Canada's beneficial ownership problem

Over the last seven years, Canada has developed an unwanted reputation: As a corporate transparency backwater. A country struggling to fight money laundering and tax evasion because it simply lacks the tools to understand who actually owns the companies registered in Canada.

There were high-profile examples that have contributed to Canada's worsening reputation. There was a money-laundering scandal in British Columbia casinos. We had foreign bribery by Quebec engineering firm SNC-Lavalin. There are credible concerns that Russian oligarchs continue to hide money in Canada, evading sanctions.

There's even a term for it all: "snow washing."

Those headlines have belied a more technical problem that transparency advocates have been spotlighting for years: It is exceedingly difficult to reveal the major owners of Canadian corporations.

Who owns you?

"There is no legal requirement for legal persons and entities to record and maintain beneficial ownership information," reads a 2016 report from the Financial Action Task Force. "Accordingly, companies and trusts can be structured to conceal the beneficial owner and can be used to disguise and convert illicit proceeds. Privately-held corporate entities can also be established relatively anonymously in Canada."

As Transparency International laid out in a report around the same time, Canada did not require federally-incorporated private companies to record or report who owns the company. In Canada, one can hold shares in a company on behalf of another person and needn't tell any regulators. Canada did not even have a definition of "beneficial owner."

It means that, beyond some basic information like the corporation's registered address and its directors, the public is unable to tell who controls and directs companies. Even law enforcement officers and the anti-money laundering experts at FINTRAC have no direct access to that information.

It's partly why Canada has slipped precipitously down the rankings of Transparency International's Corruption Perception Index.

Ottawa wasn't alone in that failure. Major economies had been largely incapable of identifying who truly owns and controls corporations in their jurisdictions. That gap led to the G20 declaring that setting up such registries should be a priority. Countries, by and large, heeded that call.

Then the European Union published its plans for a beneficial ownership regime in 2015 and, spurred on by the tax avoidance scandals revealed by the Panama Papers, rushed to adopt them by 2017. The United Kingdom moved to identify the ownership of its corporations in 2016. More recently, it has expanded that regime to include foreign entities owning property in the UK.

The United States announced plans for its registry in 2020, and unveiled the full suite of rules this September. The vast majority of corporations in America will be required to report data on ownership and their major shareholders starting in 2024.

These registries, to varying degrees, identify those who either own a sizable share of a company or trust, or who directly or indirectly control their operations. While this sort of transparency tends to be the default for publicly-traded corporations, it is more of a rarity for privately-held ones.

Meanwhile, Canada has been moving considerably slower on this front.

Ottawa first laid out its plans for a beneficial ownership registry in 2018, and companies were first required to preserve their beneficial ownership information the following year. It took until this year for the government to introduce more legislative amendments to create the registry and commit the money required to set it up.

"We're slowly moving forward, as Canada tends to do," Stephen Nattrass, a partner at Norton Rose Fulbright and the Canadian head of the firm's regulations and investigations team, told CBA National. "We're not always on the forefront of some of these things." 

The Trudeau government's most recent timeline has the registry coming online for 2023, two years ahead of schedule. Trouble is, the details remain murky. The final regulations have yet to be published.

"You look at where Canada is compared to its other like-minded jurisdictions — like the EU, the UK and the US — on a number of these fronts, it has taken us longer than anticipated," Nattrass says.

Public, or private?

In 2019, the EU took its beneficial ownership registry to the next level: It announced that details on major company stakeholders would be publicly available. The UK had done this right off the bat, making itself the first country in the world to do so. 

A Europe-wide transparency regime promised a window into a hitherto inscrutable part of the economy. The EU registry facilitated a huge investigation into some 55,000 Luxembourgish offshore shell companies, identifying possible tax avoidance and assets belonging to Russian oligarchs and Italian mob bosses.

Transparency International has heralded these public registries as "important tools for advancing the fight against corruption, tax abuse and other financial crimes."

