The push to expose hidden flows of offshore Russian oligarch money has renewed calls to illuminate the darker corners of Western finance and politics.
In the political sphere, a series of extraordinary leaks have alerted the public to hidden money flows that have helped to fuel the rise of far-right politics. In 2016, documents released by the International Consortium of Investigative Journalists, known as the Panama Papers exposed the inner workings of the Panama City-based law firm Mossack Fonseca, which had created more than two hundred thousand shell companies that allowed clients to assemble vast fortunes from opaque sources. Among the discoveries, Putin’s banks and proxies had helped to elevate far-right politicians across Europe. Marine Le Pen and her party, France’s National Front, were later found to have received millions of dollars from Russian sources, partly funnelled through Cyprus. Ahead of 2017 parliamentary elections in Germany, the Russian government reportedly funded the far-right Alternative für Deutschland party— perhaps without the AfD’s knowledge—relying on middlemen to sell it gold at below-market prices.
But the most pernicious effects of dark money can be found not in the political sphere but within networks of Western financial institutions and professional firms. The West’s accommodation of dark money has accelerated the trend toward more opaque ownership structures and complex trusts aimed at evading taxes and laundering money. This is supported by a massive network of bankers, insurers, accountants, real estate interests, PR firms and lawyers scattered throughout the world’s advanced, capitalist democracies.
By some estimates, close to 20% of the Russia’s wealth is stashed in offshore jurisdictions like Cyprus, the Seychelles, the British Virgin Islands — even the United States and Canada.
Let’s focus on Canada.
It can’t be said enough. Money doesn’t just move and hide itself. In Canada, the flight of Russia’s wealth has been supported by our big banks, real estate interests and the Canadian outposts of a global industry of professionals (lawyers, accountants, consultants, etc.) who specialize in providing rich clients with shell companies, trusts and other secretive vehicles.
And those special interests have enormous political influence in Canada.
Last December, the Prime Minister’s Office (PMO) released letters mandating Finance Minister Chrystia Freeland, Industry Minister François-Philippe Champagne and Minister of National Revenue Diane Lebouthillier to establish a beneficial ownership registry for federally regulated corporations, a database that will store details about who ultimately owns and controls millions of private Canadian companies.
Although such a central repository of beneficial information is considered an essential tool to unmask oligarchs and other crooks who hide behind anonymous shell (including numbered) companies, the PMO neglected to include a crucial two-word stipulation in the final text of its cabinet directives.
Specifically, the PMO failed to instruct those cabinet ministers to create a “publicly accessible” beneficial ownership registry. This isn’t a trivial issue. The exclusion of that crucial proviso from their mandate letters marked a notable departure from the Liberal Party’s election campaign platform, and the language used in previous government statements.
They’re just two words, but without them, Canada’s forthcoming beneficial ownership registry will not be able to do its job.
So, what is a beneficial ownership registry and why is it so important?
In contrast to a “legal owner” – who holds legal title to a property or asset in his/her own name – a “beneficial owner” is an individual who possess certain benefits of ownership over a property or asset irrespective of appearing on its legal title. For example, individuals or groups of individuals who are not the legal owners of a corporation might directly or indirectly have the power to influence the actions of that company and may therefore be considered its beneficial owners. In general, legal ownership is recorded and easily determined by the government and/or law enforcement, while information pertaining to beneficial ownership is more difficult to collect or obtain.
Knowing who the beneficial owners are is crucial as the perpetrators of money laundering and/or terrorist financing often obscure their identities through the use of a shell corporation or other legal arrangements.
Under Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations Act’s regulations, a “beneficial owner” is the actual persons who directly or indirectly owns or controls 25% or more of entities such as corporations and trusts. Beneficial owners cannot be another corporation or entity; they must be a natural person.
So who is lobbying the Prime Minister’s Office and Finance Department to keep the proposed registry closed to the public? Many of the most powerful special interest groups in Canada, that’s who.
For example, appearing before a House Committee studying money laundering in late 2018, the Investment Industry Association of Canada (i.e. securities dealers) felt that a central registry was required, but that the public or private nature of the registry would depend on the government’s policy objectives. The Canadian Life and Health Insurance Association believe that the sensitivity of the information in such a registry may not be appropriate for the public at large, but allowing limited access for authorized reporting entities would reduce certain regulatory burdens placed on their industries. Furthermore, the Canadian Bar Association (i.e. lawyers) explained that any law that requires a lawyer to collect client information on behalf of the government undermines solicitor-client privilege and weakens the independence of the Association. However, witnesses informed the Committee that lawyers in other jurisdictions – such as the U.K – have AML/ATF reporting requirements for their non-litigious work. In addition, the Canadian Real Estate Association did not feel that the duty to collect beneficial ownership information should be extended to realtors. Finally, the Canadian Bankers’ Association supports the idea of a beneficial ownership registry and wants member banks to have access to the beneficial ownership information but doesn’t see any reason why the general public should have access to it.
