What is snow washing?
Hint: it has nothing to do with the Ivory Snow Detergent washing powder.
Wikipedia tells us that Snow washing refers to hiding illegitimate financial transactions often for purposes of tax evasion in Canada. The term being an amalgam of the words snow meaning purity as well as the cold Canadian climate and washing referring to money laundering.
Snow washing conjures images of the natural beauty of snow-covered expanses of northern Canada — pure as the driven snow — and a financial image that is relatively conservative.
There have been numerous articles over the past decade, and even longer, that point to Canada as a developing venue to facilitate money laundering — an attractive place for “snow washing” ill-gotten gains from questionable or illegal activities.
The Canada Papers
A four-part series by Robert Cribb and Marco Chown Oved for the Toronto Star and CBC-Radio Canada in early 2017[1] (interestingly entitled The Canada Papers) highlighted a number of factors. Indicating that Canada had become a money-laundering location of choice. Of interest is that Mossack Fonseca – of Panama Papers fame – were aware of loopholes and/or laxities in Canadian corporate/business creation rules and touted the potential of Canada as a tax-haven almost 10 years ago. Messrs. Crib and Oved note that our northern neighbor had quietly emerged “as a popular tax haven for the global elite, who create shell companies with figurehead directors to evade or avoid taxes.”
Behind the trend was a number of factors
- Numerous tax agreements with over 100 countries has made it easier to move money in and out
- Canada’s corporate registration systems – one at a national level and at the provincial levels (there are ten provinces) can provide an amount of confusion and potential for obfuscation, which is exacerbated by rules allowing company owners who wish to remain anonymous to hide behind shell companies created by corporate registries or stand-in representatives
- Canadian limited partnerships (LPs) – a corporate structure that has no tax filing requirements – partners are obliged to file taxes, but if they’re not residents of Canada, no taxes need be filed
- Canada is not a name that comes to mind when thinking about foreign tax haven jurisdictions.
Companies with hidden ownership were formed – paid individuals were used to serve as directors or officers. Nominee directors – often paid at a flat annual rate per company for their signatures on the shell company’s official documents and/or filings – are not illegal in Canada.
The Old Shell Game
The subject of nominee shareholders not being required to maintain ownership and identity with respect to all those for whom they act as nominees was raised in the OECD Peer Review Report on the Exchange of information on Request Canada in 2017 as a repeat issue from 2011.[2]
The secrecy such shell companies provide, clearly invites abuse. While there may be legitimate reasons for such secrecy, the downside of that secrecy – the abuses it facilitates – more than outweighs the potential benefits. Money launderers are constantly searching and scheming for new and novel ways to hide money and disguise the proceeds of illegal activity.
More Recently….
There have been a number of investigations and cases that have highlighted the potential for snow washing. A Transparency International Canada press release in September 2019[3] cited a survey indicating that three-quarters of Canadians say money laundering is an issue within their own province (74%). Even more, say that on a national level it is a challenge that Canada needs to address. The same press release quotes annual money laundering estimates in Canada from $43 billion to $100-$130 billion – and goes on to discuss a consequence of inflated housing prices in certain Canadian markets.
In June 2019[4], the government announced commitments to create a working group with the Federation of Law Societies of Canada to address the inherent risks of money laundering; to establish cross-government coordination for anti-money laundering best practices; and to explore the merits of a publicly accessible company register of beneficial owners through consultations.
Isn’t this Canada’s challenge?
Well, yes it is.
But it is also a challenge for us here in the USA. It affects us all as we part of a global community.
What can we do about this?
Remain vigilant. If Canadian based entities present as part of an alert – check them out carefully. What kind of red flags can we look for?
Before going through some of the FFIEC BSA/AML Examination Manual[5] (“the Manual”) red flags – here’s a few thoughts. Account opening — a Canadian entity opening an account at your U.S. based bank. Why are they doing this? Does the story make sense? Does the business make sense? Do expected activities seem consistent with the business? Are all the CIP/KYC/CDD documents in order and verifiable. Google searches on names and address? What/where is the place of business – Google Map/Street view the address? Phone number?
From the Manual’s Appendix F:
- Is the customer a trust, shell company, or Private Investment Company that is reluctant to provide information on controlling parties and underlying beneficiaries. Beneficial owners may hire nominee incorporation services to establish shell companies and open bank accounts for those shell companies while shielding the owner’s identity.
- Frequent transactions to/from Canada – perhaps in amounts structured to avoid the travel rule.
