Bankruptcy scheme let business owner avoid massive tax bill
Offshore firm helped local manufacturer appear heavily indebted to cheat CRA, leaked documents show — facts disputed by businessman’s lawyer
Doug McKague had been stashing millions of dollars in an offshore tax haven for years when the Canada Revenue Agency finally caught up with him in 2002.
McKague’s brake parts factory in Mississauga, Maple Screw Products Ltd., was siphoning a significant portion of its sales into the British tax haven of
Jersey, where McKague owned a dozen shell companies and trust funds that hid his money from the taxman.
The CRA ruled that the offshore payments were too high, disallowed the deductions and reassessed Maple Screw. McKague’s tax bill would eventually top $10 million.
Instead of paying up, McKague enlisted La Hougue, a secretive offshore trust company, to concoct a plan to bankrupt his own profitable business so the CRA could never collect the taxes due, according to a trove of leaked files obtained by European Investigative Collaborations and shared with the Toronto Star.
Tens of thousands of documents, stacked in a disused squash court on the grounds of a stately manor in Jersey, in the Channel Islands, lay out the story of the extreme lengths to which one Canadian businessman went in order to deprive the public purse of funds.
“Doug was hit for an enormous tax bill,” wrote McKague’s offshore wealth manager Richard Wigley in a 2006 memo contained in the leak. “Rather than give in, he decided to let the Canadian entity go the equivalent of Chapter 11 and start up a new Company.”
The bankruptcy served a simple purpose, Wigley later wrote: “By the time the tax is due to be paid the Company will have been liquidated.”
Maple Screw Products declared itself insolvent in January 2006 with more than $22 million in liabilities. But much of that debt was a mirage.
This story shows how, for several years in the early 2000s, a Mississauga company that made caliper and bleeder screws, nuts, bushings and plungers also manufactured debt to run itself into the ground.
The leaked documents describe in detail how it was done.
First, Maple Screw turned its profits into losses by loaning $1 million (U.S.) to an offshore company owned by McKague, which, documents reveal, had no intention of ever paying the money back.
Then Maple Screw created fake debt by recording a loan from another offshore entity but never actually receiving the money. This debt existed only on paper so that the CRA couldn’t collect when Maple Screw went bankrupt, because a secured loan typically ranks ahead of taxes owed when an insolvent company’s assets are divvied up.
Finally, once in bankruptcy, Maple Screw’s assets were liquidated. But the company that bought them up — and relaunched its business with the same staff and the same customers — was a front for McKague as well.
Today, McKague owns Maxtech Screw Products (known as MSP), which operates the same business that Maple Screw Products (also known as MSP) did, but out of a new facility in Toronto, built and leased out by another of McKague’s front companies.
The operation was first discovered by the bankruptcy trustee, who flagged what she thought were “unusual and highly suspicious transactions” to the Office of the Superintendent of Bankruptcy (OSB) in 2006.
“There may have been a co-ordinated effort to move assets and cash offshore and out of the hands of Maple’s creditors; in particular CRA,” wrote Michelle Pickett of Zwaig Associates. “We recommend a full investigation.”
But the OSB wouldn’t act, telling Pickett the allegations of fraud and tax evasion were outside of its purview and suggested she report to the CRA instead. The CRA, which received a copy of Pickett’s report, did not take any action on the file for at least seven years, up to the day the bankruptcy trustee’s final report was filed in 2013. The CRA would not confirm if any audit or investigation into Maple Screw has since been carried out.
Throughout the bankruptcy process, the McKague family maintained they had nothing to do with Maxtech. Now, years later, as scrutiny around Maple Screw’s demise appears to have dissipated, the McKagues have re-emerged, publicly declaring their involvement in the new business.
Doug’s son, Adrian, who was a director of Maple Screw before the bankruptcy, was appointed general manager of the post-bankruptcy company, Maxtech, in 2016.
Neither Doug nor Adrian McKague agreed to an interview for this story, nor did they respond to a letter containing detailed questions about the bankruptcy and the leaked records. Their lawyer, Kevin MacDonald, responded on their behalf.
“In short, your facts are wrong,” MacDonald wrote. “As you can appreciate from your timelines, the events are ancient.”
“Our clients have no intention of responding further.”
In leaked documents, Doug McKague’s private offshore wealth manager describes him as someone who “is well aware of his tax position” and goes to great lengths to ensure his offshore wealth is untraceable.
An internal note at La Hougue reminds staffers to not record McKague or any of his family members’ names on wire transfers. Later, internal memos stress that wire transfers should be avoided as much as possible — because “there is less confidentiality” — and instead asks that bank drafts be mailed to McKague’s family members or delivered to hotels where they are staying. His wife once faxed banking instructions from a Parcels Plus office rather than calling or emailing from home.
McKague and his wife also travelled constantly, ensuring they were not considered residents of Canada or any other country where they might be required to pay tax.
