The Panama Papers

In early May 2016, the International Consortium of Investigative Journalists released what became known as the Panama Papers — 11.5 million documents that detailed the use of more than 214,000 offshore entities created primarily by a Panamanian law firm as a means for wealthy individuals and corporations to avoid paying taxes in their home countries.

Many famous international political figures, athletes and entertainers were named in the papers. The release of the papers shone the spotlight on the issue of offshore shell companies and the question of whether the wealthy have ways to avoid the annual April misery that ordinary, law-abiding taxpayers must submit to.

Easier Than Getting a Library Card

It’s impossible to assess how much tax is avoided each year, but it’s safe to assume the total is at least in the hundreds of billions of dollars.

Although not a perfect measuring stick by any means, a U.S. study conducted almost a decade ago took aim at determining the cost to the world’s most powerful nation. Demos, a public policy organization based in New York City, concluded that the U.S. government lost $305 billion to tax evasion in 2010 and $3 trillion over the previous decade. “Tax evasion also costs state treasuries billions of dollars,” Demos said. “Every tax filer will pay an extra $2,200 in 2010 to make up for the funds lost to tax cheating. Even modest success in reducing tax evasion would free up significant new resources for spending or deficit reduction.”

Just a month before the Panama Papers surfaced in 2016, the Canada Revenue Agency announced new measures to combat offshore and domestic tax evasion. It was perhaps inspired to do so by a 2016 Statistics Canada report that found nearly $45.6 billion was lost to tax cheating. A 2019 CRA survey reported that 20% of respondents believed the benefits of tax cheating outweighed the risks. Thirteen percent were classified as “outlaws” who believed tax evasion was “no big deal.”

“Most middleclass Canadians pay their fair share of taxes, but some wealthy individuals avoid taxes by hiding their money in offshore tax havens,” stated a CRA news release. “This is not fair and it needs to change. These wealthy Canadians should not be able to buy their way out of paying the income tax that they owe.” Consequently, National Revenue announced it would invest more than $444 million to enhance the CRA’s ability to detect, audit and prosecute tax evasion at home and abroad.

The focus of the release was on combating offshore tax evasion. But a recent report took Canada to task for its failure to clamp down at home, especially regarding the establishment of secretive corporate entities.

“How many shell companies exist in Canada? How many legal trusts? Who are the beneficial owners protected by such unnecessary veils of secrecy?” These questions were posed in a 2016 article in The Tyee, a B.C. online news magazine. It was responding to a study on the topic by Transparency International (TI), the global coalition against corruption.

“No one knows, because in most cases there is no legal requirement to disclose actual ownership even to regulators,” The Tyee said. “In fact, more information is required to get a library card than to set up a company in most jurisdictions in Canada. What we do know is that Canada ranks near the bottom among our OECD partners in terms of corporate disclosure requirements to fight money laundering and tax evasion.”

Millions of legal trusts are estimated to exist in Canada, the publication noted, but there is no way of knowing since there is no requirement for them to be registered or to file any record of their existence. They are supposed to file information on assets and trustees with the CRA but only a small fraction actually do this.

“A trust is the consummate legal black box,” The Tyee said. “Considered a mere private contract under Canadian law, trusts do not need to keep records on beneficial owners, let alone file such documents with the federal government. To our international embarrassment, the Financial Action Task Force [a global anti-money laundering initiative] found in 2016 that Canada was less than fully compliant in 29 out of 40 anti-money laundering measures and ‘non-compliant’ regarding transparency and beneficial ownership of such legal arrangements.”

The Tyee’s reporting was inspired by TI’s 2016 study, No Reason to Hide: Unmasking the Anonymous Owners of Canadian Companies and Trusts, which called anonymous companies and trusts the “getaway cars of financial crime.”

Canada’s Principles Weak

In 2014 TI said that the G20 countries agreed to 10 principles “to tackle corporate secrecy, such as pledging to ensure that all companies and trusts in their jurisdiction identify their beneficial owners and make that information available to law enforcement and tax authorities.” TI found that Canada’s performance, however, was either “weak” or “very weak” in seven of the 10 G20 principles.

