Maclean’s SPECIAL REPORT

FOLLOW THE MONEY

The terror crisis has lit a fire under Ottawa’s lagging anti-laundering effort

KATHERINE MACKLEM October 22 2001
Maclean’s SPECIAL REPORT

FOLLOW THE MONEY

The terror crisis has lit a fire under Ottawa’s lagging anti-laundering effort

KATHERINE MACKLEM October 22 2001

FOLLOW THE MONEY

The terror crisis has lit a fire under Ottawa’s lagging anti-laundering effort

KATHERINE MACKLEM

John Intini

$17 billion in Canada alone; $2 trillion worldwide. International authorities believe these vast sums are laundered annually through banks and businesses, masking illgotten gains with the lustre of clean capital. Before Sept. 11, the money was considered to be the proceeds of organized crime. Now, with attention intently focused on Osama bin Laden and his Al-Qaeda network of terrorist cells, the world is beginning to understand that those billions of criminal dollars are interlaced with money that funds terrorist activities. “Extremist organizations,” says Supt. Dave Beer, who heads the RCMP’s proceeds of crime branch, “are by definition criminal organizations: they walk the same path, they work in the same shadows.”

Even in Canada—a notorious laggard in the international effort against money laundering—there’s been a massive shift in attitude. An anti-laundering law, which had been languishing for 15 months under attacks from the legal and banking communities, was kicked on to the fast track on Sept. 12. In the first week of October, Finance Minister Paul Martin froze the assets of known terrorists and terrorist organizations. This week, as part of Ottawa’s raft of major anti-terrorism measures, the justice department is expected to introduce new legislation that will further beef up the anti-laundering law. “Suddenly, the world has awakened to this,” says Brian Butler, a senior investigator at the Ontario Securities Commission. “The attacks have galvanized the world.” The ties are close between terrorist groups and organized crime, even though their objectives differ—one, driven by political or religious motives; the other, by greed. They use similar methods to hide money, move money, even raise money. According to an international task force devoted to combating money laundering, terrorist groups finance their operations using the same nasty businesses that organized crime is into: extortion, robbery, fraud, gambling, and the trafficking of drugs and counterfeit goods. Terrorists also have their own distinct sources of funds, such as state sponsorships and charities that operate as fronts.

“When you’re talking about the financing of terrorism, there is a traditional element, which is the money-drugs-arms-money circle,” says Jeffrey Robinson, author of The Laundrymen and other books about organized crime. The Taliban, he says, is one of the biggest drug pushers in the world and accounts for 80 per cent of the heroin distributed in Europe, even— thanks to stockpiles—after a putative ban on opium poppy growing. He suspects much of the Taliban dmg money goes direcdy to support bin Laden’s Al-Qaeda network. Whatever the source of the money, great effort is put into concealing its trail.

The toughest step in money laundering is the first—converting cold cash into a financial instrument. Often the money earned from an illegal activity is commingled with cash income earned from a legitimate business—say a casino or restaurant or video-rental shop. Once the money is deposited in a bank, says one banker, it’s washed. The next step is to hide its trail, and this—thanks to bank secrecy, lawyerclient confidentiality, and offshore accounts—is easy: money skips in and out of bank accounts, numbered companies and offshore institutions. It is wired internationally between individuals using numbered accounts and a multitude of assumed names. It’s likely to make a quick stop in Panama, one country that still permits bearer notes. With this financial instrument, ownership of the accompanying asset—company bonds, perhaps, or even an investment certificate in a firm whose owner is difficult to trace—is conveyed to whoever is holding the paper.

The money may also have travelled around the globe through a centuries-old system known as hawala, which originated in South Asia and is common among émigrés who send money home privately to relatives. A hawala—illegal in many parts of the world—is a network of independent merchants who operate an underground banking system, often across borders, that is based on trust, where records are kept to a minimum and are often in code. Money, in the form of cash or sometimes gold, is left with one merchant who phones or faxes a fellow hawaladar, who passes on the sums, again in the form of currency or gold, to the recipient. Later, the second merchant will recoup his ouday, minus a small commission, when money needs to go the other way. In the early 1990s, Scotland Yard busted six merchants who moved $180 million a year between Britain and India. “The hawala works because people do not violate the trust,” says author Robinson. “If they do, they get killed.”

U.S. officials believe the Sept. 11 attacks cost as litde as $500,000 (U.S.), or roughly $26,000 per hijacker—not a huge sum of money. After all, the main weapons—the airplanes—were stolen, and box cutters are cheap. Still, the 19 hijackers needed money to cover their rent and living expenses, to pay for airplane tickets and pilot school. Investigators around the world are now searching for the money trail they left. So far, its traces have been well concealed. But its known that on the eve of the attacks, $15,000 was wired by three of the hijackers to the United Arab Emirates. The sum is thought to be “surplus” funds, left over from the money that financed the hijackings. It was sent in three separate wire transfers to a man, called a “paymaster” by one source, holding a Saudi passport whod entered the U.A.E. in June and left on Sept. 11 for Karachi, Pakistan. It’s also known that 11 of the hijackers stopped in London on their way to the United States. It’s suspected the stopover was to pick up money. The hawala between London and Karachi is one of the biggest, Robinson says.