- Round dollar transactions (USD or CAD)
- Loans for purchase of Real Estate purchase in Canadian markets followed by excessive repayment or third-party repayment.
- Appearance of Canada in multi-jurisdiction wires.
- Frequent transactions with an originator or beneficiary at same address in Canada
- Those items generally considered to be red flags for Shell Company Activity (FFIEC BSA/AML Examination Manual Appendix F)
- A bank is unable to obtain sufficient information or information is unavailable to positively identify originators or beneficiaries of accounts or other banking activity (using Internet, commercial database searches, or direct inquiries to a respondent bank).
- Payments to or from the company have no stated purpose, do not reference goods or services, or identify only a contract or invoice number.
- Goods or services, if identified, do not match profile of company provided by respondent bank or character of the financial activity; a company references remarkably dissimilar goods and services in related funds transfers; explanation given by foreign respondent bank is inconsistent with observed funds transfer activity.
- Transacting businesses share the same address, provide only a registered agent’s address, or have other address inconsistencies.
- Unusually large number and variety of beneficiaries are receiving funds transfers from one company.
- Frequent involvement of multiple jurisdictions or beneficiaries located in higher-risk offshore financial centers.
- A foreign correspondent bank exceeds the expected volume in its client profile for funds transfers, or an individual company exhibits a high volume and pattern of funds transfers that is inconsistent with its normal business activity.
- Multiple high-value payments or transfers between shell companies with no apparent legitimate business purpose.
- Purpose of the shell company is unknown or unclear.
The FFIEC BSA/AML Examination Manual Appendix F is a useful tool. Read through and be familiar with all the Red Flags. Many banks that we have seen include the Manual’s list of red flags almost verbatim in their relevant policy or procedure.
Meanwhile, back up north…..
Canada’s transparency interests – civil society organizations with mandates for anti-corruption, transparency, and combating tax avoidance and evasion – such as Publish What You Pay Canada, Transparency International Canada and Canadians For Tax Fairness continue to press for public availability of a database with information about beneficial owners. An April 30, 2020 letter to the government[6] follows up on the commitments made in June 2019 and cites numerous benefits including the deterrence of money launderers from funneling proceeds of crime and terrorist financing through Canadian corporations, prevention of foreign and domestic buyers from using real estate to launder money through shell companies; reduction of laundered-money-driven artificial price inflation in Canadian real estate markets, and, ultimately, to make Canada less attractive to money launderers.
Over the past few years, Canada has stepped up its game with more stringent requirements for KYC, expanded the applicability of AML laws to a broader base of entities, and enhanced requirements for large transactions and suspicious activity reporting. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTF) and its amendments, some of which go into place this month, and the majority in June 2021, will help elevate Canada’s AML regime to more fully align with leading practices and international standards for combatting money laundering and terrorist financing.
In the meantime, keep an eye out for Snow Washing, eh?
[1] The Canada Papers Part 1: https://projects.thestar.com/panama-papers/canada-is-the-worlds-newest-tax-haven/,
Part 2: https://projects.thestar.com/panama-papers/how-a-quebec-company-hid-millions-from-tax-collectors/
Part 3: https://projects.thestar.com/panama-papers/canada-signatures-for-sale/
Part 4: https://projects.thestar.com/panama-papers/lessons-for-canada/
[2] Peer Review Report on the Exchange of information on Request Canada in 2017 (Second Round), p. 10 – https://read.oecd-ilibrary.org/taxation/global-forum-on-transparency-and-exchange-of-information-for-tax-purposes-canada-2017-second-round_9789264280137-en#page1
[3] Transparency International Canada. New Survey Says Majority of Canadians Concerned and Want Action About Money-Laundering or ‘Snow Washing – September 17, 2019” – https://transparencycanada.ca/news/new-survey-says-majority-of-canadians-concerned-and-want-action-about-money-laundering-or-snow washing
[4] Transparency International Canada. Canada Moves the Ball Forward in Com\bating Shell Company Abuse https://transparencycanada.ca/news/canada-moves-the-ball-forward-in-combating-shell-company-abuse
[5] The FFIEC BSA/AML Examination Manual https://bsaaml.ffiec.gov/docs/manual/BSA_AML_Man_2014_v2_CDDBO.pdf
[6] April 30, 2020 letter to Beneficial Ownership Transparency Consultation Innovation, Science and Economic Development Canada –https://static1.squarespace.com/static/5df7c3de2e4d3d3fce16c185/t/5eac8f4f9a7f5a59bfca28f2/1588367183963/ Coalition_Federal+Consultation+Submission+FINAL+copy.pdf
