Tax evasion, beneficial ownership and money laundering – what are the issues facing Canada at the G8 Summit next week?

By Christine Duhaime | June 15th, 2013

A recent article in the Vancouver Sun on the attendance by Stephen Harper at the G8 summit in Ireland and the proposed measures to combat tax evasion contained an interesting statement buried at the end of the article as follows: “international organizations say… Canada has balked at a measure that would identify the true owners of offshore accounts and shell companies by disclosing what’s called beneficial ownership information.”

The issue at the G8 summit is not necessarily that Canada is balking at providing beneficial ownership information – it’s that in this country, such information is not in the hands of government agencies to disclose.

The question for Canadian policy makers on tax evasion and beneficial ownership is three-fold: (a) can Canada legally require the disclosure and collection of beneficial ownership information, particularly of corporations; (b) if yes, does Canada want to require the collection and disclosure of beneficial ownership internally; and (c) if yes, does Canada want to share such information externally with other countries? With respect to the first, there are constitutional and other impediments that may prevent federal action over provincially registered corporations that would need to be considered.

Beneficial Ownership in Canada

In Canada, beneficial ownership is a common law concept used to distinguish rights held by persons with a beneficial interest in property from those who hold those interests legally (i.e., in name). The law surrounding beneficial ownership is complex but in a nutshell, when a person holds property (i.e., a house or securities) legally, their name is on the property, or in other words, disclosed. When a person holds property beneficially, the property is not registered in their name and the true owner is obscured.

The tax evasion issue deals primarily with beneficial ownership of trusts, funds and private corporations, although it also involves real property ownership.

With respect to ownership (or shares) of a private corporation, directors may issue shares to shareholders who hold them legally or beneficially (as a nominee shareholder). With respect to trusts, they are different structurally but the same concept applies whereby a trustee may hold trust interests on behalf of others who are the ultimate beneficiaries of the trust property.

The beneficial ownership regime in Canada allows assets to be legally placed in corporate and trust vehicles, and without the ability to determine the natural persons who ultimately hold, or benefit from, those assets.

In addition to the placement issue, the problem in Canada is compounded by the fact that pursuant to the securities and corporate law regimes, private corporations are incorporated, and trusts are set up, without the requirement for the disclosure of beneficial ownership. While in the case of private corporations, provincial corporate statutes require the disclosure of directors on incorporation to a corporate registry, there is no requirement to disclose shareholders, beneficial or otherwise. The federal government seeks certain information on the legal ownership of  shares of private corporations when certain filings are made, but not necessarily the disclosure of beneficial owners of shares.

In Canada, there is no equivalent as exists in the EU of  “company service providers” whereby private companies act as law firms in Canada do, to set up corporations and trusts, maintain corporate records and act as the registered offices for those corporations. Corporate records are maintained by law firms and are neither public nor readily accessible to anyone except the client. Moreover, as client records, they are protected by privilege. A subpoena from law enforcement for documents at a law firm in Canada protected by privilege will be unenforceable in just about every instance.

The FATF Recommendations require that “company service providers” register as reporting entities under anti-money laundering legislation and, inter alia, report suspicious and terrorist activity, and the transfer of certain threshold amounts of money by clients, but given that in Canada, the company service providers are law firms, the requirement is not capable of being complied with in any event.

And also in any event, Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act does not capture “company service providers.” Even if it did, as it relates to law firms and lawyers acting as company service providers, those obligations would be likely ineffective as against lawyers because Canadian courts have held that anti-money laundering requirements are, for the most part, unconstitutional on the grounds that they constitute an unreasonable interference with the independence of lawyers.

The FATF Recommendations also require, independent of the above, that Canada implement measures to (i) have adequate, accurate and timely information on beneficial ownership and control of corporations and trusts that can be accessed by law enforcement and to (ii) require that persons and businesses that issue bearer shares and warrants or that allow nominee shareholders and directors be subject to legal measures to ensure there is no misuse by such persons and businesses for money laundering or terrorist financing.

Canada has not implemented these specific FATF Recommendations. If it did, it would completely change the anti-money laundering regime and impose new and onerous obligations on just about every corporation (public and private) and trust entity set up in this country. Why? Simply because all  private corporations issue bearer shares; some corporations issue warrants; and most corporations permit nominee shareholders and directors. Theoretically, every corporation could be subject to anti-money laundering requirements.

There is another problem with the disclosure of beneficial ownership and it’s that corporations in Canada can be federally or provincially incorporated – most are provincially incorporated. The federal government does not have the constitutional competence to legislate in respect of  provincially registered corporations or provincial corporate registries and thus it cannot require changes at the provincial level to yield up beneficial ownership information.

As a result of all of the above, the legal regime in Canada protects, whether intentionally or not, the secrecy of beneficial ownership information in Canada.

Beneficial Ownership & Tax Evasion

Under anti-money laundering law, banks, real estate agents and other reporting entities are required to identify their customers as part of their account opening due diligence procedures and report large and suspicious transactions.

However, when the true customer is obscured by beneficial ownership (often behind many layers of private corporations and trusts), uncovering the true nature of transactions, identifying wealth and tracing the origin of funds is not easy.

The offshore leaks scandal exposed by the International Consortium of Investigative Journalists, has brought to bear enormous pressure on governments worldwide to take action against tax evasion by prosecuting people who are found to have funneled money to tax havens and failed to pay the requisite taxes. The deliberate hiding of taxes offshore to avoid the payment of taxes is, in most jurisdictions, a predicate offence to a money laundering offence and thus tax evaders will likely also be prosecuted for money laundering as well as related tax offenses.

So at the upcoming G8 Summit, Canada will be juggling the pressure internationally to address the tax evasion problem, together with the problem that Canada does not capture beneficial ownership information and could not readily share this information with other jurisdictions in any event.

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