Canada: secrecy and dirty money haven
On May 26, a West Vancouver lawyer was found guilty of professional misconduct by a Law Society of B.C. disciplinary panel for allowing $26 million from unknown sources to flow through his trust account.
The panel found the lawyer ignored “a sea of red flags” and never asked the source of funds or where they were deployed. He admitted there was “risk involved” so he charged a tenth of one per cent of the amount, but did no legal work for the client.
This is how “money laundering” or “terrorist financing” can be easily accomplished in Canada. Lawyer’s trust accounts can be used to bypass the legal scrutiny of banks and of regulators, tax officials, or law enforcement agencies.
Canada has become a secrecy haven, and a leaky one at that
In Australia and Britain lawyers cannot do this. But in Canada this is a gigantic loophole and is the reason why Canada recently received a failing mark from the world’s watchdog into money laundering and terrorist financing — the Financial Action Task Force (FATF) launched by the G7 and United Nations.
“All high-risk areas (in Canada) are covered by … measures, except legal counsels, legal firms and Quebec notaries. This constitutes a significant loophole in Canada’s framework,” stated the FATF report on Canada.
Another major shortcoming cited was that Canada’s regulator who monitors flows of “suspicious” money into the country — FINTRAC (Financial Transactions and Analysis Center of Canada) — can only perform half the job. It reports unusual or suspicious amounts to law enforcement agencies, but cannot request additional information from reporting entities.
“FINTRAC receives a wide range of information, which it uses adequately, but some factors, in particular the fact that it is not authorized to request additional information from any reporting entity (RE), limit the scope and depth of the analysis that it is authorized to conduct,” stated FATF.
The result of this shortcoming is that Canadian police are increasingly being inundated with reports from FINTRAC about questionable flows of cash, or asset purchases, said a high-ranking police official, but are unable to do anything.
“FINTRAC provides suspicious transactions to us but without any evidence to go on. The increase is substantial. But there is no way law enforcement can look into something that has no hint of a substantive offence attached to it. Why don’t they audit the larger amounts and ask the sender/receiver questions about the source of the money? There should be a reverse-onus system where unaccounted, suspicious funds are seized pending a reasonable explanation?”
The result is there are few prosecutions, weak sentences, and few confiscations, said FATF. It added that the Canada Revenue Agency should also be routinely auditing charities for illicit capital flows, but does not.
Ironically, Canada led the world about 10 years ago by proposing legislation that required lawyers to do what banks and accountants must do.
But the same Law Society of B.C. that disciplined the lawyer in May successfully fought proposals through the court system for years.
On Feb. 13, 2015, the Supreme Court of Canada found the wording of the legislation breached the constitutional right to attorney-client privilege.
In April, Josée Nadeau, former Senior Chief, Financial Crime International for Finance Canada and now on temporary leave, said at a conference held by the Canada-U.S. Law Institute that when the Supreme Court rejected the proposed language, it encouraged rewriting the legislation.
“The Court did not say don’t apply again, but said redesign the requirements to be compliant,” she said. New provisions have not surfaced as of yet.
Clearly, this should be a priority as the flow of money from unknown sources soars, according to police sources.
It also seems unjust that the attorney-client privilege prevents lawyers from helping uphold laws, but not other professionals. Accountants, doctors, nurses, social workers or teachers are legally obligated to report abuse or criminality under the law.
“Requirements are inoperative toward legal counsels, legal firms and Quebec notaries,” said the FATF report. “In light of these professionals’ key gatekeeper role, in particular in high-risk sectors and activities such as real-estate transactions and the formation of corporations and trusts, this constitutes a serious impediment to Canada’s efforts to fight money laundering (or terrorist financing).”
Lawyers are able to deposit cash from unknown sources in their trust accounts then disperse these. They also provide anonymity through the creation of legal structures, nominees, trusts, or shell companies. The result is that Canada has become a secrecy haven, and a leaky one at that.
As long as anonymity is protected in Canada — a separate law enforcement problem — Canadians will not know where or who money is coming from, which is why provincial taxes on foreign buyers are useless in stopping the overheated real estate frenzy.
As recommended in the report, real estate agents, brokers, and developers should also face tighter government regulation.
Bringing the legal and real estate sectors to heel, banning anonymity and shell companies, giving FINTRAC more powers, and imposing a reverse-onus on foreigners bringing in scads of money would go a long way to ending the shady practices that have gone on for too long.
First published National Post July 14, 2017