How offshore banking is costing Canada billions of dollars a year
An unprecedented leak of secretive offshore tax-haven data contains stunning new revelations about the diversion of wealth from government coffers to hidden bank accounts.

Thestar.com
April 4, 2016
By Robert Cribb Foreign and Marco Chown Oved

The hidden identities of 350 Canadians with offshore tax haven investments have been revealed in the private database of one of the world’s leading shell company registration firms, according to a Toronto Star analysis of a massive leak obtained by the International Consortium of Investigative Journalists and the German newspaper Suddeutsche Zeitung.

Obscured by figurehead directors, untraceable money transfers and anonymous company ownerships, these Canadians paid for the secrecy promised by Mossack Fonseca, a Panamanian law firm renowned internationally for establishing shell companies.

Much of this is perfectly legal. For some international business transactions, offshore company registration is a logical choice. And there are international laws and treaties facilitating the legal flow of money into tax-friendly jurisdictions.

But it comes at a tremendous cost to the public interest.

Currently, Canadians have declared $199 billion in offshore tax haven investments around the world, according to Statistics Canada.But experts say that figure is a small fraction of the Canadian offshore wealth that goes undeclared.

The precise annual cost to Canadian tax coffers is unknowable. But credible estimates peg Canada’s tax losses to offshore havens at between $6 billion and $7.8 billion each year.

Tax avoidance - the legal movement of wealth to offshore bank accounts in order to minimize tax burdens - is a grey area. But there is a much darker element.

Terrorist financing, money laundering and corruption are among the byproducts of offshore secrecy. The leaked records reveal a pattern of covert manoeuvres by banks, lawyers and companies concealing suspect transactions or manipulated records in ways that facilitated illegality.

“These findings show how deeply ingrained harmful practices and criminality are in the offshore world,” said Gabriel Zucman, an economist at the University of California Berkeley and author of The Hidden Wealth of Nations: The Scourge of Tax Havens who was briefed on the details of the leak.

In the largest media collaboration ever undertaken, more than 370 journalists working in 25 languages dug into 11.5 million documents that revealed Mossack Fonseca’s inner workings and traced the secret dealings of the firm’s customers. The more than 100 news organizations involved shared information and hunted down leads generated by the leaked files using corporate filings, property records, financial disclosures, court documents and interviews with money laundering experts and law-enforcement officials.

The Toronto Star and the CBC/Radio Canada are the only Canadian media with access to the records, which include detailed client information such as emails, legal letters, correspondence, financial spreadsheets, corporate records and passport images of clients.

In the days to come, the Star will detail the hidden corporate network behind a Canadian art maven who was once the toast of London society; a Toronto-based firm fighting to lift the corporate veil that masks the ownership of a Modigliani masterpiece alleged to have been looted by the Nazis; and a Dubai-based Canadian lawyer who provided legal services to nearly 900 companies establishing themselves in tax havens, including three tied to violence in Syria.

The documents also show Mossack Fonseca considered Canada itself a potential tax haven, marketing the country as a place to incorporate anonymous companies.

While secrecy facilitates criminality, most of those in the database are simply taking advantage of a sieve-like tax system that encourages wealthy Canadians to put their assets in offshore tax havens because they can bring the money home tax free.

“Don’t confuse money laundering and corruption with tax planning,” said Martin Kenney, a Canadian lawyer who specializes in tracking down dirty money through webs of offshore corporations.

“A businessman can keep investing and reinvesting profits in different parts of the world and stack profits up in a BVI vehicle,” said Kenney, who is the brother of Jason Kenney, the former federal cabinet minister. “It’s tax efficient. It’s not unlawful. It’s not tax evasion. It’s lawful tax avoidance.”

The Royal Bank of Canada and its subsidiaries account for 378 shell companies registered in the Mossack Fonseca data. An RBC spokeswoman said the bank has an extensive due diligence process “to ensure we understand who the client is and what their intentions are,” and added that “if we have reason to believe a client is seeking to commit a criminal office by evading taxes, we would report the offence and not do business with the client.”

The diversion of wealth from government tax coffers in countries such as Canada, Britain and the United States into secretive bank accounts in tax havens is tolerated and even encouraged by the law.

But that isn’t the best measure of legitimacy, said James Henry, former chief economist with the consulting firm McKinsey and now a fellow at Columbia University and Yale.

“Just because it’s legal doesn’t make it right. Slavery was legal. Child labour was legal,” Henry said. “There’s no social purpose whatsoever. It’s just the most outrageous fraud on the treasury. Why the people involved in this don’t think it’s wrong is a wonder to me.”

The offshore system relies on a sprawling global industry of bankers, lawyers, accountants and other middlemen who work together to protect their clients’ secrets. And the financial industry spends millions of dollars lobbying for their preferred tax regulations, experts say.

For Canada that means lost billions each year to tax havens, says Murray Rankin, former finance critic for the NDP.

“(That is) money that we could use to support our frayed health care system or to provide services to our veterans or seniors - services Canadians rely on,” he said. “Every cent that isn’t paid by those people who put money offshore is money that you and I have to dig deeper with higher tax rates in order to keep schools and hospitals open.”

