Across the globe, criminals are constantly trying to wash the stench off ill-gotten gains by moving them undetected through shell companies. In goes dirty money, out comes clean, while authorities do their best to follow the trail.
Every country in the world has a money-laundering problem. Canada, though, appears to have a particular one. While other developed nations, such as the United Kingdom, have been making it harder for criminals to hide from the law, Canada has failed to keep up – such that consultants who help people stash suspicious cash are now touting Canada as a great alternative.
A recent report from Transparency International Canada documents how consultants are selling Canada as a “secrecy jurisdiction” for those who want to “conceal ultimate ownership and leverage Canada’s strong reputation to access the global financial system.” It’s a practice that has been dubbed “snow-washing.”
They can do this using Canadian limited partnerships, a legal business entity that is practically purpose-built for bad actors who want to move millions of dollars around the globe undetected.
LPs can be run anonymously in most provinces, and never have to name the “beneficial owner” – the person who ultimately owns or controls the company. They can be created and operated from abroad at very low cost, and if they never do business in Canada they are under no obligation to file tax reports. They can also be used to set up bank accounts, giving the hidden owner access to Canadian financial services.
A leak of banking records from Lithuania’s Ukio Bankas in 2015 showed how shell companies in Canada were likely used to launder money. In one example, millions of dollars were transferred into companies whose only addresses were UPS mailboxes in Saint John, and then transferred out again under such vague rubrics as “payment for communications equipment” or “for building equipment.”
Britain fought back against such practices by creating a publicly accessible registry of beneficial owners that allows law enforcement and journalists to trace companies to their owners and expose possible money laundering.
Canada has yet to do that. The Trudeau government said in its recent budget that it will fast-track the creation of a public beneficial owner registry, and have it in place by 2023. But it will only cover federally chartered companies, leaving it up to the provinces to sign on voluntarily. It’s a huge gap.
That’s not the only way Canada is behind the times. In another significant gap, law firms are not required to report suspicious transactions in trust accounts that hold clients’ money – something banks, accountants, casinos, real estate companies, securities dealers and others are all obliged to do.
Ottawa passed a law in 2000 that, among other things, allowed the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC) to carry out warrantless searches of law firms, and to seize materials. The Federation of Law Societies took the government to court, and in 2015 the Supreme Court ruled key parts of the law were unconstitutional.
The court said the old law had violated client-solicitor privilege, a jealously guarded principle of fundamental justice. But the court also suggested it would be possible for Ottawa to draft a more carefully worded and fully constitutional law. Seven years later, Ottawa has yet to do that.
This has meant that lawyers are self-regulating when it comes to disclosing suspicious transactions. There is no oversight. It’s a loophole that has repeatedly been identified as an obstacle to fighting money laundering in Canada.
Most famously, a 2019 interim report from a commission looking into money laundering in British Columbia said bluntly that, “Lawyers are the ‘black hole’ of real estate and of money movement generally. With no visibility by law enforcement on what enters and leaves a lawyer’s trust account, many investigations are stymied.”
All of these failures leave the country falling behind in the battle against financial crime, instead of gaining ground.
Canada needs a mandatory and public beneficial registry that covers federal and provincial corporations, and it needs to find an effective way of preventing the abuse of law firm trust accounts, while respecting solicitor-client privilege.
This is a country known for a lot of things. Being an up-and-coming safe haven for criminal cash should not be one of them.
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