“(McKague) spends no more than 120 days in anyone center [sic], he being based in Canada, the United States of America, Panama and also spends significant time on holiday,” wrote Wigley, in a note following a meeting with McKague in Panama City in February 2003.
Wigley was a senior staff member of La Hougue Financial, a secretive offshore wealth management firm in Jersey that catered complex tax evasion services to a small number of very wealthy clients. La Hougue went to great lengths to hide the identities of its clients, even in its internal files, referring to them by four digit numbers and conducting most of their business face to face. In one document, Wigley referred to McKague as “the gentleman with the moustache.”
Journalists at the Star and the Global Reporting Centre at the University of British Columbia were able to piece together the Maple Screw scheme and identify the players by combing through tens of thousands of pages of bank transfers, memos, faxes, emails, financial documents, internal records and detailed notes taken during and written immediately after in-person sessions.
“(McKague) still has a problem with Revenue Canada,” wrote Wigley in a note summarizing the Panama City meet. “I agreed we would clean matters up.”
In response to questions, lawyers representing Wigley said in an email: “many of the statements made in the premises to your questions are just blatantly false.”
“As you no doubt appreciate given the ongoing legal actions, our clients are greatly restrained from saying anything to you. The truth will be established before the Courts in Canada,” wrote lawyer Peter Greene.
While Wigley and La Hougue are involved in several ongoing civil cases in Ontario, none of them involve Maple Screw or the McKagues.
“The tax problems are still in existence,” Wigley wrote after a meeting with McKague in Fort Lauderdale in November 2003. “It is believed that the negotiations and agreement may take years and involve some changes whereby the Canadian Company, Maple Screw, will be kept short of funds.”
The leaked documents detail how Maple Screw made several loans to McKague’s other companies, none of which were ever paid back.
Maple Screw loaned $1 million (U.S.) to Bickenhall Holdings Ltd., a British Virgin Islands shell company owned by McKague, whose purpose, according to La Hougue’s internal records, was “borrowing from Maple Screw, Canada.”
In October 2003, the loan agreement, which included no collateral or security in case of default, was signed, and the next day Wigley wrote to McKague, spelling out the next steps: “after two years there will be an inability by the borrowers to repay.”
On schedule, shortly after Maple Screw declared itself insolvent in early 2006, a letter from Bickenhall arrived at Maple Screw stating, “at this time, we are unable to repay.”
The bankruptcy trustee went through Maple Screw’s books and would later write that despite the 5.5 per cent interest rate noted in the loan agreement, in almost three years “no interest has been accrued or paid.”
“The possibility of recovering the loan to Bickenhall appears remote. Hence, the loan receivable has been valued as nil,” wrote Pickett in her report to creditors.
Pickett did not respond to multiple emails, messages and calls.
Another series of unrecoverable loans were made to the Bramalea Blues Hockey Club, where McKague’s son, Adrian, played. Over the course of two years up to the bankruptcy in 2006, Maple Screw loaned the club $116,000 (Canadian) but again, the loans appeared to be flowing back to McKague himself.
The now-defunct club was owned by 1549626 Ontario Ltd. which was registered to Victor Seabrook, an Ontario lawyer who worked with La Hougue.
The team’s general manager at the time was also employed as a purchaser at Maple Screw, and the team’s listed phone number was the same as Maple Screw’s main office line.
Seabrook did not respond to detailed questions sent to his lawyer.
At a May 2004 meeting in Fort Lauderdale, Fla., McKague and Wigley finalized the bankruptcy plan.
Wigley’s handwritten notes lay out McKague’s state of mind: “HE IS IN FIGHT MODE.”
In a more formal, typed summary of the meeting, Wigley spelled out the plan: “Arrangements would be put in place whereby the entity (Maple Screw) would not be able to pay any tax assessments levied, i.e. if an asset is attacked, there are secured creditors in place that eat up all or the majority of the assets.”
“Secured creditors will now be in place who will rank ahead of Revenue Canada whereby, if tax is due, the Company will not have anything with which to pay,” Wigley wrote.
At a July 2004 meeting in Toronto,
“In short, your facts are wrong. As you can appreciate from your timelines, the events are ancient. Our clients have no intention of responding further.” KEVIN MACDONALD LAWYER FOR DOUG AND ADRIAN MCKAGUE
McKague and his wealth manager reviewed the details of the fake debt operation. The pair worked with Barrington Bank in the Bahamas to create a paper trail making it appear that Maple Screw owed millions, when in fact the money just moved from one of McKague’s pockets to another, according to bank statements, wire transfer records and memos in the leak.
The money Barrington Bank “loaned” to Maple Screw came from McKague’s own offshore accounts. McKague’s British Virgin Islands company, Grebe Investments, paid the entire sum of the loan — $3 million — to Barrington before the debt was recorded on Maple Screw’s books.
“We need to record in La Hougue’s books loans to Barrington Bank re Maple … These monies were returned but the liability exists on Maple’s books,” Wigley wrote.
The funds never even flowed to Maple Screw. Instead, Barrington Bank paid them back to McKague.
