Canada: Transparency advocates raise alarm over anonymous ownership

When Avigilon (TSX:AVO) CEO Alexander Fernandes and his wife, Irene, spent $8 million on their downtown Vancouver penthouse and another million renovating the 6,000-square-foot space, part of the appeal was security doors that encased the elevator in the unit, reports Business Vancouver.

The fob-controlled system ensured residents could access only their floor, and the penthouse featured self-locking wood and glass security doors on the exterior needing a physical key to open them. But a little over a year after the couple took possession, the BC Safety Authority found the doors impeded access for emergency personnel and would have to be removed and replaced by a vestibule that would eliminate about 1,000 square feet of the unit’s living space.

Alleging dangerous defects in the building, the couple is suing developer Amacon, realtor Grace Kwok and a host of others in BC Supreme Court for rescission of contract, though their names are nowhere to be found in the lawsuit.

The suit, filed in October 2016, refers only to Mr. A and Ms. B, the beneficial owners of a family trust that owns the plaintiff in the case, 0966658 B.C. Ltd., of which Irene Fernandes is a director.

“Mr. A is the chief executive officer of a global security firm and is very concerned for the security and safety of his family and property,” the lawsuit states. “The security doors were and are a critical feature of the unit for Mr. A. and Ms. B, and they would not have purchased the unit if the elevators were not equipped with the security doors.”

The numbered company’s lawyer, Paul Mendes, refused to comment on the lawsuit, and Alexander Fernandes wouldn’t confirm or comment on it, but stated in general that owning property through a company has obvious benefits.

“Most commercial real estate and people with a bit of brains or sophistication will often hold just any property, real property, whether it’s residential or commercial, in a corporation,” Fernandes said in a phone interview. “There’s only a transfer tax if there’s a change in title ownership, so if you sell your corporation, you do not have a transfer tax because the property’s not being transferred – it’s the same owner.”

The provincial government, for its part, made changes last June to track registrations of bare trusts and is “monitoring the data closely,” Ministry of Finance spokesman Jamie Edwardson said in an emailed statement.

“Government is considering the advantages and disadvantages of taxing transfers of beneficial interests that happen outside of registrations at a land titles office, and assessing what the broader consequences for business competitiveness would be. This would be a fundamental change from the current property transfer tax, and is comparable to the creation of a new system with a new tax administration.”

Meanwhile, legitimate tax benefits and security concerns aside, the use of shell companies as corporate veils of anonymity to access real estate markets in Vancouver and around the world has transparency advocates increasingly concerned.

In its Doors Wide Open; Corruption and Real Estate in Four Key Markets report released March 31, Transparency International sounds the alarm over anonymous companies and trusts in Canada, Australia, the United Kingdom and the United States.

“The ease with which such anonymous companies or trusts can acquire property and launder money is directly related to the insufficient rules and enforcement practices in attractive markets,” the report states.

The report’s Canadian findings draw upon No Reason to Hide: Unmasking the Anonymous Owners of Canadian Companies and Trusts, a Transparency International Canada report released last December written by Adam Ross, a corporate investigator and transparency advocate with Vancouver’s White Label Insights.

Ross told Business in Vancouver that shell companies have numerous legitimate uses such as limiting liability, though the high-end property market in the city is littered with multimillion-dollar homes owned by companies cloaked in secrecy.

“There are … legitimate tax purposes that you would set up and use a company for aside from trading in goods and services. But now people are able to kind of shop around to jurisdictions where there’s the lowest level of transparency and disclosure when it comes to setting up a company. And unfortunately, Canada is one of the least transparent jurisdictions in the world.”

The lack of transparency associated with offshore tax havens has awoken the public and governments the world over to the use and potential abuse of anonymous corporate entities.

“We are in the midst of a monumental shift in societal expectations about transparency,” Ross’ report states. “Whistleblower disclosures such as the Panama Papers and Luxembourg Leaks have provided concrete examples of the ways in which legal entities and arrangements – companies and trusts – are exploited to the public’s detriment by those looking to avoid taxes or launder the proceeds of crime and corruption, among other nefarious aims.”

Ross said gaps in data collection by corporate registries such as shareholder information and lack of verification measures are problematic, especially for investigators probing companies potentially involved in illegal activity.

In B.C., for instance, accessing company director information requires a BC Online account and a fee applies to each search, and even after it is paid, shareholder information is not kept, directors might be nominees working on behalf of the real beneficial owners and addresses recorded are often post office boxes or lawyers’ offices.

“If a company’s being used for something illegitimate and you’re trying to investigate it, whether you’re the RCMP or the tax authorities or a counterparty in a lawsuit or a journalist, you’re just going to be met with dead ends,” said Ross. “That post office box is just another dead end, as is a lawyer’s office or a nominee who is appointed as a director or officer of the company. The way that people are able to set up companies in Canada right now, they can do so in a way that there’s nothing but dead ends.”

He added that there’s a disconnect between public perception and the realities of a modern globalized world where regulations have failed to keep pace with technology.

“The gap between public perceptions of Canada as this progressive, transparent, reputable society where we associate Canada with good governance and kind of best practice, and actually, the way that we structure companies and trusts and the way that property is owned here is anything but – it’s totally opaque,” he said.

But Ross said that perception is changing as people “are seeing property prices, for instance, skyrocketing.”

“When it’s something tangible like that – stories of students buying $30 million mansions – and knowing that there doesn’t have to be any disclosure on where the money came from and who really owns it, that’s resonating with people. It’s now on people’s doorstep here.”

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