New Finance Minister Bill Morneau has committed additional resources to tracking down offshore tax evaders.

“Our government is engaged in international efforts to combat tax evasion and aggressive tax planning,” Morneau’s spokeswoman, Annie Donolo, wrote in an emailed statement. “We will continue to strive for a tax system that instills confidence for Canadian families, and protects the revenue base.”

In last month’s federal budget, Ottawa committed $88.8 million per year to crack down on tax evasion and avoidance, and expects to recoup $520 million every year in revenues.

Expert critics are skeptical.

“We have a tax system that is totally unfair and incapable of being administered in any kind of a coherent fashion,” Allison Christians, chair in tax law at McGill University, said. “Money goes wherever it wants and guess what? It wants to go where there is no tax.”

The government’s attempts to tinker with tax collection aimed at recovering Canadians’ offshore income amount to “tilting at windmills,” she says.

“We know we can’t succeed.”

The federal government does not calculate the “tax gap” - the difference between what is owed in taxes and what is actually collected. The United States, the United Kingdom, France and 16 other countries in the Organization for Economic Co-operation and Development use this measure to evaluate tax policy and target tax evaders, but calls for the Canada Revenue Agency to follow suit have been rejected.

Globally, governments are losing an estimated $190 billion each year to the problem.

The OECD has been nudging countries to enhance transparency and companies to report global income. But practical solutions have remained elusive.

Many say it’s time to drop the hammer on tiny offshore nations that lure wealth from the countries where it is earned.

“I believe that we need to confront this as a political issue, not a technical one,” said Alain Deneault, a sociologist at the University of Montreal who has written extensively on Canada’s history with tax havens. “We must take this by the horns and legislate against the tax havens, treating them as adversaries, not allies.”

The story of Mossack Fonseca is, in many ways, the story of the offshore financial system itself: cloaked in secrecy, protected by confidentiality and ready to adapt when scandals erupt.

The Panama-based law firm has grown from a small 1970s partnership between Jurgen Mossack and Ramon Fonseca into one of the world’s leading incorporators of shell companies.

With more than 500 employees and collaborators in more than 40 offices around the world, MF has registered more than 200,000 offshore entities connected to people in more than 200 countries and territories.

“Together,” Fonseca said in 2008, “we have created a monster.”

A leak of more than 11.5 million of the firm’s internal records, spanning almost 40 years, reveals a company whose clients have been involved in arms trafficking, the trade in African blood diamonds and bribery for international sporting events. Dubious clients of all stripes are attracted by the firm’s expertise in complex structures that make it hard for tax collectors and law enforcement to track money across borders.

Mossack Fonseca denies that it provides structures designed to hide the identity of owners, calling the allegation, “completely unsupported and false.”

Though the firm publicly says it “conducts exhaustive due diligence to verify the legitimacy of each our clients” and says it would never work with political grafters, criminals or other shady characters, the firm’s internal records paint a different picture.

An analysis by ICIJ found, for example, that Mossack Fonseca has worked with at least 33 companies and people blacklisted by U.S. authorities because of their links to terrorism, narcotics trafficking or because they aided rogue regimes such as North Korea or Iran.

Mossack Fonseca said it “does not foster or promote unlawful acts” and has “never knowingly allowed the use of our companies” by individuals working with sanctioned governments. In most cases, the obligation to vet customers belongs to the banks, law firms and intermediaries that are the link between the Panama firm and the owners of their shell companies, it said.

The firm responded to questions raised by ICIJ’s findings saying that “for 40 years Mossack Fonseca has operated beyond reproach ... Our firm has never been accused or charged in connection with criminal wrongdoing.”

Spokesman Carlos Sousa said that the firm “merely helps clients incorporate companies.”

That doesn’t amount to “establishing a business link with or directing in any way the companies so formed,” Sousa said.

Until recently, Mossack Fonseca has largely operated in the shadows. But it has come under growing scrutiny as governments have obtained partial leaks of the firm’s files and authorities in Germany and Brazil began probing its practices.

In February 2015, German newspaper Süddeutsche Zeitung reported that German law-enforcement agencies had launched a series of raids targeting one of the country’s biggest banks, Commerzbank, in a tax-fraud investigation that authorities said could lead to criminal charges against Mossack Fonseca employees.

In Brazil, the law firm has become a target in a bribery and money laundering investigation dubbed “Operation Car Wash” (“Lava Jato,” in Portuguese), implicating former president Luiz Inacio Lula da Silva and current President Dilma Rousseff.

In January, Brazilian prosecutors labelled Mossack Fonseca a “big money launderer” and announced criminal charges against five employees of the firm’s Brazilian office for their role in the scandal.

Mossack Fonseca denies any wrongdoing in Brazil.

But in March, the growing Brazilian scandal pushed Ramon to resign his position as adviser to Panamanian President, Juan Carlos Varela. He stepped down, he said, “to defend my honour and my firm and my country.”

In his spare time, Fonseca has penned several award-winning novels. Among his books is Mister Politicus, a political thriller that, his literary website says, “articulates the tangled processes that unscrupulous officials use to gain power and achieve their detestable ambitions.”