In Canada: A New Tax Haven, Alain Deneault traces Canada’s relationship with Commonwealth Caribbean nations back through the last half of the twentieth century, arguing that the involvement of Canadian financiers in establishing and maintaining Caribbean tax havens has predisposed Canada to become a tax haven itself – a metamorphosis well under way.

Canada: A New Tax Haven is available from Talonbooks for $29.95.

Below, read the bulk of the book’s introduction (pages 1–9). (Note that while the text of the book is heavily bolstered by end notes, notes have been omitted in this web version.)

INTRODUCTION

Above: map of the Caribbean (Wikimedia)

Headlong flight

In which investigative journalists release massive amounts of data about owners of secret tax haven accounts, and the Canadian finance minister hastens to Bermuda

On April 4, 2013, members of the International Consortium of Investigative Journalists (ICIJ) in countries throughout the world announced that they had gained access to the financial records of over 100,000 investors with bank accounts in tax havens. Among the ICIJ members were CBC and Radio-Canada journalists, who covered the story at the national level. This was by far the most spectacular leak of offshore data the world had ever seen, but it was not the first. In 2008, a systems engineer working for the HSBC Bank in Geneva, Hervé Falciani, had given French authorities details of thousands of accounts held by his bank, and that same year, German tax authorities had intercepted information about tax evaders in Liechtenstein. In short, although information on this topic is still relatively sparse, bank secrecy is no longer as impenetrable as it once was.

By the time investigative journalists unleashed their thunderbolt, the home states of major clients of offshore banks had already begun to take action. After years of leniency, in March 2010 the United States suddenly enacted the Foreign Account Tax Compliance Act, familiarly known as FATCA. This law requires banks throughout the world “to track down those who are evading American tax laws throughout all of their subsidiaries and to take disciplinary action against them on behalf of the United States tax authorities.” In 2013, the year FATCA came into force, France was setting up a judicial body specializing in international tax fraud and tightening supervision of assets held by elected politicians, while the British government unexpectedly threatened to exceed its constitutional powers in order to challenge the bank secrecy clauses defended by a number of highly permissive jurisdictions under the direct authority of the British Crown.

The Canadian government could not remain indifferent to this issue. By 2012, Canadians had “invested” more than $155 billion in seven offshore tax havens. Under this practice of tax avoidance, citizens are deprived of money to fund public services, and the state as defender of the common good looks like a joke. Like its neighbours, Canada started by announcing a program to track those guilty of “fraud” – or such at least was its ostensible purpose as it threatened to sue CBC journalists to make them disclose the information they had obtained. The government also tabled a budget that closed a few peripheral loopholes, then announced it would increase funding for the department in charge of detecting tax swindlers. Having taken these measures, Ottawa felt entitled to include in its budget anticipated revenues from Canadians abroad amounting to $5.2 to $7 billion a year.

The chief effect of all these decisions, however, was to transform a political debate into a legal issue. Focusing on tax cheats is a way of taking attention away from the fact that, for decades, Canada has been legalizing the use of tax havens under a wide range of circumstances and has also looked to them for inspiration in developing its own policies.

The federal government’s real response to CBC and ICIJ revelations was expressed on April 12, 2013, when Finance Minister Jim Flaherty hastened to Bermuda to reassure the business community there. Flaherty was welcomed with open arms by Business Bermuda, an association dedicated to the promotion of investment in the archipelago. Bermuda, one of the most overtly criticized tax havens in the world, is also one of the states that has signed a Tax Information Exchange Agreement (TIEA) with Canada. TIEAs may pierce the bank secrecy of permissive jurisdictions under some (rare) circumstances. Their chief purpose, however, is to enable Canadians to use these jurisdictions to register assets generated in Canada; the assets can then be transferred back to Canada as dividends, on which no tax is paid. The stratagem is made possible by Canadian tax regulations associated with TIEAs. As a consequence, by 2012, Canadians had moved close to $12 billion to Bermuda. Flaherty’s 2013 trip to Bermuda was intended to consolidate commercial relations between the financial establishments of the two countries. During his visit, the finance minister acknowledged Bermuda as a “global leader” in the reinsurance field. As we will see, hundreds of companies in the wider insurance field have incorporated in Bermuda in order to bypass the tax policies and regulations of countries such as Canada. The minister trivialized the relocation of a colossally profitable economic sector, which, at a moment when the world was becoming acutely conscious of the severity of the relocation problem, was nothing short of provocative.

