Pandora Papers: ‘This is a global network of which Canada is a hub’

The Pandora Papers, the latest leak of offshore financial records, don’t seem to have a particular focus on Canada — at least based on what has been revealed so far.

But they nonetheless shed light on a global network of illicit financial flows of which “Canada is a hub,” says James Cohen, executive director of the Canadian chapter of Transparency International.

The nearly 12 million documents from 14 offshore services providers offer more detail on how the wealthy can shelter their money from the prying eyes of tax authorities and law enforcement.

The document dump, obtained by the Washington, D.C.-based International Consortium of Investigative Journalists, a network of reporters and media organizations, follows the Panama Papers and the Paradise Papers leaks.

2:09 Pandora Papers: White House says Biden administration committed to ‘additional transparency’

Here are some key questions about how the wealthy hide their money and what the practice means for Canada:

No, it isn’t. It is perfectly legal for Canadians to have financial accounts and assets abroad.

“Canadians and others are allowed to put their money where they want,” says Michael Smart, an economics professor at the University of Toronto.

There are plenty of legitimate reasons for holding funds and assets outside of one’s country of residence, such as doing business and investing abroad or simply owning a vacation home abroad, for example.

But offshore financial systems can be a way to shelter wealth from tax and law enforcement authorities.

“It can be very difficult for the Canada Revenue Agency and the other national tax authorities … to know what’s going on there, know how much tax should be paid at home on the amounts that are flowing through those places,” Smart says.

At issue is both tax evasion and tax avoidance, says Andre Lareau, a law professor at Universite Laval. The first involves breaking the law. Tax avoidance is a murkier concept. It generally involved minimizing one’s tax burden in ways that are within the letter but not the spirit of the law, Lareau says.

In 1988, Canada added a “general anti-avoidance rule” to the Income Tax Act that has served as the reference point to draw the line between acceptable strategies to minimize tax and tax avoidance, which abuses the law, Lareau says.

0:35 ‘Pandora Papers’: UK’s Boris Johnson, Jordan’s King Abdullah comment on financial leak

The term “offshore” originates from some of the small island countries that have become famous for being tax havens. Some of the financial services providers involved in the Pandora Papers leak, for example, operate in the British Virgin Islands and Cyprus.

But the latest leak makes it clear that offshore locations aren’t the only place where the wealth can set up opaque financial structures.

“One revelation already coming out of the Pandora Papers is that South Dakota is a very prominent jurisdiction for anonymous companies to be incorporated,” Cohen says.

And in 2016, the Panama Papers revealed Canada itself is a tax haven for some. The country’s pristine international reputation and lax anti-money laundering regime have made it an especially attractive destination for criminals looking for a place to park their funds, Cohen says.

It takes money to hide your money. Circumventing taxes and investigators usually requires sophisticated legal and tax strategies.

“The root of the problem are tax advisors,” Lareau told Global News. While Canada has monetary penalties for tax pros who help clients perpetrate tax fraud, it should introduce jail sentences for added deterrence, he argues.

2:21 Panama Papers: Names of hundreds of Canadians released

Whether or not the account is actually “offshore,” sheltering wealth usually involves setting up complex financial structures that make it difficult to figure out who ultimately owns what.

“You have Company 123 owned by Company ABC owned by Company QWR and then behind that, there’s finally Bob, who owns 25 per cent … or more of that company,” Cohen says, giving an extremely simplified example.

“Who is Bob? Where did Bob get that money from?” he asks.

While financial institutions have an obligation to address that question and verify who they’re really doing business with, it wasn’t until June of this year that Canada introduced similar requirements to others, including tax advisers and real estate agents.

But even with stricter rules in place, it can often be difficult for private-sector entities to assess who really owns what, Cohen says.

That’s why Canada needs a publicly searchable registry of beneficial ownership, he adds.

In 2019, British Columbia created a publicly searchable registry of information about beneficial ownership of land in the province. Quebec, meanwhile, now requires beneficial ownership to be reported in its existing corporate registry.

In its 2021 federal budget, the Liberal government announced $2.1 million to support the creation of a public corporate beneficial ownership registry by 2025. And during the federal election, the Conservatives, NDP and Greens also called for the creation of a similar database to help tackle tax dodging and money laundering.

And it’s crucial that any such registry be publicly available, Cohen says.

“We can say, ‘Let’s put more money into the RCMP and CRA,’” he says. “But at the end of the day, we look at the Pandora Papers and the Paradise Papers and the Panama Papers. These were journalists and civil society groups that are digging through the data to find out who is involved faster than even the authorities can work through that data.”