Snow washing (Canada)

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Snow washing 🇨🇦
Canada map.png
Location: Canada
Definition: Euphemism for money laundering practices in Canada, alluding to Canadian weather
Keywords: Canada North America Money laundering Borders Taxation Tax avoidance Corporate informality Tax haven Euphemism
Clusters: Creating facades
Author: John Smith
Affiliation: Alumnus, School of Slavonic and East European Studies, University College London, UK

By John Smith, Alumnus, School of Slavonic and East European Studies, University College London, UK

Snow washing is a Canadian practice of money laundering, usually through purchasing property or through tax evasion that employs Canadian international trade treaties to move money into tax havens (Cribb and Oved 2017a). The name of the practice alludes to Canadian weather conditions; making the money “white as snow” or “clean as snow” is euphemism for money laundering. The Financial Action Task Force (FATF) defines money laundering as “the processing of criminal proceeds to disguise their illegal origin in order to legitimise the ill-gotten gains of crime” (OECD 2009: 11). Money laundering is often linked to tax evasion, which is technically a crime, but often exists in a multi-layered and ‘grey’ area of legal loopholes (ibid.). In 2011, the UN Office on Drugs and Crime (UNODC) estimated that the total amount of money derived from criminal proceeds was 3.6 percent of the global GDP, or 2.1 trillion US dollars, of which only 1 percent was recovered by national and international authorities (UNODC 2011). About 70 percent of the total amount (2.7 percent of global GDP or 1.6 trillion US dollars) was laundered and made available for spending.

There are several phases of snow washing: placement of money into a bank account; concealment of its criminal origin by layering; creation of an apparent legal origin; and integration or investment, making laundered money available for use (ibid.). This means that transparency of ownership of money, allowing authorities to trace the roots of financial operations, is particularly crucial in preventing money laundering. During the G20 summit in 2008, G20 leaders made a commitment to promote and reinforce the international exchange of tax information and transparency (G20 Leaders 2008: 1). Further progress was made in 2009, when the G20 Summit prioritised a tax reform that would promote a general compliance with the “global standards of transparency and exchange of information for tax purposes” (ibid.). The High-Level Beneficial Ownership Principles of Transparency were adopted at the 2014 G20 Summit (G20 Leaders 2014) and the Anti-Corruption Action Plan in 2015-16. The implementation of the Principles was intended to improve transparency of public and private sectors assets and of beneficial ownership (ibid.). As part of this agreement, each country was to be evaluated by Transparency International (TI) based on the strength of their legal framework for implementation.

In 2015, Canada was one of six G20 countries assessed as having a ‘weak’ legal framework protecting against money laundering in 2015, and one of two countries in 2017 (Maira and Murphy 2018). The 2015 TI report found that Canada was not compliant with any of the G20 Principles; information collected by legal entities and financial institutions was “inadequate”, and “current rules on bearer shares and nominee shareholders and directors [were] also inadequate” (Maira and Murphy 2015: 10). In 2016, FATF critiqued Canada for enabling legal entities and arrangements to maintain secrecy and issued a call to the Canadian government to prioritise the accessibility of beneficial ownership information (ibid.). Canada, alongside the US and China, scored zero points for “requiring companies to collect and maintain accurate and up-to-date beneficial ownership information in 2017” (Maira and Murphy 2017: 28). On compliance with the G20 Principle 7, which requires institutions to verify the beneficial ownership of their customers, both Canada and South Korea scored 8% in both 2015 and 2017(ibid.).

Canadian snow washing gained momentum due to how easy it is to establish anonymous companies. Canada is ideal for creation of “shell companies”, existing only on paper for the purpose of financial transactions (FATF 2007). Shell companies are often used to conceal corruption, launder criminal proceeds, evade taxes, commit fraud, manipulate trade markets, and even fund terrorist organisations (ibid.). Whilst historically Canada did not have a prominent reputation as a tax haven, it is becoming an increasingly attractive location for money laundering though snow washing, ever since other countries made efforts to increase transparency (FATF et al. 2016). Financial investigation or money forensics are frequently obstructed by inaccurate or intentionally falsified company records, as apparent from the investigation into the Quebec public works industry and the Charbonneau Commission invoicing fraud. The investigation concluded that Montreal-area construction firms used shell companies to produce false invoices in connection with corruption, procurement fraud, price fixing, and organised crime (Ross 2016).

Through snow washing, foreign investors can take advantage of Canada’s treaties, such as tax-free benefits with the USA, the UK and Barbados. According to the Star/CBC-Radio-Canada investigation, “in virtually every instance, we found the names listed on public registries that have nothing to do with the companies' real owners” (Cribb and Oved 2017b). The report mentioned how ‘nominee directors’ were used to sign public documents to conceal the real owners of the assets (ibid.).

Snow washing is prominent in the property market. Out of the top one hundred most valuable residential properties in Greater Vancouver, one third are owned by shell companies, eleven list a ‘nominee’ on the title, and six are held by registered trusts (Ross 2016). Whilst snow washing is difficult to trace, the trends in the real estate market may be revealing. FATF notes that the real estate market is particularly vulnerable because it is difficult to monitor due to the international nature of transactions, thus providing an outlet to obscure funding sources and beneficial owners (FATF 2007). Estimating accurately estimate the number of foreign owners and disclose the source of their income is challenging. The influx of foreign money into the real estate market has had the effect of increasing prices of high end properties. The TI report from 2015 found that the use of luxury real estate market for money laundering was extensive in Australia, Canada, UK and the US, most notably driving up property values in London, New York, Sydney, and Vancouver (Maira and Murphy 2017). The Canadian Mortgage and Housing Corporation does not hold reliable data on the number of foreign-owned properties so the question of the extent of snow washing remains an open one.

References

Cribb, R. and Oved, M. 2017a. ‘Snow washing, Part 1: Canada is the world’s newest tax haven’, Toronto Star, January 25

Cribb, R. and Oved, M. 2017b. ‘Signatures for sale: Paid to sign corporate documents, nominee directors serve to hide companies’ real owners’, The Toronto Star, January 26

Financial Action Task Force (FATF). 2007. Money laundering and terrorist financing through the real estate sector. Paris: FATF

Financial Action Task Force (FATF) and Asia-Pacific Group on Money Laundering (APG). 2016. Anti-money laundering and counter-terrorist financing measures – Canada. Paris: FATF

G20 Leaders. 2008. G20 Leaders' Declaration, Washington DC: G20 Leaders, 15 November

G20 Leaders. 2014. G20 Leaders’ Communique, Brisbane: G20 Leaders, 16 November

Maira, M. and Murphy, M. 2015. Just for show? Reviewing the G20 promises on beneficial ownership. Berlin: Transparency International

Maira, M. and Murphy, M. 2017. Doors wide open: Corruption and real estate in four key markets. Berlin: Transparency International

Maira, M. and Murphy, M. 2018. G20 leaders or laggards? Reviewing G20 promises on ending anonymous companies. Berlin: Transparency International

Organisation for Economic Co-Operation and Development (OECD). 2009. Money laundering awareness handbook for tax examiners and tax auditors. Paris: OECD

Ross, A. 2016. No reason to hide: Unmasking the anonymous owners of Canadian companies and trusts. Toronto: Transparency International Canada

United Nations Office on Drugs and Crime (UNODC). 2011. Estimating illicit financial flows resulting from drug trafficking and other transnational organized crimes