Unmasking Corporate Owners in Canada

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Lincoln Caylor
Litigator focusing on high-stakes, cross-border financial crime disputes
Bennett Jones LLP

Most large-scale fraud, corruption, taxation and other economic crimes have a common characteristic: complex webs of corporations and trusts used to perpetuate schemes and to launder funds. While the “corporate veil” establishes the separate legal identity of corporations for legitimate reasons, it can also aid in the concealment of money and the identities behind it.

By permitting corporate ownership to remain secret, governments facilitate money laundering. Secret corporate ownership occurs when a corporation hides the identities of their true beneficial owners. The Panama Papers serve as the most recent example of the need for transparency of this beneficial ownership. However, it is not a new concern.

In addition to places like Panama, Canada is also an attractive jurisdiction for those looking to keep corporate ownership secret because of its lack of ownership disclosure requirements. But the issue in approaching a solution is not a lack of awareness – Canada is well known to be a hub for these white-collar crimes, facing criticism from nations who have created successful transparency schemes such as the U.K. and the British Virgin Islands (BVI). Bringing the country into compliance with international norms and increasing beneficial ownership transparency has been a recent budget agenda item of the Canadian government, but several factors are continuously highlighted as standing in the way of formal commitment. For example, only 10% of Canadian companies are federally registered, making it difficult to create a national strategy to close loopholes without the cooperation of the provinces.

Despite barriers to prompt resolution of this issue, elements of a successful government approach to monitoring corporate ownership are clear:

  • Strong leadership from the Financial Action Task Force, the G-20 and the U.K.;
  • Coordination with the provinces and foreign governments;
  • A public registry of beneficial corporate owners;
  • Mechanisms to ensure a balance between privacy and social interests; and
  • Successful models to strive toward, such as those in the U.K. and BVI.

Canada is currently a safe harbor for laundered money, but it doesn’t have it to be. This infographic and the steps it lays out give Canadians the steps needed to make progress in the transparency of corporate ownership.

Are you interested in learning more about the latest fraud-related topics and trends that impact Canada? Attend the upcoming 2017 ACFE Fraud Conference Canada in Toronto, October 29-November 1. Register at FraudConference.com/Canada by September 29 and save CAD 100!

What You Need to Know About the U.K.’s Criminal Finances Act

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Jordan Underhill, J.D.
Research Specialist

On April 27, the U.K. officially passed the Criminal Finances Act 2017. This law represents the most significant development in U.K. corporate criminal liability since the passage of the Bribery Act in 2010. The Act also strengthens the government’s ability to combat money laundering, terrorist financing and tax evasion. The various provisions of the Act are expected to come into force later this year and will affect both U.K.-based firms and foreign firms conducting business in the U.K.

Tax Evasion
One of the most important sections of the Act expands corporate criminal liability for tax evasion. This expansion represents the U.K.’s latest effort to combat domestic and global tax evasion and to increase its coordination with foreign governments. The Act creates two new strict liability criminal offenses:

  1. Failure to prevent the facilitation of U.K. tax evasion offenses
  2. Failure to prevent the facilitation of foreign tax evasion offenses

These new offenses are modeled after Section 7 of the Bribery Act, which created a strict liability offense for the failure of commercial organizations to prevent bribery on their behalf. Like Section 7, these new “failure to prevent” offenses have potentially broad applications because no intent is required. A corporation can be held liable for the actions of employees who, in their professional capacity, encourage or assist the tax evasion of others. This is true regardless of whether upper management had knowledge of or directed the actions of the facilitator.

However, the Act does provide a defense for firms that have reasonable prevention measures in place. To successfully assert this defense, the corporation must show that, at the time of the offense, it had reasonable prevention procedures in place to prevent employees from facilitating tax evasion. Alternatively, the corporation can show that it was not reasonable in all circumstances to expect the corporation to have any prevention procedures in place.

Unexplained Wealth Orders
Chapter 1 of the Act creates the “unexplained wealth order” (UWO), which is a new investigatory tool that authorities can use to expose corruption, tax evasion and other illicit activities. UWOs require individuals to explain the origin of funds that appear disproportionate to their reported income. These orders can be issued by a High Court at the request of an enforcement authority to a “politically exposed person” (e.g. public official) or a respondent that the court has reasonable grounds to suspect is involved in a serious crime or is associated with someone involved in a serious crime.

A UWO can be issued to someone not based in the U.K. and may relate to property outside of the U.K. If an individual makes false or misleading statements in response to a UWO, they can be convicted of a criminal offense that carries a maximum penalty of two years’ imprisonment.

