The use of anonymous shell companies and trusts to hide the connection of illicit funds to their owners is a common money laundering technique.

It should come as no surprise that two Canadian women were acting as nominee directors for more than 200 companies they had little or no knowledge about, in the CBC article “How 2 Canadians named in Panama Papers led nearly 200 companies they claim to know nothing about”. In many instances, real estate is purchased through such companies without the due diligence by the gatekeepers that facilitate such transactions, such as the lawyers, accountants, and real estate professionals.

A 2016 study by Transparency International on land title records found that almost 50 most valuable residential properties in Greater Vancouver are held through structures that hide their beneficial owners. About a third of the properties are owned through shell companies, while at least 11% have a nominee listed on the title. This sort of practice is merely the tip of the iceberg.

Starting from the basics, the term beneficial owner is not currently defined in Canadian law. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) also does not define beneficial ownership but does provide for the type of information that should be collected as due diligence.

The Financial Actions Task Force (FATF), an inter-governmental organization that sets global standards on anti-money laundering and terrorism financing, defines a ‘beneficial owner’ as “…the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement”.

In the absence of the capability to access beneficial ownership information, qualifying entities are challenged to obtain independent assurance on the ultimate owners of corporations and trusts. They are required to take reasonable measures in compliance with Canadian anti-money laundering regulations to determine beneficial ownership, including self attestation by authorised officers of the company where information is unavailable, obtaining copies of share certificates, trust deeds, shareholders’ agreements or a legal or accounting opinion confirming beneficial ownership. This process, if not automated, causes significant friction in terms of inefficiencies in the corporate onboarding process.

Canada has made numerous international commitments to make the ownership of corporations and other legal entities more transparent, including committing to fully implement the ‘G20 High-Level Principles on Beneficial Ownership Transparency’. However, the Financial Action Task Force (FATF) Mutual Evaluation Report in Canada issued in September 2016, cautioned of a lack of progress on beneficial ownership transparency.

Existing laws and regulations do not require legal entities to file information on beneficial ownership with the government. There is also no requirement for a nominee shareholder to declare to the company if they own shares on behalf of a third person and shareholders are also not legally obliged to inform the company regarding changes in share ownership.

The information in corporate provincial registries does not provide the capability to verify beneficial owners. Typically, registration information in most provinces is limited to names of directors and their address only.  Since there is no requirement to ensure changes in directorships or ownership are made on a timely basis, the information is often inaccurate and outdated. Further, for a trust entity, there is no requirement to register trusts or retain records of the beneficiaries of the trust.

While the anti-money laundering regulations include lawyers as a designated non-financial business and profession, the Supreme Court of Canada has decided that this provision is unconstitutional, on the basis that it interferes with the lawyer’s duty to keep client information confidential.

So, how could the True North address this predicament?

Canada is structured as a federated organization. Therefore, the federal government should begin by advocating verifiable information standards for beneficial ownership at provincial corporate registries and support the development of a legal framework to enable provincial corporate registries appropriately share access to data in real time, while ensuring the privacy rights are not compromised.

The information standards held at the provincial corporate registries should include, at a minimum, an individual owning or controlling, directly or indirectly, more than 25% of the shares or voting rights in a company, or who has an ability to exercise dominant influence or control over a company.  Where it is not possible to establish the ultimate beneficial owners of a company and/or there are no individuals who meet these threshold ownership requirements, the name and details of the directors or the chief executive officer of the company should be disclosed.

The information at corporate registries must also include verifiable and protected information such as Name, Date of Birth, Nationality, Residential Address, and a statement of the nature and extent of the interest held by the beneficial owner.  The register must also include details of the date on which the individual was first added to the register as a beneficial owner and the date on which the individual ceased to be a beneficial owner.

The UK recently published the world’s first fully open register of beneficial ownership and other countries like France, Ireland, Netherlands and Norway have made great progress.

Having said this, following Panama papers, high-profile corruption and complex tax evading schemes, initiatives are well underway for establishing an international standard for beneficial ownership data that will catalyze the development of an open global beneficial ownership register.

Here in Canada, some of the notable government initiatives underway include the formation of DIACC: “Founded as a result of the Federal Government’s Payments Task Force Review, the Digital Identity and Authentication Council of Canada (DIACC), a coalition of members of the public and private sector, collaborate to develop a Pan-Canadian Trust Framework of standards for a digital identity ecosystem. These Canadian standards are being developed to address the identity and authenticity of people, organizations, and relationships.” The President of DIACC, Joni Brennan said.

On March 22, 2017, the federal government announced in its budget that it will work with the provinces “to implementing strong standards for corporate and beneficial ownership transparency that provide safeguards against money laundering, terrorist financing, tax evasion and tax avoidance…”.

The benefits of transparency in beneficial ownership are immense – governments will be able to pierce the corporate veil, there will be greater transparency in the public and private sector procurement process, companies will be able to perform more effective due diligence on their customers and suppliers and it will greatly enhance investigations and keep check of injustice in our society.

Through sustained collaborative efforts to address these challenges, Canada can take a lead in North America to support a more trustworthy global digital economy.