But then, last month, the European Court of Justice delivered a huge blow to those tools. The court concluded that the public registry infringed on shareholders' privacy rights. For now, as other cases wend through the courts, the EU registry will disappear behind the curtain.

Ottawa was bullish on creating such a public registry. Its consultation document mused that public access to the registry "could support global anti-corruption efforts and deter the misuse of corporations to obscure illicit activities, such as money laundering, terrorist financing and tax evasion or avoidance."

In its 2022 budget, Ottawa announced it "intends to work with provincial and territorial partners to advance a national approach to a beneficial ownership registry of real property, similar to other countries, including the United Kingdom."

"Then, when the amendments were published, it was: 'No, you have to report up to the director,'" Nattrass says.

Indeed, the government's legislative amendments only envision corporations disclosing their ownership details to the federal government, not to the public, and makes scant mention of working with the provinces or territories. In its climb-down, Ottawa cited everything from Canadians' privacy rights to the possible threat of kidnapping.

As it stands, Canada's registry will likely only be accessible by law enforcement officers, regulatory agents, and shareholders who can attest that they have a valid reason for accessing it. 

"I suspect at some point down the road there may be more transparency," Nattrass says. But even that semi-private registry is "a big step in the right direction," he says. "It will certainly help law enforcement agencies to speed up investigations."

Even still, he adds, Canada's privacy laws are a poor excuse for shielding this information from the public. "There are privacy protections in Canada, but it's going to be a balancing of: How much information do you disclose?"

A federal problem

As with most aspects of Canadian financial regulation, Ottawa's decisions are only one piece of the puzzle.

Each province and territory has its own approach to financial and corporate disclosure, and objections to any kind of national system have already stymied efforts to build any kind of national securities regulator.

Initially, it seemed the issue of beneficial ownership would be a collaborative federalism success story. The federal government, provinces, and territories signed an agreement laying out the principles for a standard in their beneficial ownership regimes in 2017. 

"BC has moved forward; Quebec is taking great strides," Nattrass points out. "Most of the jurisdictions are moving to something." He notes that British Columbia has already set up a beneficial ownership registry for land holdings.

But national collaboration has largely ended.

Alberta, singled out as a particularly hot jurisdiction for money laundering, has barely budged on creating such a registry. The United Conservative government in Edmonton has even expressed skepticism over the scope of the problem. "This critical attitude of the Government of Alberta presents a bigger problem for the efficacy of Canada's response to money laundering," wrote Jenine Urquhart, now an associate at Norton Rose Fulbright, in 2020 for the Law Society of Saskatchewan. "Any rigorous legislation that other jurisdictions are implementing may be effectively nullified by Alberta's lack of participation."

Two years on, and Alberta has made no announcement on its plans for a beneficial ownership registry. The territories are in a similar spot.

Quebec, meanwhile, has announced plans for a public registry that will include all corporations carrying on business in the province, no matter where they are headquartered.

"Some observers are calling this Quebec register Canada's de facto public corporate beneficial ownership register, as no other Canadian jurisdiction, provincial or federal, is currently enacting a public register on this matter," wrote Daniel Frajman, a lawyer with Spiegel Sohmer.

Even if there is some unevenness across the country, most jurisdictions in Canada have gotten on the same page.

The federal government and the provinces that have forged ahead on their registries have set the threshold for reporting at 25% ownership. "At least for now, 25% is at least somewhat reasonable," Nattrass says. "It's not a controlling percentage of the corporation — so they haven't gone, you know, 50% or more ownership, right? It's some sort of minimal threshold, and that doesn't mean that that won't decrease at some point in the future."

As Frajman points out, Ontario and Quebec have taken on expansive definitions of what constitutes control of a company, even before Ottawa has set out its own test for how to make that determination.

Even if the approaches to the registry itself vary, Nattrass points out that the obligation to preserve this information is a reasonably significant measure to improve compliance.

"If you were gonna leave the country, you would have done it a couple of years ago when these registries started to be required in the first place," he says.