Anti-Money Laundering and Terrorist Financing
The Act also enhances the abilities of law enforcement to investigate suspected money laundering and terrorist financing in three key ways:

  1. The Act empowers law enforcement to issue disclosure orders during money laundering investigations. These orders compel individuals that authorities suspect may have relevant information to answer questions and disclose documents. Individuals who fail to comply with disclosure orders can be fined up to £5,000.
  2. The Act allows for information sharing between various firms when there is suspicion of money laundering. This includes the ability for firms to submit joint suspicious activity reports (rather than a single report for each firm), which combines information from each firm into a single, cohesive document to create a more streamlined investigation for authorities.
  3. The Act gives the National Crime Agency (NCA) more time to investigate suspicious activity reports. Ordinarily, when a business submits a suspicious activity report, it requests consent from the NCA to proceed with the reported transaction or activity. The NCA can deny consent, creating a 31-day moratorium period during which investigators can gather evidence on the reported activity and determine if further action is required. However, this window is often too short for a thorough investigation. The Act allows the NCA to petition a court for up to six 31-day extensions to the moratorium period, providing more time for a careful analysis of the suspicious activity.

The Criminal Finances Act represents another step in the fight against fraud. Affected businesses should conduct risk assessments to ensure that they are in compliance with the Act before it comes into force later this year. In particular, special attention should be paid to procedures designed to prevent employees from facilitating tax evasion. Likewise, employees should be educated about the Act and any changes in internal policies.

Shutting Down the Laudromat: An Interview with an AML Superhero

LETTER FROM THE PRESIDENT

James D. Ratley, CFE
ACFE President

Successful criminals often have a common problem. After they steal the cash, they can’t spend it. They must first wash it.

They search for discreet laundromats. But financial institutions — spurred by federal laws, loss of reputation and a heightened sense of ethics — are cracking down on crooks who want to make their cash squeaky clean.

Jennifer Shasky Calvery has been fighting money laundering and other crimes for years — first at the U.S. federal government and now as the Global Head of Financial Crime Threat Mitigation at HSBC Bank. Before joining HSBC in 2016, she was director of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) for four years after a 15-year career at the U.S. Department of Justice. She’ll be receiving the ACFE Cressey Award at the 28th Annual ACFE Global Fraud Conference.

“While I was at the Treasury Department, FinCEN analysts made major strides to enhance deployment of advanced analytics tools to make sense of the ocean-sized data they had at their disposal from SAR [Suspicious Activity Report] filings and other sources of information,” Calvery says in the cover article of the May/June issue of Fraud Magazine. “These tools were essential to FinCEN’s ability to mine data and spot trends, and I knew that I would also need to leverage these tools at an international bank like HSBC.”

Calvery believes that fraud fighters should seize the opportunity to strengthen money laundering information sharing between the public and private sectors.

However, she says that banks are constrained by what they can share with industry peers and to governments. And banks and governments are restricted in what they can exchange cross-border. Regardless, Calvery can act as a mediator among the players because of her anti-money laundering credentials.

“In my role ... at HSBC, I’m focused on deploying innovative solutions that increase the effectiveness and efficiency of our ability to detect, deter and combat financial crime,” says Calvery. “In jurisdictions around the world, governments are adopting ‘sandbox approaches,’ allowing industry latitude to be creative in finding internal solutions to address risks in a way that encourages innovation while providing appropriate safeguards.”

More power to Jennifer Shasky Calvery. I’m looking forward to hearing her keynote at the 28th Annual ACFE Global Fraud Conference, June 18-23 in Nashville. See you there!

Panama Papers Aftershocks: Mossack Fonseca's Offices Raided, Founders Arrested

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Martin Kenney
Managing Partner of Martin Kenney & Co., Solicitors

Authorities finally appear to have caught up with Mossack Fonseca’s (MF) founders, Jürgen Mossack and Ramon Fonseca, who were arrested last month in Panama City in connection to the Brazilian “Lava Jato” or “Operation Car Wash” corruption scandal.  Along with the high-profile arrests, the firm’s offices were also raided.

The news is another blow to the company, which was already reeling from the aftershocks of the Panama Papers scandal, in which MF was shown to be the center of countless international shell companies and tax havens.

In a statement, Panama’s Attorney General Kenia Porcell said that recently the firm allegedly worked with contacts in Brazil to "destroy evidence related to those implicated" in the Brazilian scandal. "In short: money from bribes circulate through various places to return laundered to Panama," she said.

Although further details have yet to be released, tying the firm to Operation Car Wash will raise a few eyebrows. The year-long investigation reads like a Who’s Who of South American countries; added to the mix are the U.S. and Switzerland.

Although the Panama Papers scandal has been fading from the public eye, I had mused that silence was not linked to inaction. Most criminal investigations are cloaked in secrecy for obvious reasons. The Panama Papers story was simply too big and too grave for law enforcement to ignore. Public interest was always going to dictate that a full investigation would be required to gauge the depth of the problems being unearthed.

