With increasing spotlight being shone on the prevalence of financial wrongdoing worldwide - especially following revelations arising from information leaks such as the Panama Papers and the FinCEN Files, and increased risk given business disruptions and monetary activity associated with the COVID-19 pandemic - corporate transparency is increasingly front of mind for governments and international watchdogs. The Canadian government, often a target for those who say it is not doing enough to fight white collar wrongdoing, appears to be responding to calls to action. In its Annual Budget released April 19, 2021 (the Budget), the Government of Canada announced the implementation of a beneficial ownership registry for corporations in Canada. The Budget proposes to provide $2.1 million over two years to Innovation, Science and Economic Development Canada to build and implement a publicly accessible corporate beneficial ownership registry by 2025 in order to better "catch those who attempt to launder money, evade taxes, or commit other complex financial crimes"
Money laundering, corruption and beneficial ownership in Canada
Canada's anti-money laundering (AML) regime, authorized under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the PCMLTFA) and administered by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), includes, among other things, rigorous client identification requirements commonly referred to as "know your client" rules or "KYC". These rules include the collection of beneficial ownership information of companies with which regulated entities do business. A "beneficial owner" is the real person (i.e., not a corporate vehicle) that ultimately owns, controls or benefits from a company or trust and the income it generates. In the AML context, beneficial ownership information is used to prevent the abuse of corporate vehicles for money laundering or other criminal purposes.
Beginning June 1, 2021, all regulated entities subject to obligations under the PCMLTFA will be required to obtain and take reasonable steps to confirm the accuracy of beneficial ownership information when conducting mandatory KYC checks - a requirement that was previously limited to certain sectors. However, even under the new rules, it is entirely incumbent upon these regulated entities to collect and attempt to confirm beneficial ownership information, and regulated entities may have limited recourse when attempting to acquire beneficial ownership information. A publicly accessible beneficial ownership registry would provide a significant additional tool for regulated entities to draw upon for their KYC compliance, while substantially boosting beneficial ownership transparency in Canada's efforts to combat money laundering.
As stated above, Canada has faced significant criticism in recent years for its perceived lack of enforcement over both money laundering and related corruption. Transparency International has referred to Canada's "notorious reputation" for allowing bad actors to easily "hide dirty money and fund illegal activity from abroad" - a process known as "snow-washing". The leak of the Panama Papers beginning in 2016 revealed significant money laundering in Canada through shell corporations.1 In May 2019 British Columbia established the Commission of Inquiry into Money Laundering in British Columbia (the Cullen Commission) to determine where and how money laundering is taking place in the province, why it has been allowed to happen, and whether and how it can be prevented. Hearings are ongoing. A 2020 report by the Criminal Intelligence Service estimates that between $45 and $113 billion is laundered annually through Canada. In addition, the COVID-19 pandemic has increased risks for business as vast resources have been expended to mitigate the health, economic, and social impacts of the pandemic. This flood of money, often without rigorous oversight, has led to increased risks for both AML and corruption-related crimes.
The perception of Canada as an easy place to launder money has drawn international attention to the perceived prevalence of and lack of enforcement over corruption in Canada. In 2020, Canada dropped four places, from 8th to 12th, in Transparency International's Corruption Perceptions Index [PDF] (the CPI), the annual ranking of countries in relation to perceived public sector corruption. In ranking Canada below its top 10 for the first time since 2005, the CPI cited Canada's growing reputation as an easy place to launder money.
Given the growing prevalence of these issues within Canada, civil society, industry associations and experts, including former RCMP officials, have recommended establishing a publicly accessible beneficial ownership registry. Government calls for such an initiative go back to 2017, when Finance Ministers across Canada joined an Agreement to Strengthen Beneficial Ownership Transparency discussing the need to help law enforcement, tax authorities, companies and the general public in efforts to deter and identify abusive shell companies in Canada.
The trend: A risk-based approach to AML compliance
The establishment of a beneficial ownership registry represents a further step for Canada toward a risk-based approach to AML compliance, consistent with the approach taken by several other jurisdictions.
As we have previously written about, in January 2021, the U.S. passed the National Defense Authorization Act, amending the Bank Secrecy Act to require all U.S. corporations to register the identity of their beneficial owners in a confidential database. The U.K. has established the People with Significant Control Register, which requires all beneficial owners of corporations to be identified to the public. The details of beneficial ownership must be included in the Register upon incorporation. The U.K. also established a trust register in 2017, which is not publicly accessible, and has expressed an intention to introduce a register of beneficial owners of properties and land by the end of 2021.
Transparency International indicates that currently 48 countries, including a number of G7 and G20 economies, have made commitments to publicly accessible registries. 61 countries are committed to central or partial registry systems. The steps proposed in the Budget bring Canada in line with our G7 and G20 counterparts.
Impact on Canadian businesses
The proposed beneficial ownership registry follows similar developments in two provinces where money laundering issues have been front and center in recent years. On April 14, Québec adopted in principle Bill 78, An Act mainly to improve the transparency of enterprises. This bill makes beneficial ownership information available on Québec's existing corporate registry. Similarly, in May 2019, British Columbia passed the Land Owner Transparency Act, establishing the Land Owner Transparency Registry. The Registry will become operational later this month, and will provide the public access to some beneficial ownership information for land-owning companies, partnerships and trusts.
While it is unclear at this time what a proposed national registry will look like, existing and provincial and international registries include information such as a corporation/partnership/individual's full name, corporate jurisdiction or individual citizenship/nationality, place of residence, a corporation's business number, month and year of an individual's birth, and the nature of corporate control and categories of shareholder rights. The Office of the Ontario Privacy Commissioner has provided comment on the potential impact of Ontario privacy law on such registries.
The government has yet to announce details on the requirements of business once the proposed registry is established, and at this time simply provides funding for the establishment by Innovation, Science and Economic Development Canada of a registry. As such, it is unclear at this time what steps companies will be required to take to take to register beneficial ownership information once a registry has been established.
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