CORPORATE EXPOSURE
Canada can find lessons in the taxation transparency models followed in Britain and the U.S.
The glittering towers and spartan offices of this international financial capital hold billions of illicit offshore dollars, money belonging to countless anonymous company owners who came here to evade taxes and finance fraud, money laundering and terrorism.
That established model of corporate concealment, adopted by Canada, has met its end in Britain.
Last June, Britain became the world leader in exposing tax cheats by requiring corporate registrations to include the names of the real company owners — or “persons with significant control” — and listing the records in a database that anyone can view free online.
The British model, although still new, has been hailed as groundbreaking for disarming the most essential weapon for tax evaders: secrecy.
“The objective is to drive illicit money out of the U.K.,” said Donald Toon, the U.K.’s economic crime director. “A publicly open accessible register is valuable. It is valuable because of transparency.”
Britian’s top financial crime cop considers corporate-ownership secrecy “a threat to the economic security of the U.K.”
The Canadian government has displayed no such sense of urgency.
In Canada’s federal and provincial corporate registries, it is difficult — often impossible — to identify the real owners of companies if they choose to hide behind lawyers, accountants or paper-only directors.
It’s the same kind of corporate secrecy that lures money launderers, tax evaders, drug traffickers and embezzlers to offshore tax havens such as Panama, the Seychelles and British Virgin Islands.
Canada’s growing reputation as a tax haven has consequences, say experts, including attracting money from criminals and injecting unrestrained foreign investment into real-estate markets that drives up housing costs beyond the reach of many Canadians.
Here’s how it works: Let’s say you’re a foreign business person looking to evade taxes and hide any connection to money flowing into your company.
You may well want to run that cash through an anonymous shell company registered in a place that doesn’t require you to list your name on any public document, file taxes or keep any financial records.
Ontario is perfect. Ontario limited partnerships have become a go-to corporate structure for hiding international wealth legally, thanks to secretive business registration and regulations that are being used in ways the province never intended.
“Canada is one of the most opaque jurisdictions, globally, in terms of identifying corporate ownership,” said Peter Dent, a forensic accountant and past chair of Transparency International Canada. “Canada is increasingly becoming an attractive jurisdiction for individuals that want to hide their money or their assets.”
Dent’s investigations tracing the identities of anonymous corporate owners behind Canadian companies are often stymied by secrecy, he said.
“I’d say it’s more than 50 per cent of the time I run into brick walls,” Dent said. “We’ve heard complaints about law enforcement not being able to uncover or to properly investigate many transactions . . . because they can’t find out the true owners of certain companies . . . So you’d think that it’s in the best interest of government to have a more transparent system of identifying who are the true owners of a company.”
Countries around the world are wrestling to close the regulatory black holes that facilitate tax evasion in the aftermath of the Panama Papers revelations, based on the leak of 11.5 million documents obtained by the International Consortium of Investigative Journalists and shared in Canada with the Star and the CBC.
Britain, once heavily criticized for failing to control its overseas territories such as the British Virgin Islands, Jersey and the Isle of Man, chose the right target for rooting out tax cheats, says Robert Palmer, who runs the anti-money laundering arm of the U.K. research group Global Witness.
“Secrecy is at the heart of financial crime,” he said. “You can create a company overnight and that company can own assets, have bank accounts, employ people, own property. And you can create a structure to make it impossible to determine who is behind that company. Nominees and straw men who are on paper as shareholders just take instructions from someone else and it’s very, very hard to trace the corporate hierarchy.”
Former British business secretary Vince Cable, an architect of the British public registry, said his government acted because the country was “in danger of attracting bad people with bad money.”
“Russian oligarchs for an example, they did acquire quite substantial companies here,” said Cable, who took on powerful corporate interests in the City of London to create the registry.
“Britain has taken the lead and now it is reasonable to expect for other countries like Canada to look at the experience and see if it has improved things. And if it has improved things, they should follow suit.”
The newly introduced British transparency model isn’t perfect. It does not apply to British tax-haven territories, although it has created moral suasion that has inspired greater co-operation with law enforcement requests for financial records, says the U.K.’s Toon.
“Are we in a position where, if you are a determined, effective criminal, we’ll make it impossible for you to run a company? No, we’re not. But we’ll make it harder, we’ll make it more awkward for you and to some extent, if that means that you don’t register your company in the U.K., don’t operate it in the U.K. and you go somewhere else, that is a success,” he said.
The options for going elsewhere might soon shrink.
At least 16 other countries have committed to creating similar public registries, according to Global Witness.
In Ottawa, Finance Minister Bill Morneau says the issue is on the radar.
“We’re absolutely in favour of knowing who is registering companies, what their goals are and what taxes they should be paying in our country and that they’re not in any way avoiding taxes somewhere else through their registry here,” he said.
But if swift action isn’t taken and the issue gets bogged down in federal-provincial jurisdictional squabbles, experts say Canada will only become more attractive to money launderers, tax evaders and corrupt foreigners.
