Lax Canadian regulations sheltering corporate shell games

Frauds thrive amidst legal loopholes, regulatory patchwork and lack of law enforcement


The Panama Papers leak earlier this year unleashed a flood of revelations about offshore shell companies being used as tools for tax evasion and money laundering, but the U.S. Treasury Department’s recent allegations that Vancouver-based PacNet Services is a “transnational criminal organization” highlight how those activities can thrive under the nose of Canadian law enforcement.

Fraudsters in Canada and abroad have multiple ways to mask and hide ill-gotten gains, partly enabled by lack of uniform regulations, especially surrounding the collection of beneficial ownership information on registered companies.

Read: U.S. Treasury Department’s pursuit of Vancouver company rattles local fintech sector

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“They have to distance themselves ostensibly from the wealth they can control,” said Martin Kenney, a Canadian lawyer based in the British Virgin Islands, told Business in Vancouver in a phone interview, “so they use a whole bunch of  techniques, whether it’s P.O. [post office] box numbers, mail drop boxes, 75 layers deep of companies in 20 different jurisdictions, it’s all just a question of cost, proportionality, risk – they’re risk managers. They’re going to spend a lot of money and time devising strategies to cover their tracks, cover the tracks of the money. That’s all the game is about.”

Vancouver has had many players in that game over the years, taken down not by the Vancouver Police Department or the RCMP, but often U.S. regulators.

Back in 2002, the U.S. Federal Trade Commission along with the now-defunct BC Director of Trade Practices (DOTP) shut down a foreign lottery mail fraud scheme run by Omid Tahvili. The scheme used mailbox rental businesses, including Midtown Mailboxes at 2416 Main Street, which was “directly linked” to the scheme. Owner Calvin Wilks, named in court documents from the DOTP, told BIV in an interview that “those days are over.”

“We have photo ID of every client that rents a mailbox here, and if the police want to come in here and see it, the books are open,” Wilks said, adding that “B.C.’s one of the few provinces that will allow people from outside of the province to register their offices here.”

One of Midtown’s boxes, listed as “Suite 398,” is rented by Toronto-based Business Development Centre, which specializes in company registrations and the sale of clean shelf companies. The box is home to dozens of entities, including Blacksands Pacific Energy Corp., owned by Raheem Brennerman, identified by the Guardian newspaper as the owner of offshore shell companies feeding London’s property boom in 2012.

Other companies registered to “Suite 398” include a web redirection service that masks ownership of domain names used by a slew of loosely regulated online casinos.

Lana Furman, a Business Development Centre manager in Toronto, refused to answer BIV’s questions when reached by phone back in May.

“People are beginning to recognize that the truth is that the formation of companies is an industry. It’s a business; it’s global,” Kenney said. “Some jurisdictions are more successful in the industry than others. Some are better regulated than others.”

The British Virgin Islands (BVI), for example, has approximately 475,000 incorporated entities registered there.

“In each case,” Kenney said, “those 475,000 companies in the BVI are incorporated by regulated persons who have to collect very extensive documentation as to who stands behind the company.”

In contrast, the state of Delaware has 800,000 registered entities and beneficial ownership information is not readily available. Kenney said he and his team can get a company’s ownership information relatively easily in the BVI, whereas in Delaware, even with a court order, beneficial ownership information is not readily available, and a subpoena to a corporate services company based in the state nets very little too.

“I inevitably get a letter from a Manhattan law firm that specializes in asset protection, or something like that,” Kenney said.

In British Columbia, 304,859 companies were incorporated through the province’s Ministry of Technology, Innovation and Citizen’s Services between 2006 and 2015 according to information provided by the B.C. government.  Federal incorporations through Corporations Canada jumped to 35,762 companies in fiscal 2015-16 from 21,243 in 2006-07.

According to a recently released Financial Action Task Force report, Canada has 2.6 million corporations, more than 90% of which are incorporated provincially, and lax regulations allow virtual anonymity to many registrants. 

“Canadian legal entities and arrangements are at a high risk of misuse for [money laundering and terrorism financing]  and mitigating measures are insufficient both in terms of scope and effectiveness,” the report states. “The reliability of the information recorded raises concerns because there is no obligation on registrars to confirm the accuracy of the basic company information provided at the time of incorporation.”

In addition, a Supreme Court of Canada decision in February 2015 exempted law firms from anti-money laundering  provisions. The decision found that the rules turned firms into agents of the state, which violates attorney-client privilege.

“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],” the report states.

(PacNet Services, for example, has a registered and records office with Vancouver law firm Lesperance Mendes. Robert Lesperance told BIV in a phone interview that his firm handles records for hundreds of companies, but “has nothing to do with the day-to-day operations of [PacNet Services].”)

Meanwhile, Canadian law enforcement agencies, the report found, “are aware of the risk of misuse of corporate entities in [money laundering] schemes, but, in some provinces, do not investigate such cases to the extent that they should mainly because of a shortage of adequate resources and expertise.”

Kenney claims that offshore jurisdictions like the British Virgin Islands get a bad name from sensational media coverage, while the real problem with fraud in a globalized economy is not a matter of where, but who.

“Regulation has to be uniform and it has to be robust and it has to gather the information about who is behind the companies. If you don’t do that, then you’ve got a serious problem,” he said. “The issues that pertain to company formation, administration, regulation are of co-equal importance and force whether we’re talking with a B.C. company, a Delaware company or a BVI company.”