The Operation Car Wash investigation is similarly vast, and the many levels of corruption and the losses incurred by the public purse demand that many stones be overturned.

It remains to be seen if MF’s founders were involved in the events tying the firm to Operation Car Wash, either directly or by turning a blind eye. MF has issued a denial that they were connected to any entity linked to Operation Car Wash.

The underlying problems for the firm are a lack of plausibility and credibility. There have been too many revelations and too many blanket denials. MF handled the initial and subsequent fallout very poorly; issuing denial after denial, or flimsy excuses, is not the way to limit damage when under criticism from the press and the public. Ramon Fonseca argued that his firm can’t be held to account for how the 200,000+ offshore companies it formed behaved – just as GM can’t be blamed for a reckless driver doing harm with one of its vehicles. That’s just not credible, and it ignores his firm’s obligations to know its customers, identify the UBOs of the companies it formed, and to ferret out and report suspicious activities. The use of misdirection and red herrings is unhelpful in this context.

If MF has knowingly facilitated the improper movement of assets away from Brazil, then it deserves all it will get. In this instance, the ordinary citizens of Brazil have suffered the most as billions of dollars appear to have been unlawfully diverted elsewhere.

There is also going to be a lot more fallout from the Panama Papers scandal. The countries affected have lost billions in revenue as a consequence of tax evasion, and will not let matters lie. Add the facilitation of money laundering for criminal gangs and organized crime, plus the potential links to terrorist extremists and their revenue streams, and you have a heady cocktail of reasons why this scandal is anything but dead. Global authorities owe it to their people to right the wrongs and bring those responsible to book.

Martin Kenney is Managing Partner of Martin Kenney & Co., Solicitors, a specialist investigative and asset recovery practice based in the BVI and focused on multi-jurisdictional fraud and grand corruption cases www.martinkenney.com |@MKSolicitors . Mr Kenney was recently selected as one of the Top 40 Thought Leaders of the Legal Professionin 2017 by Who's Who Legal International. He is the only fraud and asset recovery lawyer included in this list of Thought Leaders drawn from 16 different practise areas.

The opinions expressed in this blog are not necessarily those of the ACFE.

Clare Rewcastle Brown to Discuss Money-Laundering Controls Learned from 1MDB Scandal

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Sarah Hofmann
ACFE Public Information Officer

“I think this whole offshore financial structure that’s been allowed to grow like a canker … the whole thing’s got out of control,” said investigative journalist Clare Rewcastle Brown in an interview with the Association of Certified Fraud Examiners (ACFE). 

Rewcastle Brown founded The Sarawak Report and Radio Free Sarawak in 2010 to disseminate news that concerned the Sarawak region of Malaysia and eventually, news surrounding the emerging 1MDB (1Malaysia Development Bhd) scandal. In August 2015, a warrant for her arrest was issued by a Malaysian court for "activities detrimental to parliamentary democracy" and the "dissemination of false reports."

“I think we’re seeing a swing of the pendulum and I think 1MDB’s just kind of cropped up perhaps at the right place at the right time … governments across the world have started to realize that they’ve lost control and populations have lost patience,” she said.

Rewcastle Brown will address anti-fraud professionals from across Europe at the 2017 ACFE Fraud Conference Europe in London, March 19-21. Despite having an arrest warrant issued for her by a Malaysian court, Brown remains optimistic that corruption on a global scale can be defeated. She said, “I do think we’re seeing a lashback and 1MDB is going to be just one example of enforcement agencies hitting back.”

Despite not being able to attend the 2016 ACFE Fraud Conference Asia-Pacific last November in Singapore due to safety concerns, she is committed to speaking in-person at the conference in London. She plans to lay out the intricate timeline of the 1MDB scandal that allegedly began in 2009 and runs through present day.

1MDB is currently being investigated by Swiss, Singh and U.S. authorities. In a question-and-answer session after her prepared remarks in Singapore, Rewcastle Brown addressed what controls she thought could help prevent this type of large-scale money laundering. “I think this case is really an opportunity to hold banks and players in these actions seriously to account. And to make the actors who have broken the rules pay the penalty, seriously. [They should be] absolutely exposed, shamed and embarrassed because we need to put off future, potential situations like this arising again,” she said. “I think that’s the best we can hope to come out of this. By showing at last, that the financial regulators have teeth and that they’re catching up to the global criminal element who have been using our offshore system and far-too compliant financial organizations. If we can get ahead of them, maybe that’s the best way to deal with this particular problem.”

Find out more about the upcoming 2017 ACFE Fraud Conference Europe, and register by February 17 for early registration discounts, at FraudConference.com/Europe.