In 2016, a group of Canadian lawyers filed a lawsuit against one of the country’s most prominent corporate giants. The lawyers accused Ottawa of violating the country’s banking secrecy laws, by allowing a bank to move money offshore by helping hundreds of wealthy Canadians set up offshore companies using a network of shell companies. In response, the Crown filed a request to settle the case, saying the bank made more than 1,000 secret transfers over the course of 13 years. It claimed that if the $15 million was recovered, the bank would still be able to operate. The lawyers refused.
The bank has since pled guilty, paid a $6 million fine and is currently at work cleaning up its act, Reuters reports. Now, a new year-long investigation by Reuters, drawing on records filed with the country’s banking watchdog, has found that tens of thousands of secret financial transactions are still going on at Canadian banks every year, a little over two years after the banking watchdog and the federal government vowed to crack down on offshore tax schemes.
The settlement with the bank highlights the difficulties facing Canada in shaking off the legal and financial spectre of the Cayman Islands. Though records were first requested by Reuters in 2014, the story published this week has shown the extent of the problem. The files have traced 200,000 questionable transactions, as well as actions by at least 76,000 Canadians, since 2005. According to preliminary calculations, the banks moved nearly $1.4 billion to overseas tax havens. The largest transfer, which was managed by an official of an eight-billion-dollar pharmaceutical company, was worth $17 million.
The companies affected by the Canadian tax strategy are mainly corporations, businesses and wealthy individuals. One of the wealthiest, Sherbrooke, Quebec-based Inc. Petroleum Solutions Ltd., set up as many as 250 offshore entities to ship more than $3.2 billion worth of products. An employee of the firm’s internal services department identified some of the transactions and sold them to tax investigator Christian Mathieu.
Not all of the transactions were so problematic. Sona McHenry, a director of Hong Kong-based Spectrum Real Estate Investment Corp., became Canada’s second-highest beneficiary of tax avoidance by setting up companies, including the Bank of Canada. After a brief investigation, federal tax officials found that such moves were not illegal and did not land McHenry in any legal trouble.
Investigations are underway. At least 15 people have been arrested or investigated and charged since 2015 in connection with offshore tax schemes.
The federal government, which already has significant revenue trouble and has said repeatedly that its increased tax demand is sufficient to clean up the problem, has been confronted with a catch-22. It is encouraged to tackle the problem of aggressive tax evasion in the name of development, but it cannot afford to cut back on services necessary to help people avoid taxes. Reuters interviews found Canadian banks have recently advertised for people with knowledge of offshore transfers — and the lawyers most in demand by banks to set up the offshore entities.
At a recent Senate committee hearing, Glenn Simons, the government’s chief financial officer, explained that Canada does not have the funds to tackle the problem. “This is a not-for-profit scandal,” he said, referring to the government’s failed attempt to bring in offshore tax evasion penalties. “It’s important we are continuing to be vigilant to prevent this happening again and that’s what we’re looking to do.”