Hidden Beneficial Ownership and Control: Canada as a Pawn in the Global Game of Money Laundering.

Author:Meunier, Denis
 
FREE EXCERPT

THE C.D. HOWE INSTITUTE'S COMMITMENT TO QUALITY, INDEPENDENCE AND NONPARTISANSHIP

The C.D. Howe Institute's reputation for quality, integrity and nonpartisanship is its chief asset.

Its books, Commentaries and E-Briefs undergo a rigorous two-stage review by internal staff, and by outside academics and independent experts. The Institute publishes only studies that meet its standards for analytical soundness, factual accuracy and policy relevance. It subjects its review and publication process to an annual audit by external experts.

As a registered Canadian charity, the C.D. Howe Institute accepts donations to further its mission from individuals, private and public organizations, and charitable foundations. It accepts no donation that stipulates a predetermined result or otherwise inhibits the independence of its staff and authors. The Institute requires that its authors publicly disclose any actual or potential conflicts of interest of which they are aware. Institute staff members are subject to a strict conflict of interest policy.

C.D. Howe Institute staff and authors provide policy research and commentary on a non-exclusive basis. No Institute publication or statement will endorse any political party, elected official or candidate for elected office. The views expressed are those of the author(s). The Institute does not take corporate positions on policy matters.

Daniel Schwanen

Vice President Research

DENIS MEUNIER is a former Deputy Director of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and a Board member of Transparency International Canada

THE STUDY IN BRIEF

Official estimates of money laundering in Canada range from $5 billion to $100 billion. Offences such as drug trafficking, fraud, tax evasion, smuggling and corruption are fuelling the laundering of dirty money. While many methods and techniques may be used to hide ill-gotten gains from tax authorities and police, launderers often use corporations and trusts to co-mingle dirty money with legitimate funds to flow them through these entities' bank accounts or brazenly use the entity to exclusively conduct illegal activities.

The "secret sauce" in this recipe is the creation of legal arrangements that hide the beneficial owner of the corporation, partnership or trust that exercises significant control over the entity. Indeed, with professional knowhow, complex structures can be created in Canada, or offshore, that will slow down or stop any intrepid investigator trying to connect the dirty money to the beneficial owner.

The focus of this Commentary is to show how the lack of beneficial ownership transparency facilitates the use of corporations and trusts for illicit purposes. At present, there are no requirements to disclose beneficial ownership when creating a corporation. Nominee shareholders and directors can be appointed without disclosing the ultimate beneficial owner or the nominator. For trusts, there are also no requirements to identify the parties when registering. As a result, Canada fares poorly on international standards for disclosing beneficial ownership. Lack of beneficial ownership transparency is not only a structural flaw in Canada's corporate registration system (federally, provincially and territorially) and, consequently, in its anti-money laundering and anti-terrorist financing measures, but it paints Canada as an international laggard and as a financial-secrecy jurisdiction.

However, there now is a global momentum, led by the Europeans, to make beneficial ownership registries accessible to the public, and trusts under certain conditions, to more effectively address the threats posed by money laundering, terrorist financing, corruption and tax evasion.

This Commentary s recommendations are for the federal government, in collaboration with the provinces and territories, to establish a central publicly accessible beneficial ownership registry of corporations and certain trusts; require all reporting entities under the Proceeds of Crime (Money Lainidering) and Terrorist Financing Act to identify beneficial ownership information; place the onus on corporations and trusts to truthfully and fully disclose beneficial ownership information; and follow the European example by keeping Canada current with the international standards, commitments and trends on beneficial ownership transparency.

C.D. Howe Institute Commentary[C] is a periodic analysis of, and commentary on, current public policy issues. Michael Benedict and James Fleming edited the manuscript; Yang Zhao prepared it for publication. As with all Institute publications, the views expressed here are those of the author and do not necessarily reflect the opinions of the Institute's members or Board of Directors. Quotation with appropriate credit is permissible.

