Why Canada should stop the use of phantom firms

Sasha Caldera is the Program Manager of the Beneficial Ownership Project at Canadians for Tax Fairness

This Halloween, there is a special type of ghost that should be unmasked: phantom firms. These secretive companies, also called anonymous shell companies, allow the people who own or control them (the “beneficial owners”) to keep their identities hidden. These ghosts are one of the main ways for corrupt individuals at home and abroad to hide and launder illicit money, and they are much too easy to set-up in Canada.

The Government of Quebec has just launched a public consultation on corporate transparency and announced its intention to make the identification of beneficial owners mandatory for companies. This is good news for the global fight against corruption.

According a conservative estimate by the RCMP, about $47 billion dollars is being laundered into Canada each year. Despite Canada’s traditionally positive reputation on the international stage, our country is increasingly criticized for ‘snow washing’ – cleaning dirty money like pure white snow. To date, Canada allows the true owners of companies, properties and trusts to remain anonymous. This loophole is often exploited by criminals to stash their illegally obtained wealth. Identity checks required to obtain a library card are more demanding than those to set-up a new company!

This is why a coalition of organizations has launched a campaign to put an end to snow-washing. The goal of this campaign is to push Canada to create a publicly accessible register that discloses the beneficial owners of companies. This would help journalists, whistleblowers, civil society organizations, tax authorities, and law enforcement here and abroad to access information relevant to corruption and capital flight. Businesses would benefit too. According to Ernst and Young, 91% of senior executives believe it is important to know the ultimate owner of the entities with whom you do business.

This issue matters for development. About $50 billion of illicit money is estimated to flow out of Africa each year. Every dollar lost to corruption is one that is not used to provide health services and send children to school. To tackle poverty, it’s essential to shut down conduits of domestic or foreign illicit cash that’s flowing anonymously into the Canadian economy or that’s being parked in Canada to evade taxes, finance terrorism and other criminal activities.

Access to a Canadian public registry would enable tax authorities in developing countries to track down corrupt foreign officials who may be laundering money in Canadian real estate. Tax authorities in developing countries often struggle with a lack of enforcement capacity, and a made-in-Canada beneficial ownership registry could enhance the ability of low-income countries to improve tax collection and investigate officials suspected of bribery and corruption.

Canada is behind and needs to catch up to its international peers.

Amidst global efforts to fight corruption, several of the world’s leading economies have created, or have plans to create publicly accessible company registers listing beneficial ownership information. Canada is one of the few G20 countries without any type of register! European Union (EU) member states are required to launch publicly accessible registers of beneficial owners by January 2020, and the United Kingdom (UK) government seeks to make public registers the global norm by the end of 2023. Just last week, the U.S. House of Representatives passed the Corporate Transparency Act of 2019 that would require companies to disclose their actual beneficial owners.

In 2016, the Financial Action Task Force (FATF) – a global watchdog group comprised of governments– rated Canada partially compliant and non-compliant with respect to beneficial ownership transparency. In 2018, Transparency International ranked Canada as having the weakest corporate transparency laws among the entire G20.

Experts have concluded that complex corporate and legal structures are used to hide illicit money in Canada, and that “enhanced beneficial ownership disclosure is the single most important regulatory improvement opportunity available.” They also recommended that a registry should be “transparent, public and easily accessible.”

There has been progress, but we are not there yet.

Since most companies in Canada are registered at the provincial level, the federal government along with provinces and territories made a general agreement to strengthen beneficial ownership transparency in December 2017. However, some provinces are leading the charge for specifically for registries. In addition to Quebec launching a public consultation on corporate transparency this past month, British Columbia recently became the first province to roll out a publicly accessible registry that lists beneficial owners of property.

These provinces are showing that sunlight is the best disinfectant to fight corruption. We hope that the Government of Quebec will go ahead with its intention to require the disclosure or the real owners in its public register of companies. Other provinces and the federal government should follow suit to shut down this loophole—people around the world are counting on Canada to do the right thing.

For more information on the campaign in Canada and to take action, visit #EndSnowWashing

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