What became clear in the spring of 2013 was that the Canadian federal government’s policy is to fight tax fraud by legalizing it. The government simultaneously condemns the fraudulent use of tax havens and encourages their legal use by corporations and the very rich; in some cases, it even provides these users with benefits. As sociologist Pierre Bourdieu argues, the left hand of the state doesn’t know what the right hand is doing. The principles that lead the government to fight tax fraud are obviously contradicted by measures that incite corporations and wealthy individuals legally to benefit from highly permissive legislative and jurisdictional regimes. And in order to satisfy the financial and industrial class whose interests are represented in Ottawa, Canada is now working unobtrusively to legalize what was formerly viewed as fraud.

Tax havens and highly permissive jurisdictions

A tax haven is commonly defined as a jurisdiction whose tax rate is or approaches zero and whose legal system (not that its unworthy rules really deserve to be known as “laws”) creates a level of bank secrecy that conceals the identity of account holders as well as the nature of their transactions. No substantial activity takes place in a tax haven: its jurisdiction is used strictly for accounting and legal purposes to avoid laws and regulations in force elsewhere in the world. In this sense, it is a haven – a safe place – for corporations and “high-net-worth individuals” trying, by legal or illegal means, to avoid paying taxes.

But highly permissive jurisdictions include more than just tax havens. They also include other types of states: states that provide not only tax advantages, but also a wide range of privileges, and especially privileges of a regulatory and legal nature. Working to benefit banks, corporations, and wealthy individuals, these ultra-termissive states neutralize the laws, public policies, and regulations that hold sway in traditional states. We will refer to all these states as accommodating jurisdictions, a generic term we suggested in a previous work to include not only tax havens but also legal and regulatory havens, free zones, and free ports. Each of these jurisdictions, of which there are dozens, in its own way enables privileged actors to bypass not only laws of taxation in their country of origin, but also laws applying to many other fields such as high finance, insurance, accounting, intellectual property rights, manufacturing, or maritime transportation.

Another type of activity merits consideration. Criminal trafficking is more likely to flourish in accommodating jurisdictions than in traditional states. The radical permissiveness of the former, established with the assistance of the latter, allows the gangrene of crime to spread. On the world market, political sovereignty is now a commodity. According to economist Raymond W. Baker, “The law in these places can be bought … What is legal is commercialized by authorities and sold as a product. Many havens and enclaves are niche players in this business of legalizing subterfuge. Tax lawyers go ‘treaty shopping’ for the most favourable legislation protecting certain types of activities.” One such tax consultant, Alex Doulis, actually says that a tax haven is a “jurisdiction that is in the business of providing tax avoidance” when it is designed, for example, to transform a process that should not be legal (tax evasion) into one that is (tax avoidance). Thus global governance pits states against each other as competitors, forcing them to satisfy international capital by every possible means, including extreme deregulation and legalization of acts that are viewed elsewhere as wrongful acts according to the spirit of the law. Summing up the situation, Marie-Christine Dupuis-Danon, an expert long employed by the UN in the fight against money laundering, noted that the offshorization process in which we are now involved is inciting an increasing number of individuals and companies “no longer to ask if an act is wrong in itself, but to ask if it can be carried out in a completely legal manner somewhere in the world.”

What this means is that tax havens cannot be reduced to a cartoon representation of coconut trees and dazzling beaches on a distant island where anything goes. “Today, the traditional image is being replaced by an image of countries whose laws and tax administration are effective … in that they have the power to attract. The idea of the tax haven, like any other concept, evolves over time,” writes a group of accountants with a fondness for offshore activity. A less jovial definition that also recognizes the historical evolution of tax havens was provided by tax specialist Richard Gordon. In a report submitted to the White House in 1981, Gordon pointed out that a tax haven is simply any jurisdiction that is viewed as such by those who profit by it. This definition tells us that tax havens aren’t necessarily where we think they are. Today, unsuspected jurisdictions can sometimes be detected only by signs such as capital flows – especially when these flows bear no relation to the state of the real economy – or a high number of incorporations.

