Hidden Beneficial Ownership and Control: Canada as a Pawn in the Global Game of Money Laundering

Abstract

Official estimates of money laundering in Canada range from $5 billion to $100 billion. Offences such as drug trafficking, fraud, tax evasion, smuggling and corruption are fuelling the laundering of dirty money. While many methods and techniques may be used to hide ill-gotten gains from tax authorities and police, launderers often use corporations and trusts to co-mingle dirty money with legitimate funds to flow them through these entities’ bank accounts or brazenly use the entity to exclusively conduct illegal activities.

The “secret sauce” in this recipe is the creation of legal arrangements that hide the beneficial owner of the corporation, partnership or trust that exercises significant control over the entity. Indeed, with professional knowhow, complex structures can be created in Canada, or offshore, that will slow down or stop any intrepid investigator trying to connect the dirty money to the beneficial owner.

The focus of this Commentary is to show how the lack of beneficial ownership transparency facilitates the use of corporations and trusts for illicit purposes. At present, there are no requirements to disclose beneficial ownership when creating a corporation. Nominee shareholders and directors can be appointed without disclosing the ultimate beneficial owner or the nominator. For trusts, there are also no requirements to identify the parties when registering. As a result, Canada fares poorly on international standards for disclosing beneficial ownership. Lack of beneficial ownership transparency is not only a structural flaw in Canada’s corporate registration system (federally, provincially and territorially) and, consequently, in its anti-money laundering and anti-terrorist financing measures, but it paints Canada as an international laggard and as a financial-secrecy jurisdiction.

However, there now is a global momentum, led by the Europeans, to make beneficial ownership registries accessible to the public, and trusts under certain conditions, to more effectively address the threats posed by money laundering, terrorist financing, corruption and tax evasion.

This Commentary’s recommendations are for the federal government, in collaboration with the provinces and territories, to establish a central publicly accessible beneficial ownership registry of corporations and certain trusts; require all reporting entities under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to identify beneficial ownership information; place the onus on corporations and trusts to truthfully and fully disclose beneficial ownership information; and follow the European example by keeping Canada current with the international standards, commitments and trends on beneficial ownership transparency.

Keywords: Financial Services and Regulation

JEL Classification: G15; G28; H26