Moving all this money in a big circle made it appear that Maple Screw was heavily indebted. What Maple Screw’s books did not reveal: the company really owed the money to its owner, Doug McKague.
And when the time came, this fake debt allowed Barrington Bank to intervene in the bankruptcy, seize Maple Screw’s assets and sell them, returning all the proceeds to McKague.
The Star was unable to reach Michael Morris, president of Barrington Bank, for comment, and the extent of his involvement in the scheme is not clear.
Barrington Bank had its banking licence revoked by the Central Bank of the Bahamas in 2015. No reason was given.
By the time McKague and Wigley met in Toronto in mid-2005, they were into the final phase of the plan.
Victor Seabrook, a lawyer who worked with La Hougue, and an accountant, Bruce Buckley, incorporated numbered companies in Ontario less than two months before Maple Screw announced it was insolvent.
One numbered company purchased a factory and leased it to the other numbered company, which bought up Maple Screw’s assets, rehired its staff and took over operations from Maple Screw.
The whole thing was financed by more than $9.1 million in loans from another of McKague’s offshore companies, Crestfall International Ltd, ensuring that the brake parts manufacturer continued to send hundreds of thousands of dollars into his offshore accounts each month in the form of interest and loan repayments.
In a note, Wigley summarized how McKague’s shell companies appeared to anyone making inquiries: “The property owner is an entity under the ownership of V M Seabrook and the machinery is owned by an entity under the ownership of Bruce Buckley. I am Crestfall and the lender so far as the world at large is concerned.”
On Jan.11, 2006, Doug McKague signed a document filed with the Office of the Superintendent of Bankruptcy declaring Maple Screw insolvent.
Maple Screw made a proposal to creditors that divided those owed money into two categories: the suppliers and business partners — including McKague’s offshore entities — would get about 76 cents on the dollar, while the CRA, the Workplace Safety & Insurance Board and others would receive less than one cent on the dollar.
If accepted, Maple Screw would pay only $60,328 of its $10,054,751 tax bill.
The proposal hinged on the sale of all Maple Screw’s assets and business contracts to a numbered company that later became Maxtech and which Maple’s lawyers assured everyone was “acting at arms-length to Maple.”
A meeting of creditors was scheduled for July 20, 2006, at the Best Western hotel near Pearson Airport.
Asking subordinates to prepare a “bible” of all McKague’s business arrangements, Wigley noted that he could cram before the meeting: “I will quickly be able to judge if I can do a good job.”
“Good if all goes well but could go horribly wrong!” Wigley scrawled. “To me this is a serious game & not to be treated lightly. (Fail to prepare & prepare to fail!)” At the creditors’ meeting, the CRA voted against the proposal and Maple Screw was officially put into bankruptcy. But it didn’t take long for the structure set up by McKague and Wigley to move in and seize the company’s assets.
Less than a week later, Wigley noted that “the bankruptcy seems to be running its course and it is not expected that there will be any unpleasant surprises with the tax enquiry.”
Two weeks after that, Barrington Bank had seized the contents of Maple Screw’s factory and offices in Mississauga and declared its intention to sell everything. The Nassaubased bank didn’t reveal in its bankruptcy court filings that it was acting on behalf of a company that one point, according to its records, was owned by McKague.
In this labyrinth of financial dealings, where McKague seems to be everywhere, he even financed the liquidation of his own company’s assets, sending $200,000 to Barrington Bank to seize his machinery and equipment and sell it to a company he owned.
Nearly all the money recouped in the bankruptcy was sent back to McKague’s offshore entities except the proceeds from the sale of one building that Wigley did not register a lien against. That building was sold and $827,000 was paid to the Ontario Ministry of Finance, which was also owed $1.6 million in tax. The CRA didn’t get anything.
Morris at Barrington Bank later sent cheques for $645,000 (Canadian) and $249,000 (U.S.) to McKague’s company in the British Virgin Islands, promising another $500,000 was on the way.
Because Grebe had insisted Barrington take out insurance on its loan to Maple Screw, Wigley later told McKague that he should expect to recoup between $3 million and $3.5 million (Canadian) from Maple Screw, once the liquidation had been completed.
Contained in four banker’s boxes, thousands of pages of files sit in the Ontario Commercial Court archives in Cooksville. Suits and countersuits swirled around Maple Screw’s bankruptcy for years.
Sandwiched amid the briefings, motion records and affidavits is a single loose printout of an email from the woman who figured it all out.
“I am still too angry and disgusted with this file to even discuss the issue of the unpaid fees,” wrote bankruptcy trustee Michelle Pickett.
“Maple management and all concerned with his file have taught me a valuable lesson on the extent of deceit, lies, immoral and unethical practices that individuals and professionals will stoop to in the interest of money.”
“I am still too angry and disgusted with this file to even discuss the issue of the unpaid fees.” BANKRUPTCY TRUSTEE MICHELLE PICKETT WROTE IN AN EMAIL