“As jurisdictions start to clamp down on this kind of secrecy, the corrupt will look for other places, other safe havens to put their money,” said Rachel Owens, a researcher with Global Witness. “If Canada doesn’t start to reform and bring transparency in company ownership then arguably Canada may become a safe haven for the corrupt as well.”
More than $1 trillion (U.S.) in “illicit” financial flows (including “tax evasion, crime, corruption and other illicit activity”) moved from the developing world to the developed world in 2013 alone, according to a study by Global Financial Integrity. That figure had been growing at an average rate of 6.5 per cent each year over the previous decade.
Dent says an influx of untaxed overseas wealth is already having a direct impact on Canadians by driving up the costs of real estate.
A recent study found it impossible to determine the identity of nearly half the owners of the most expensive Vancouver homes bought or sold over the past few years. Their names are hidden by numbered companies, private trusts, figurehead directors and impenetrable corporate structures, according to Transparency International Canada’s study.
“We don’t know the consequences of potential real-estate bubbles being created in our two largest markets in Canada — Vancouver and Toronto,” Dent said. “People wanting to buy a home in Canada . . . are being priced out of that market.”
Perhaps the most attractive lure is the Ontario limited partnership (LP). The unique tax structure is marketed globally by dozens of online firms promising quick and easy anonymity and shelter from taxation.
“This is a simple company with no obligation to submit a financial statement or pay taxes in Canada. Establishing a company takes 1 day,” reads the website of a U.K. tax avoidance specialist. “A Canadian limited partnership (LP) can be established by one person who will be the general partner, as well as the limited partner. If necessary, we can provide a nominee general partner or limited partner.”
Like other popular Canadian business structures, such as limited liability partnerships (LLPs) in B.C. and companies in New Brunswick, Ontario LPs were never intended to be tax shelters for foreigners. They are being exploited by tax avoidance experts who scour the globe looking for tax loopholes. One reason LPs are so popular: They don’t require anyone behind the company to actually live in Canada.
As a “flow-through” structure, LPs don’t have to file any taxes with the CRA because their profits are passed directly on to the partners, who are supposed to pay tax. While this may be an efficient business structure, it also creates a corporate entity that isn’t required to declare its activities to the government. If its partners are foreigners, they don’t file taxes in Canada and the LP’s cash flow is completely unknowable and untaxed.
“There’s a disconnect: you’re on Canadian soil, but you’ve got no scrutiny from the tax authorities. That’s potential fraud right there,” said Richard Leblanc, a corporate governance expert and professor at York and Harvard Universities. “When you conduct business through an LP . . . you completely avoid the scrutiny of the tax authorities in Canada. That could be used as a vehicle, not only for tax avoidance, but for bribes,” he says.
“An individual, a resident of Canada or a corporation always attracts the scrutiny of Revenue Canada. Limited partnerships do not. So maybe the time (has come), the question can be asked, should they?”
As of Jan. 1, the U.S. Internal Revenue Service started requiring foreign-owned LLCs (a similar structure to LPs) to register their ownership and report transactions between the company and its owner.
“The U.S. has been attacking this . . . and yet Canada goes on, so people are just obviously going to use Canada,” said Mark Morris, an independent tax consultant based in Zurich. “The only way this can be tackled is if Canada does something . . . Otherwise, it is facilitating global tax evasion,” he said
As it stands now, Canadian corporate transparency is lacking. While they vary across the country, most corporate registries only list directors — not shareholders — and none list beneficial owners.
Closing these loopholes and improving public access to company information is more difficult here than in the U.K., in part because of Canada’s 10 separate provincial registries, said a spokesperson for Morneau.
“It’s far from straight forward, but it is important and top of mind,” wrote finance ministry staffer Dan Lauzon in an email.
Since taking office, the Liberal government has increased the CRA’s enforcement budget, committed Canada to international reporting standards designed by the OECD and raised the issue with the provinces, Lauzon wrote.
“Though there is no silver bullet or overnight fix, this is a governmentwide effort, and we will continue to work with partners here at home and around the world to ensure fairness across the board,” he wrote.
In an interview, Morneau raised privacy concerns about the listing of corporate owners in a public registry. That, Dent says, is a red herring. “We’re asking (that) basic business card information be made public — names, addresses . . . I don’t think it impacts anyone’s concerns around privacy.”
In fact, the business community should welcome corporate transparency for their own interests.
“It’s in their own best interest to know exactly who they’re doing business with.”
The Association of Canadian Financial Officers signed an open letter to Morneau last December, calling for a public registry of beneficial owners of corporations and trusts.
British economic crime director Toon’s advice to Canada is clear: Make corporate ownership information open to all — not just police and tax authorities.
“There is a hugely valuable role that can be played by the media. The Panama Papers is an interesting example,” Toon said. “If there is an open access, it enables investigative journalism, it enables bodies, such as Transparency International, such as Global Witness, to dig into areas of concern they identify.”
“The more open the better, what do you have to lose?”