Unlike most bin Laden cells, which finance their own activities, these operatives appear to have been given significant financial support. “Think of bin Laden as the chairman of the board of a holding company with lots of semi-autonomous subsidiaries,” says Robinson, a speaker this week at a major annual conference in Montreal on money laundering. “He seeds them and says, ‘Go do it.’ He has enough of them out there, you know. It’s a percentage game.” Ahmed Ressam, the Montreal-based militant who entered the U.S. with a trunkful of bomb-making material on the eve of the millennium, is an example of the more traditional bin Laden method. Ressam, who will be sentenced in February, was linked to groups in Canada and the U.S. involved in credit-card fraud and counterfeiting passports.

With its proximity to the States, plus

sophisticated capital markets, a welcoming immigration policy and lax anti-moneylaundering laws, Canada has long been viewed as the perfect locale for washing dirty cash. Chris Mathers, now president of KPMG Corporate Intelligence Inc. in Toronto, worked for 20 years as an undercover RCMP officer. For 10 years, he operated a bogus money-laundering operation. When it came time for meetings with the “bad guys,” he recalls, he’d propose Amsterdam or Panama. “I like to go to exotic places,” he says. “They’d say, ‘Vancouver’s nice.’ ” The reason? “You take a hit for money laundering or drug trafficking in this country and it’s almost unheard-of for you to get serious jail time.” Canada’s reputation among its friends internationally is similarly loose. “Canada is home to virtually every ethnic organized crime group in the world,” the U.S. state department lamented in early 2000, in a country report that began: “Canada remains vulnerable to money laundering.”

At the time of the state department report, Ottawa was pushing through Parliament new anti-laundering legislation that brings Canada closer to its international peers. The law was passed in June, 2000, and was expected to go into effect last spring. It calls for mandatory reporting of suspicious transactions by banks and a wide range of other players, including real estate brokers and lawyers. Cash transactions inside Canada—or transfers out of the country—of more than $10,000 must be reported. The measure establishes a new federal government agency, the Financial Transactions and Reports Analysis Centre, or FinTRAC, which will track suspicious deals and act as a centralized financial intelligence unit. But resistance from the banking industry and legal circles has delayed the laws accompanying regulations. The banks were opposed to the legislation because they didn’t want to be gatekeepers or take on what a Bay Street law firm, Osier, Hoskin & Harcourt, deemed “potentially onerous, costly and in many ways problematic obligations.” A veteran Canadian securities regulator retorts that the new law could cost some banks part of their business. “In the industry we regulate, everything deals with making or losing money,” he says. “These are the people who think greed is good.”

The banking industry’s concern, says Denise Harrington, spokeswoman for the Canadian Bankers Association, is that the new legislation will create “extra work and volume that won’t necessarily get at the problem.” The banks, which have voluntarily reported suspicious transactions for the past 10 years, have a “long history of cooperating with law enforcement,” she says.

The Federation of Law Societies of Canada, a national umbrella organization, is taking a tougher stance than the bankers. The law undermines the principle of client confidentiality, says federation president Maurice Laprairie—and once the regulations take effect, the federation intends to launch a constitutional challenge. “For the first time,” says Laprairie, “lawyers will have to report to a federal agency what their clients are doing and not tell their clients.” On Sept. 12, some of the controversial regulations were put into the official Gazette, making them active. Still, it won’t be until Nov. 8 that mandatory reporting of suspicious transactions—a rule that has been common around the world for years—begins in Canada. And other key elements—reporting of cash and cross-border transactions of more than $10,000—may not be brought into effect before the end of2002.

Some critics are dismayed not only by the delays in the law, but also by its content. Unlike its U.S. counterpart, the Financial Crimes Enforcement Network, FinTRAC does not have law enforcement powers. In fact, police will need to seek a court order before they can get from FinTRAC a detailed disclosure of a suspicious transaction. By comparison, any U.S. law enforcement agency can access the FinCEN database— no search warrant required. “FinTRAC: it’s simply a way to employ people and pretend Canada’s doing something,” says Robinson, who is based in London. “Shame on Canada.”

To the RCMP’s Beer, however, Canada has made impressive strides in the past two years, from the creation of FinTRAC and the coming mandatory reporting of suspicious transactions to the withdrawal from circulation of $ 1,000 bills, which were popular among carriers of cash. “At this point, we have the laws and regulations in place to provide a good foundation to shed that reputation of Canada being a money-laundering haven,” Beer says. And the attacks on the U.S. have had a major impact: “The level of co-operation has just skyrocketed.” That co-operation will be essential. The Canadian financial services industry is so closely intertwined with the U.S. industry that the two have really become one. Now, with the global links between terrorism and money laundering becoming abundandy clear, Canada just may find the will to intertwine its laws on the movement of money a little more tighdy with the rest of the world.