Canada's Disclosure Laws -Haven for Money Laundering

Money laundering and corruption isn’t just a developing world issue. While the G7 countries already have numerous regulations and enforcement agencies to limit money laundering, there’s still multiple issues to fix. For example, Canada is only the 44th best on the Basel AML Index, and it was the best performing of the G7. One area that is drawing a lot of attention, especially since the Panama Papers, is beneficial ownership.

Recently, Transparency International released a report subtitled Unmasking the Anonymous Owners of Canadian Companies and Trusts. The report was highly critical of Canada’s regulations over the setup of companies and trusts and lack of beneficial ownership transparency; “[tweet_dis excerpt="In Canada, more rigorous id checks are done for getting library cards than for setting up companies — @anticorruption"]In Canada, more rigorous identity checks are done for individuals getting library cards than for those setting up companies.”[/tweet_dis]

When setting up a company or trust, there’s no ID verification on principle owners and few (if any) requirements for shareholder information or beneficial owners. Nominees can be named on documents, but don’t need to disclose that they are acting on someone else’s behalf, or disclose the third party. Similar rules apply to trusts and they don’t even have to register, or file, that they exist. There is speculation that millions of trusts exist in Canada and billions of tax dollars goes uncollected, but as the records are so vague, there’s no way to know.

Money Laundering Through Real Estate

Another major impact attributed to lax beneficial ownership rules is the exploding cost of real estate in Vancouver and Toronto. In Vancouver, the price of a house went up 37 percent in a year and that’s on top of already record prices. Transparency International looked at the records of the 100 most expensive homes in the region and 49 of them had some form of hidden ownership.

While other factors such as speculation and high demand are also in play, the fact that Fintrac found "significant" deficiencies at 468 Canadian real estate companies regarding anti-money laundering (AML) and counter-terrorist financing (CTF) controls, points to the problem. There’s lots of money at stake and weak protections;[tweet_dis excerpt="With weak protections, it's not surprising that money is laundered through shell companies and trusts. via @trulioo"] it’s not surprising that money is laundered through real estate via “layering” using shell companies and trusts.[/tweet_dis]

This issue is highlighted in an AML and CTF evaluation report (Sept. 2016) by the Financial Action Task Force (FATF) and the Asia/Pacific Group on Money Laundering (APG):

  1. Canadian legal entities and legal arrangements are at a high risk of misuse for ML/TF purposes and that risk is not mitigated. This is notably the case with respect to nominee shareholding arrangements, which are commonly used across Canada and pose real obstacles for LEAs (law enforcement agencies).

The report goes on to say:

  • Beneficial ownership information is more difficult to obtain … is neither verified nor comprehensive in all cases.
  • Authorities have insufficient access to information related to trusts.
  • LEAs have successfully identified the beneficial owners in limited instances only.

Disclosure Recommendations

To alleviate these high risk situations, both Transparency International and the FATF/APG have a series of recommendations. A commonality that runs through many items of both lists involves identifying the beneficial owner of financial dealings, whether it be a trust, company or real estate holding. Another common recommendation is for proper identification; it’s not enough just to name principles or beneficial owners, they must be accurately identified.

AML and CTF loopholes are serious concerns, enabling corruption and terrorist funding to further their nefarious activities. While most countries have put in many regulations and enforcement procedures, much work remains. Clarifying beneficial ownership structures, with proper identification, is a step that all countries should take.