The UK ‘s register of Persons with Significant Control
Clearly, the Canadian wealth protection industry does not want a beneficial ownership registry that is accessible to the public. But keeping beneficial ownership information from the public is not how they do it in the U.K.
In 2016, the UK became one of the first countries to create a public register of beneficial owners of companies. The UK register, called the register of Persons with Significant Control (PSC), has both demonstrated the feasibility of publicly accessible registers and set new standards in publishing the data as open data, allowing others to analyze the data in bulk.
The UK register has been pioneering and there is much that can be learned for others (including Canada) establishing public beneficial ownership registers.
The information on the register is made freely available by the UK’s Companies House both as a
searchable web interface as well as structured data in machine-readable format. Crucially, this data is available under an open data license which means that it can be reused by other organizations and individuals without any restrictions. Publishing the registry as open data allows journalists or civil society organizations to analyze the database as a whole, rather than just viewing each company individually. In November 2016 Global Witness, DataKind UK, OpenCorporates, Spend Network and OCCRP worked with 30 volunteer data scientists to undertake an initial analysis of the first 1.3 million companies that had submitted ownership data to the UK registry
This analysis allowed these organizations to identify signs of non-compliance with the law. For example,
9,800 companies listed their beneficial owner as a foreign company. This is possible if the foreign
company was listed on one of the stock exchanges deemed equivalent to the UK system (e.g. the US, EU
and Japanese exchanges). However, of these companies almost 3,000 listed their beneficial owners as companies with addresses in tax havens. This is not allowed under the rules.
Making the data publicly available can greatly enhance accuracy by allowing users of the data – be they private sector, civil society, or public sector – to review and report errors in the data. In the case of the UK public company registry, the UK’s Companies House confirmed that within the first six months they were following up on multiple contacts from the public highlighting inaccuracies in the data
A Made in Canada Solution
A reasonable approach to creating an effective beneficial ownership registry in Canada would start with the beneficial ownership information being publicly available. However, any beneficial registry (federal or provincial) should include some form of exemption that could be made by application only, to be decided by an objective process on a case-by-case basis. Government registrars should clearly inform the public, corporations and their representatives about any such exemption. Privately-held corporations with legitimate business confidentiality rationales could be permitted to have their beneficial ownership information exempted from public disclosure for a specific time period, for example, one or two years, after which it would be made public. Applicants would be required to provide evidence to support a business confidentiality application.
For beneficial owners concerned about harassment or protesters, a longer lasting, different type of exemption could be contemplated, perhaps modelled on the U.K. example.
It should be noted that on December 11, 2017, finance ministers from across Canada signed the Agreement to Strengthen Beneficial Ownership Transparency. The Agreement acknowledged “the misuse of corporations and other legal entities for tax evasion and other criminal purposes, such as money laundering, corruption and the financing of terrorist activities.” The ministers agreed “in principle” to amend their respective corporate statutes to, among other things, ensure that all closely held corporations provide up-to-date and transparent information regarding beneficial owners of the corporation
However, the provinces have been slow to implement this agreement for their provincially regulated corporations and as of this writing, none have made the beneficial information available to the public.
For example, Ontario is proposing legislative amendments to its Business Corporations Act to introduce beneficial ownership information requirements in 2023 – but the beneficial information will not be made available to the public.
The Ford government is proposing that privately held business corporations would be required to collect and maintain beneficial ownership information and make it available upon request to law enforcement, tax authorities, and certain regulatory authorities including the Ontario Securities Commission, Financial Services Regulatory Authority of Ontario, and the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
British Columbia is the only jurisdiction in Canada to make a beneficial ownership registry accessible to the public. However, the B.C. beneficial ownership registry that is publicly accessible is not its corporate registry but rather, its land registry.
Finally, the Quebec government has passed legislation to publish the ultimate beneficiaries of enterprises as part of its existing business registry, with the act expected to come into force in October 2022.
By way of background, European Union governments have grappled with balancing privacy against the benefits of greater transparency of beneficial ownership. Originally, the 4th Anti-Money Laundering Directive (AMD4) required governments to provide access to beneficial ownership information to those with a “legitimate interest,” but the 5th Anti-Money Laundering Directive adopted in 2018 now requires public access to national beneficial ownership registries for all EU members.
To be sure, creating a publicly-available beneficial ownership registry, such as the one in place in the UK, requires that Canadian legislators consider the many factors that might result in public disclosure infringing upon privacy in a manner that outweighs the public benefit. That said, the economic interests of Canada’s wealth protection industry must not be allowed to interfere with the creation of an effective vehicle for the unmasking of the Canadian assets of Russian oligarchs, Mexican drug cartels and corrupt family members of leading figures in the Chinese Communist Party.
Canada’s governments need to move quickly on establishing federal and provincial publicly-accessible beneficial ownership registries. The powerful forces behind dark money need to be stopped.