Efforts to Combat Snow Washing: Canada Moves Towards a Beneficial Ownership Registry

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(Disponible en français : Lutte au blanchiment à la neige : les premiers pas du Canada vers un registre des bénéficiaires effectifs)

Beneficial Ownership and Money Laundering

When a criminal activity generates substantial profits, the individual or group involved inevitably attempts to control those funds in a manner that avoids the attention of authorities. This activity is known as money laundering, which is an offence under section 462.31(1) of the Criminal Code and is broadly defined as disguising the source of money and/or assets that have been derived from criminal activity.

In many jurisdictions, including Canada, corporations are generally granted the same legal status as human beings. This means that, among other things, they can acquire assets, owe taxes, enter into contracts and be found guilty of crimes. Law enforcement and tax authorities naturally have an interest in who controlled the corporation during the commission of a crime or taxable activity. However, corporations can be the legal owners of other corporations – described as “shell companies” –  allowing for a complex web of ownership that can obscure the underlying owners of these entities. The legal owner of a corporation is the person or entity that owns at least 51% of the corporation’s voting shares.

A “legal owner” of an asset holds the legal title to that asset in their own name, while a “beneficial owner” possesses certain benefits of ownership even if they do not appear on its legal title. For example, someone who is not the legal owner of a corporation might directly or indirectly have the power to influence the actions of that company and may therefore be considered its beneficial owner. Notably, legal and beneficial ownership are not mutually exclusive categories.

Corporations can be convenient vehicles for money laundering activity since they offer the additional benefit of obscuring the owner’s identity. For example, a group of individuals derives their income from drug trafficking and wishes to obscure the source of their funds. They incorporate a business that traditionally operates in cash and deposit the criminal funds into the corporate accounts, claiming that the funds are legitimate earnings. They then pay themselves or their spouses a seemingly legitimate salary for “operating” the business. If these individuals obscure their ownership of the cash business through a chain of shell corporations, they may cease to be the legal owner of that business but remain its beneficial owner under Canadian law.

The International Movement to Beneficial Ownership Registries

In order to address the use of corporate entities as vehicles for criminal activities, the United Kingdom requires all companies operating in its jurisdiction to provide a government-run agency – Companies House – with certain information concerning the beneficial owners (also referred to as “persons with significant control”) of their company or partnership. Companies House then publishes much of this information on a public registry.

In May 2015, the European Commission adopted the Fourth Anti-Money Laundering Directive (AMLD4), that requires each member country to create a central registry of beneficial ownership information that, at a minimum, is accessible to competent authorities, financial intelligence units and other specified entities.

Corporate Ownership in Canada

A business operating in Canada can be incorporated federally under the Canada Business Corporations Act or under the provincial/territorial incorporation regime in which the business operates. Certain corporate information is collected and is made publicly accessible when a business is incorporated, including the names and addresses of the corporation’s directors. However, the directors of a corporation may not be its legal or beneficial owners. This corporate information is kept by the jurisdiction under which the incorporation took place. Therefore, there is no central registry, and generally, no beneficial ownership information is recorded.

Due in part to the lack of Canadian beneficial ownership information, recent media reports and pundits have dubbed Canada as a jurisdiction rife with “snow washing,” the act of laundering money through Canadian corporate structures. Anonymous corporate owners have also been linked to the foreign ownership of residential property in high-value markets such as Vancouver, which may contribute to the area’s abnormally high property values.

Canadian Efforts Towards Beneficial Ownership Registries

As announced on 11 December 2016, the federal and provincial ministers of Finance agreed to pursue legislative amendments to federal, provincial and territorial corporate statutes to ensure that corporations hold accurate and up-to-date information on beneficial owners, and that such information will be available to law enforcement, tax and other authorities. A number of such amendments were introduced at the federal level through Bill C-86, which received Royal Assent on 13 December 2018.

Effective mid-2019, most federally incorporated private businesses will be mandated – subject to certain privacy requirements – to create and maintain a list of their own beneficial owners, referred to as “individuals with significant control” (ISCs) and defined as those having directly or indirectly at least 25% of total share ownership or voting rights of the corporation.

Under this regime, beneficial owners cannot be another corporation or entity; they must be a natural person. Corporations will face fines of up to $5,000 for failing to take reasonable steps to ascertain, hold, and regularly verify the ISC’s names, dates of birth, latest known address, jurisdiction for tax purposes, when they became or ceased to be an ISC, as well as a description of their relevant control, interests and rights. Corporate directors will be personally liable for fines up to $200,000 and/or imprisonment for a term not exceeding six months should they knowingly contravene or permit the contravention of these requirements, as will the shareholders should they fail to accurately, completely and promptly fulfill the corporation’s requests for such information.

While these changes do not create a central registry of beneficial information, corporations will be required to disclose information held within their own registers upon request to an individual appointed by the Minister of Industry. In addition, the current measures do not address requests for information by law enforcement or tax officials, as is the case in the European model. In general, these measures appear to lay the groundwork for future developments in these areas, as the federal government awaits matching provincial/territorial actions.

Author: Brett Capwell, Library of Parliament

Categories: Business, industry and trade, Law, justice and rights

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