To order this publication please contact: the C.D. Howe Institute, 67 Yonge St., Suite 300, Toronto, Ontario M5E 1J8. The full text of this publication is also available on the Institute's website at www.cdhowe.org.

Official estimates of money laundering in Canada range from $5 billion to $100 billion. Offences such as drug trafficking, fraud, tax evasion, smuggling and corruption are fuelling the laundering of dirty money

The taxes that are evaded become a burden for compliant taxpayers and corporations who shoulder a disproportionate amount of government expenditures and deprive citizens of better services, such as education, healthcare, policing and national security. The tax gap from non-compliance alone was estimated in 2014 to reach S14.6 billion, and that doesn't consider corporate tax noncompliance. (1) Like the taxes evaded, the billions that are generated from other crimes find their way into the domestic economy when not hidden offshore. Illicit financial flows upset the level playing field and competitiveness of honest business persons. Dirty money finds its way through bribes to officials, with taxpayers dishing out more money to pay for inflated public infrastructure projects, as was seen in the Charbonneau Commission inquiry in Quebec. The impacts of money laundering are significant and insidious.

While many methods and techniques may be used to hide ill-gotten gains from tax authorities and police, launderers often use corporations and trusts to co-mingle dirty money with legitimate funds to flow them through these entities' bank accounts or brazenly use the entity to exclusively conduct illegal activities. The "secret sauce" in this recipe is the creation of legal arrangements that hide the beneficial owner of the corporation, partnership or trust that exercises significant control over the entity. Indeed, with professional knowhow, complex structures can be created in Canada, or offshore, that will slow down or stop any intrepid investigator trying to connect the dirty money to the beneficial owner. The focus of this Commentary is to show how the lack of beneficial ownership transparency facilitates the use of corporations and trusts for illicit purposes.

At present, there are no requirements to disclose beneficial ownership when creating a business corporation. Nominee shareholders and directors can be appointed without disclosing the ultimate beneficial owner or the nominator. For trusts, there are also no requirements to identify the parties when registering. (2)

As a result, Canada fares poorly on international standards for disclosing beneficial ownership. While the World Bank rates Canada as the second-best place to start a business, the Tax Justice Network rates it the 21st worst "financial-secrecy jurisdiction," a place where people or entities can create and operate secretive structures for tax-and law-dodging purposes (World Bank 2017; Tax Justice Network 2018). Lack of beneficial ownership transparency is not only a structural flaw in Canada's corporate registration system and, consequently, in its anti-money laundering and anti-terrorist financing measures, but it paints Canada as an international laggard and as a financial-secrecy jurisdiction (Transparency International 2018).

Regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act require certain reporting entities, including financial entities, life insurers, securities dealers and money services businesses (herein referred to as Financial Service Providers (FSPs)) to obtain and take reasonable measures to confirm the identity of their beneficial owners. The same requirement applies to other arrangements such as trusts; i.e., the settlors, trustees and beneficiaries. (3,4) However, these obligations exist without the benefit of a publicly accessible and centrally integrated beneficial ownership registry for corporations, or a registry of trusts, creating a difficult compliance burden for the private sector. This Commentary identifies four weaknesses with the current regulations: placing the onus on reporting entities to obtain beneficial ownership information; allowing for costly and ineffective procedures that do not ultimately verify the identity of the beneficial owner; a narrow scope, in that they do not apply to all reporting entities; and scrutinizing individuals more carefully than corporations and trusts.

In December 2017, Canada's finance ministers announced priority action on determining beneficial ownership of corporations (Finance Canada 2017). On February 7, 2018, the federal Department of Finance released a consultation paper on Reviewing Canada's Anti-Money Laundering and Anti-Terrorist Financing Regime seeking Canadians' views on "... how to improve corporate ownership transparency and mechanisms to improve timely access to beneficial ownership information by authorities while maintaining the ease of doing business in Canada (Finance Canada 2018)." In Budget 2018, the federal government announced it would be taking measures to enhance income tax reporting requirements for certain trusts and would introduce legislative amendments to the Canada...

To continue reading

FREE SIGN UP