Canada should brace itself for an "invasion" of international tax cheats and shady businesses unless it follows the U.K.'s lead and reforms its corporate secrecy rules, warn business watchdogs and British police.
The U.K. launched a bold experiment last year by creating the world's first open-data corporate registry system to force the true owners of all U.K.-registered companies out of the shadows and into a public database.
But the U.K.'s success could spell trouble for Canada and other countries that don't require similar transparency. The risk is jurisdictions that enable secrecy will increasingly be used by cheats who hide behind shell companies to mask tax evasion, money laundering and other dodgy business deals.
"If the Canadians are dopey about this, they will have an invasion," said Richard Smith, a blogger with Naked Capitalism.com
"When we crack down in the U.K., they'll simply go to somewhere else that is onshore, legitimate-looking."
This week, a joint CBC/Radio-Canada and Toronto Star investigation of the Panama Papers revealed Canada has emerged as an unlikely tax haven because of its twin benefits of a sterling reputation and corporate registry rules that allow for a high level of secrecy.
Not a single corporate registry in Canada requires that a company list the names of its real owners, which makes for a system that's opaque and vulnerable to abuse. All provinces allow the use of "nominee" directors, stand-ins who serve as a company's officers on paper only.
CBC News reported the story of two women, a law clerk from Toronto and a paralegal in Montreal, who served as directors for nearly 200 companies over 25 years, but claimed to know nothing about the businesses or the multimillion-dollar deals bearing their signatures.
Exposing the oligarchs
The U.K. created its new, more transparent corporate registry following a string of scandals involving bogus companies in England and Scotland.
Vince Cable, who served as secretary of state for business under the David Cameron government, says Britain was in danger of attracting "bad people with bad money."
"We'd become a kind of centre for Russian oligarchs, for an example. Indeed, they are acquiring quite substantial companies here," Cable said. "We did feel that we were at risk had we not had a proper system of declaration."
Beginning in June, the government insisted registered companies file annual "confirmation statements" listing the names of all corporate directors and individuals who hold more than 25 per cent of shares or voting rights in a company.
The registry also requires their dates of birth and nationalities.
"Companies now have to declare who owns them," Cable said. "You can't hide behind anonymity and you can't hide behind false names."
Police, watchdogs hunt for cheats
The new requirements are being phased in and the registry is not yet complete, but by the end of 2016 more than 1.3 million out of approximately 3.5 million companies had filed their updated ownership information.
Donald Toon of the National Crime Agency, the U.K.'s top law enforcement body for economic crime, says it used to be extremely easy to create a company structure and conceal the identity of the people who actually own it.
He says the new registry "makes life a bit easier for law enforcement" and "a bit more difficult for criminality."
'As jurisdictions start to clamp down on this kind of secrecy, the corrupt will be looking for other places, other safe havens, to put their money in.' - Rachel Owens of Global Witness
And it's not just police who are using it.
Global Witness, an international anti-corruption watchdog group based in the U.K., began scouring the registry last fall. Notwithstanding the bugs and gaps in the data, researchers say they made some interesting preliminary discoveries.
Nearly 3,000 companies list their owners as another company based in a reputed tax haven, the group says.
The group also claims 76 owners listed in the registry share the same name and birth date as individuals on U.S. sanctions lists.
Rachel Owens of Global Witness says the U.K. took the big first step and now it's time for other countries to follow its lead.
"We really feel that there is a global momentum behind this … and now we are looking at other jurisdictions such as Canada, the U.S., to take action as well."
Canada has signed on to G8 and G20 resolutions to adopt greater transparency governing corporate ownership, but the government has yet to act.
Peter Dent, a forensic accountant in Toronto with Transparency International Canada, wants lawmakers to create a registry — or registries — similar to the U.K.'s.
"We're not asking that every bit of information be laid bare," he said. "We're asking for basic business card information be made public."
Finance Minister Bill Morneau has acknowledged Canada's commitments to its G8 and G20 partners but says making changes across this country is complicated given each province has different rules and technological systems.
"We're absolutely in favour of knowing who is registering companies, what their goals are and what taxes they should be paying in our country and that they're not in any way avoiding taxes somewhere else," Morneau said in an editorial board meeting with the Toronto Star.
"How we get to that answer, in our estimation, includes working together with the provinces to get to a common approach."
Until then, Canada could become an even bigger target for shady businesses, warns Rachel Owens of Global Witness.
"As jurisdictions start to clamp down on this kind of secrecy, the corrupt will be looking for other places, other safe havens, to put their money in."
The Canada Papers
TODAY: How to fix Canada's tax-haven problem