TI pointed out that in September 2016, the Financial Action Task Force “published an evaluation of Canada that was highly critical of the secrecy it affords to legal entities and arrangements. The task force called on the government to make beneficial ownership information accessible ‘as a matter of priority.’”

TI called Canada one of the easiest places in the world to set up a company. “All you need is a few hundred dollars, an address and someone to appoint as a director. There is no need to show documentation to prove who you are, and you are free to list other people — nominees — as the company’s directors or shareholders. In all but two provinces — Alberta and Quebec — companies are not required to identify their shareholders.”

To underline Canada’s dismal track record when it comes to allowing corporate secrecy, a study of 60 countries identified Canada as one of the easiest places to set up an untraceable company, just ahead of Kenya and a few U.S. states. Even compared to what many would perceive as the classic tax havens — Switzerland, Belize, Panama — Canada fared far worse.

The study was dubbed the Dodgy Shopping Count by a team of researchers working with Jason Sharman, an international relations professor at the University of Cambridge and co-author of Global Shell Games, among other books.

Sharman and his team tested how compliant countries were with international regulations governing the transparency of companies. According to Maclean’s magazine, “The researchers approached 3,700 firms that provide shell companies across 182 different countries via more than 7,400 emails, posing as both low-risk clients (the ‘placebos’ in their experiment) and potentially high-risk individuals — money launderers, corrupt officials and terrorist financiers. (For instance, for the latter they claimed to be residents of one of four nations associated with terrorism and working in Saudi Arabia for an Islamic charity.)”

Sharman’s team discovered that firms in developed countries such as the UK, Australia, the U.S. and Canada “were three times worse at enforcing transparency rules — such as requiring proper identification — than developing countries and widely-recognized tax havens,” Maclean’s said.

Sharman told the magazine that an Ontario firm was approached by someone from his team using a fake name and fake identity through email. “He was never asked to prove his identity with a copy of his passport,” he said. “Instead, he was told to type in the name of the shell company he wanted to set up on the firm’s website, and that the firm would take care of the rest. All he had to do was send the money.”

Nearly two-thirds of the Canadian lawyers and incorporation agents who responded to emails from Sharman’s team members were willing to set up a company for them and act as their nominee, TI said in its report. “As a testament to the secrecy afforded in Canada, the law firm at the center of the Panama Papers leak, Mossack Fonseca, marketed Canada to its clients as an attractive place to set up anonymous companies.”

The professor posited a major reason why Canada has a reputation around the world as a safe haven for those wanting to establish secretive corporate entities. “The thing about Canada that makes it attractive to criminals, ironically, is that it’s not associated with criminality,” he said.

Sharman also surmised that Canada’s enthusiasm for deregulation made it easier for entrepreneurs to set up small companies that could hide their wealth. Canada, he added, was extremely efficient. “If you’re looking to set up a company in China, it takes three to six months. In Canada, it’s a matter of days.”

Among its key recommendations for change, TI suggested a low-cost first step would be to require all Canadian companies and trusts to declare beneficial owners and publish this information on a searchable public registry.

It also called on the federal government to work with the provinces to establish a central registry of all companies and trusts in Canada, and their beneficial owners. The registry should be available to the public in an open data format.

As Maclean’s rightly pointed out, there are legitimate reasons for setting up a secretive shell company. However, it added that international transparency rules are in place to deter those who are engaged in illegal activity from doing so. Perhaps the words of Denis Healey, UK Chancellor of the Exchequer in the 1970s, should also be taken to heart: “The difference between tax avoidance and tax evasion,” he said, “is the thickness of a prison wall.”

From Uncovering Fraud: True Stories About Fraud, Fraudsters & How They Got Caught by David Malamed, edited by Paul McLaughlin. This column was first published in April 2017.