helpful for the Assad regime not to fight the Islamic state.

[Andrew Saxton, Conservative, North Vancouver, BC]

What do you think is the most effective thing we can do as a government to combat terrorist financing?

[Tom Keatinge]

As I mentioned, there are the internal sources that we have talked about already, the taxation and the like. It's very difficult to switch those off. I think what Canada as a government and other governments around the world can do is to make sure that the external sources are restricted to the greatest extent possible.

Now, as has been pointed out, the Islamic State benefits much more from internal funding, but nonetheless external sources have played a role. So making sure that the countries that surround Syria and Iraq are standing by their international obligations, that they have the necessary capabilities to monitor financial flows, to monitor informal systems—remittance companies, for example—all those things need to be done in a united fashion, and at the moment they are not.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

[The Vice-Chair, NDP, Nathan Cullen]

Thank you, Mr. Saxton.

Mr. Van Kesteren, you may have up to seven minutes, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Chair.

Thank you all for being here. It's a fascinating discussion again. We could go off in so many directions, but I want to drill down to what we're really talking about, and I'm going to go to you, Mr. Amicelle.

Unfortunately, I'm going to have to converse with you in English, but we have good translators, so I don't think you'll have as much trouble as I would have on your end.

I want you to tell us what works when it comes to monitoring terrorist financing activities. I have a number of questions; maybe you can just answer them when I'm done.

What works when it comes to monitoring terrorist financing activities and what doesn't work? From a bird's eye view, are governments and financial institutions around the world taking antiquated approaches to this issue? And what needs to change, and what do you recommend?

Perhaps you could comment on all of the above.

[Anthony Amicelle]

Clearly, this is a huge area. As I mentioned earlier, we must always bear in mind the fight against terrorist financing as we know it today. I also talked about the two strategies. They are both targeted sanctions similar to the UN system and financial intelligence practices. Initially, the fight was against money laundering, but the terrorist financing aspect was added later.

Internationally, the interesting part is that a report published in June 2001 said that anti-money laundering measures were not suitable in the fight against terrorist financing. Then, the events of September 11, 2001, happened. Terrorist financing was then included in the recommendations. We know that terrorist financing is unique in the sense that it does not always come from an illegal source. The funds are not necessarily illegal, but the destination may be. The amounts are often relatively small.

The tension between these two aspects has to do with the overvaluation of terrorist financing. We used to think that financial intelligence could eventually prevent some terrorist attacks or problems. However, it turns out that its use is most effective after an attack, in the context of a classic criminal investigation, when an attack is committed by one or more individuals. That is the starting point for trying to trace the financial trail and to establish financial relationships in order to “map” a number of relationships between potential suspects. The idea is to use this method after an attack, as an investigation.

The emphasis on targeted sanctions is another issue. I am thinking of the UN measures dealing with al-Qaeda and the Taliban. The idea is to identify individuals or groups and then freeze their bank accounts. However, it is not easy to tell whether those individuals are actually using bank accounts. Another practical challenge is the major controversy over the way individuals and groups are designated. By this we mean respecting rights and knowing why someone is on any given list and how they can defend themselves if they think a mistake was made.

However, I think there is a pivotal issue that has not yet been raised today. It has to do with the practical challenges in freezing assets. We assume that, once the person or group is on the list, their bank account will be automatically frozen, without further analysis. In reality, bankers have a great deal of trouble identifying and detecting the individuals on lists because they often don't have identifiers. They sometimes have a last name or a first name, but that's it. Imagine if they just have the first name Anthony. The challenge is that they then have to filter several million financial transactions every day and for each bank to determine whether it is the real Anthony they found, the person on the list, or whether it is what is called a “false positive”.

It is important to always keep in mind that the balance lies in countering terrorism, of course, but without disrupting the existing financial order. That is how the system was designed. The two objectives are to protect the existing financial system and to counter terrorism, but if the fight against terrorism disrupts the financial system, problems will ensue. The flow of money must not slow down while terrorism is being countered. Clearly, it is difficult to do that right now.

[The Vice-Chair, NDP, Nathan Cullen]

Mr. Van Kesteren, the floor is yours.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Chair.