The latest regulatory move to improve money-laundering regulations in Canada came in June 2019 when the federal government introduced new Beneficial Ownership Regulations under the Canada Business Corporations Act (CBCA).
Private federally registered corporations are now required to create and maintain a new and separate register, which shows individuals with significant control (ISC). There is no change for public or provincially formed corporations.
Organizations like Transparency International Canada are promoting greater transparency by advocating for a publicly accessed registry. They believe these new rules are a step towards Canada’s increasing transparency around beneficial ownership.
One of the most vocal and passionate advocates is James Cohen, the executive director of Transparency International Canada, part of an organization which operates in about 100 countries.
“No country is free from corruption. But our vision is a world in which government politics, business, civil society, and the daily lives of people are free from corruption. It’s a very bold ambition, but we need to at least strive for the bold.”
“We want to empower Canadians to find solutions to address the various issues of corruption in the country.”
Feds, provinces urged to address corruption
Transparency International has talked to the various provincial governments and the federal government about ways that they can address corruption.
Cohen points to the world’s first publicly accessible registry, the Companies House, which was set up in the UK.
Since then, the European Union has been catching up with its directive for money laundering (AMLD5) that came into effect and required all EU members to establish a public registry by 2020.
The UK also passed a bill that the overseas territories would also have a public registry. And there was the recent announcement that the Cayman Islands is now in favor of a public registry.
Cohen said Canada has a long way to go to catch up. He pointed out that shortcomings were outlined both by the Financial Action Task Force (FATF), and by Transparency International.
“We’ve had a number of comments within the budgets over the years that there would be movement and we’ve had some progress on AML.”
Push for beneficial ownership rules
“They did put out a comment that’s aligned with the Open Government Partnership that they would look at all options for a registry to adhere to beneficial ownership, including a public registry, which for us that was a big win – that they’re putting that on the books and willing to think about it.”
Cohen said the 2019 federal budget put some money towards anti money laundering with a focus on British Columbia. He was also pleased with the Canada Business Corporations Act (CBCA) requirement that all private companies have to keep beneficial ownership information on hand.
Cohen said in order for any federal registry to work, the provinces have to be onboard. He pointed to a working group between the finance ministers, which discusses AML issues and has had a number of meetings throughout the years.
“We’ve heard various things about how much leverage or how much credence they’re giving to the issue of beneficial ownership within finance talks. But we’re very happy to see this past summer (2019) that the ministers did come out of discussions saying they were going to keep pushing forward.”
Ministers discuss ownership registry
Former finance minister Bill Morneau talked about looking at the public registry, while the British Columbia finance minister challenged her fellow finance ministers across Canada to do more.
“There are still some issues with the legislation in place as it will not be fully publicly available. So all these issues discussions with the federal government and the provinces are a two-phased approach. The first phase was increasing the transparency around business registries and the federal government,” said Cohen.
“Phase two is meant to be the discussion about, what do we do about a (beneficial ownership) registry? There’s been differences of opinion. The Quebec government has already started public consultations, so there is momentum at the provincial level. We have two of the larger provinces on board. It’s a matter of bringing a number of the others on board as well.”
Cohen said their first study looked at 100 of the most valuable properties in the Vancouver area and found that in almost 50 per cent of the sales, nobody knew who the true owner was. Another 25 per cent were sales made through Canadian shell companies.
Media reported there were houses owned by people without any income – an issue dubbed the Vancouver model of money laundering.
Toronto a hotbed for money laundering
Focusing on Toronto, they took a much wider scope looking at 1.4 million real estate transactions from 2008 to 2018.
“We found out that $28.4 billion was acquired during that decade through corporations or through corporate entities. Some $25 billion of that included residential mortgages provided through unregulated lenders with no reporting obligations, versus $9.8 billion worth of cash,” he said.
Cash purchases by companies have risen steadily over the past decade, hitting a peak of 45 per cent in 2018.
“It wasn’t saying that all this money is bad, but it is a high-level warning to the Ontario government about the biggest real estate market in Canada. But at the end of the day there is no a silver bullet solution for addressing any type of corruption.”
Canadians may ask how this affects them. One way is through inflated property prices, Cohen stated.
Laundering pushes up house prices
The B.C. government report on the effects of money laundering and property prices found on average, prices went up at around seven per cent across the province.
“Money laundering is facilitated within Canada. It’s drug dealers and crooks and tax dodgers in Canada who are using the loopholes here. And the RCMP found that a majority of money laundering cases use beneficial ownership to purchase property anonymously,” said Cohen.
Cohen said Vancouver has a lot of money coming from China and through real estate and casinos. However, Cohen stated it is also mixed in with the fentanyl trade in Canada.
“The money has to be washed in some way, so it’s domestic crime, domestic tax dodging, international crime that come together.”
The C D. Howe Institute’s latest report estimated that $100 billion is laundered in Canada each year. They wrote that offenses such as drug trafficking, fraud, tax evasion, smuggling, and corruption are fueling the laundering of this dirty money. And they highlight that it’s the creation of legal arrangements that hide the beneficial owner of that corporation.
“This is about risk assessment. And it’s not to say that a corporation owning property is illegal or should be illegal. It’s about the risks that are in the loopholes to buy this property. And that’s what we want to close. And that was the warning sign,” he said.
“We’re trying to send to the government, both federally and provincially, that this is not just a Vancouver issue. Those are some of the issues affecting other ordinary Canadians.”
Involve law enforcement in registry
Cohen and his organization say a large piece of the solution would be the establishment of a publicly accessible registry of beneficial ownership in Canada accessible by law enforcement and others.
“We want it to be accessible by the public. So that means journalists, civil society, and concerned citizens can have access to it. It will be a corporate registry for beneficial ownership.”
“It must have a verification system as we wouldn’t want to have something where the data was useless.”
Cohen said they want to see nominees identify who they are ultimately working for.
Snow Washing money in Canada
Another issue that comes up related to money laundering in Canada is the use of the term ‘Snow Washing.’
“In the Panama Papers they described this to their clients as bring your money to Canada, as it will be cleaned like the pure white snow, because we have a lack of beneficial ownership rules. And, frankly, who thinks of Canada? Everyone thinks of some tropical islands for money laundering, but not Toronto or Vancouver.”
Cohen looks to the EU and its public registries as a testing ground for the issue.
“This is where European Union is going. This is where more countries are moving. We’ve been a laggard on this issue for long enough. It’s about time we play catch-up with the rest of the world. It’s good for business,” said Cohen.
They have called for a registry that includes a unique identifier number, full legal name, or other known names, partial date of birth, month, a year, a service, or correspondence address, and the nature and extent of interests held within a company.
Until a public registry is available in Canada, the best plan of action is to keep as much information on clients as possible – Know Your Customer – and the beneficial ownership of corporate entities.
Another way to back that up is to employ a solution such as Alessa, which helps determine whether any of your clients are on sanctions and watch lists and to perform enhanced due diligence. Alessa can help financial institutions screen entities both during onboarding and periodically, depending on the risk profile of the customer.