Canada’s Laws Leave Door Open for Money Laundering by LatAm Groups

This news brief was published at InSight Crime.

Recent reports highlight a loophole in Canada’s laws that could facilitate money laundering by Latin American crime groups, particularly if the United States and other countries take action to close similar gaps in their own financial regulations.

A December 2017 report by Canadian lawyer Mora Johnson suggests that Canada’s lax corporate registration laws are “out of step with global efforts to address money laundering and terrorism financing” because of the lack of transparency around who owns and benefits from these business transactions.

In Canada — as in many other countries where anonymous shell companies are being established, including the United States — private corporations and trusts are not required to disclose the “beneficial owner” or person who “owns, controls, or exercises ultimate effective control over [the] legal entity, arrangement, or property,” the report explains.

As a result, “privately held companies can easily be abused for tax evasion, for money laundering purposes and to stash the proceeds of crime,” Johnson recently told the Guardian.

This lack of transparency in turn makes it more difficult for law enforcement agencies and tax authorities to determine when these illegal financial transactions are taking place, according to an earlier report by Transparency International Canada. The anti-corruption group described shell companies as “financial getaway cars” that enable criminals to “vanish without a trace.”

“Since shell companies can be set up without disclosing who owns or controls them, it is difficult if not impossible for law enforcement to catch the perpetrators when an anonymized company is used to commit crimes,” Transparency International Canada reported.

Both reports suggest that stripping away anonymity and creating a public registry of beneficial ownership could help the Canadian government to more effectively detect, prosecute and deter financial crimes. Without these changes to the law, Transparency International Canada warns that the country could “risk becoming a beacon for the corrupt.”

In December 2017, a group of Canadian finance ministers took an initial step of pledging to increase “safeguards” against criminal misuse of companies and trusts, including a legislative measure that would require corporations to maintain up-to-date information on beneficial owners that could be turned over to law enforcement upon request.

Nonetheless, Canada lags behind many other countries in the G20 international forum, which agreed in 2014 to improve transparency around the ownership of legal entities.

InSight Crime Analysis

Canada’s clean image on the international stage and its lax laws surrounding anonymous shell companies may be making the country an increasingly appealing haven for financial crime, particularly as other countries begin to step up regulations.

Canada’s otherwise strong rule of law means that corporations registered there are less likely to attract scrutiny from authorities, making it an ideal place to launder money. As James Cohen of Transparency International Canada told the Guardian, “Canada is being sold through snow washing by foreign intermediaries, who are telling their clients that you can bring your illicit finances into Canada and they’ll be cleaned like the pure white snow.”

This image paired with Canada’s slow movement on regulating anonymous beneficial ownership as compared to other countries, may be shifting more illicit financial activity there. In recent years, Britain, Norway and Denmark have taken measures to create registries of business ownership, and major countries in the European Union agreed in 2016 to exchange information on previously secret business ownership.

Perhaps most significantly, the United States — thought to be the country with the most anonymously registered shell companies in the world — has begun considering measures to regulate beneficial ownership. The US House of Representatives and the Senate have both repeatedly introduced bills in recent years that would force companies to disclose ownership. So far, these measures have fallen flat and some analysts say that the administration of US President Donald Trump, who himself uses shell companies, is unlikely to sign it into law.

However, if the United States were to pass stronger regulations, the Latin American crime groups that currently exploit these US entities to launder millions of dollars each year may find themselves lured north to Canada.

As Transparency International Canada’s recent report suggests, “as more countries put up barriers to the criminal and corrupt, those looking to game the system will gravitate to jurisdictions with weaker standards … Canadian companies and trusts are particularly vulnerable to exploitation.”