In the postwar years, many British dependencies and former colonies changed their laws to establish themselves as formal tax havens, but Canada did not do so. Rather, it chose to involve itself with a number of Commonwealth jurisdictions that were becoming tax havens, often instigated by Canadian emissaries and Canadian citizens present in the Caribbean. At home, however, Canada did not adopt comprehensive measures guaranteeing bank secrecy or providing tax-free status for foreign entities choosing to incorporate in Canada without carrying out any real economic activity there. This was to come sector by sector and in small touches, particularly in the extractive industry. During the crucial postwar years, Canada managed to maintain a credible facade, even urging corporate entities (corporations and their subsidiaries) and individuals active in Canada to report on their extraterritorial operations.

In a thousand ways – progressive, subtle, and indirect – Canada has favoured, in recent years, the powerful and wealthy seeking to use tax havens to bypass public constraints. And yet these constraints are precisely what give substance to the principle of rights and freedoms that should apply fairly to all. Today, our country’s laws and public policies apply only to citizens belonging to social classes unable to take advantage of the loopholes that our indulgent government has created for the benefit of the powerful.

Canada, pioneering instigator of Caribbean tax havens

If we want to understand the relationship between Canada and today’s tax havens, we need to understand Canada’s direct contribution to the genesis of some of these jurisdictions. Because Canada had trade relations with British dependencies in the Caribbean long before they became tax havens, and because Canadian banks had played a key role in the Caribbean since the early twentieth century, Canada was a major player in their transformation. As we will document in this book, beginning in the 1950s, at the instigation of Canadian financiers, lawyers, and policymakers, these jurisdictions changed to become some of the world’s most frighteningly accommodating jurisdictions. In 1955, a former governor of the Bank of Canada most probably helped make Jamaica into a reduced-taxation country. In the 1960s, as the Bahamas was becoming a tax haven characterized by impenetrable bank secrecy, thanks to a former Canadian minister of finance the Bahamian finance minister was a member of the board of administrators of the Royal Bank of Canada (RBC). A Calgary lawyer and former Conservative Party honcho drew up the clauses that enabled the Cayman Islands to become an opaque offshore jurisdiction. Later, in the 1980s, the Canadian government itself made Barbados into the tax shelter of choice for Canadians. Our country has also asserted itself as an imperialist power in states that are notorious drug-trafficking hubs, such as Trinidad and Tobago.

Canada eventually began to experience the impact of creatures that it had helped beget. In the 2000s, the government of Nova Scotia encouraged subsidiaries of Bermudian companies responsible for routine accounting tasks to establish themselves in the province, while the Toronto Stock Exchange acquired a stake in the Bermuda Stock Exchange. Persistent rumours indicated that Canada was about to annex accommodating jurisdictions such as the Turks and Caicos Islands and make them into Canadian territory. Canada also signed a free-trade agreement with Panama, world centre for laundering the proceeds of drug trafficking, and today is attempting to sign similar agreements with all the countries included in the Caribbean political community (CARICOM). A number of Caribbean tax havens currently share Canada’s seat at the World Bank and the International Monetary Fund.

Given its history of leniency, it’s hardly surprising that Canada is now seen as a tax haven itself. This is a reality that is increasingly difficult to conceal. Not only is the corporate tax rate in Canada one of the lowest in the industrialized world, but some of the loopholes in its laws induce foreign companies to relocate their activities to Canada, just as if it were Luxembourg or Belize.

Early symptoms

Early symptoms of Canada’s seamless incorporation into the world network of tax havens were described in the early 1990s by investigative and forensic accountant Mario Possamai (who was close to an RCMP source) on the CBC’s Fifth Estate television program and in his book Money on the Run: Canada and How the World’s Dirty Profits Are Laundered. Possamai’s findings ought to have come as a bombshell; however, his work was quickly set aside. Reading his book even today is enough to send a chill down the spine. One story concerns Haitian kleptocrat Jean-Claude Duvalier and his wife, Michele. When they were forced by popular unrest to leave Haiti on February 7, 1986, their first move was to empty government bank accounts. The Duvaliers, whose colossal fortune is particularly shocking and scandalous in that it originates in a country of extreme poverty, helped themselves even to money owed by the state to foreign institutions. In the 1980s, while nine out of ten children in Haiti were malnourished, two hundred local families had gradually acquired wealth that made them into millionaires. The Duvaliers, as everyone knows, entrusted a significant part of their assets to Swiss banks. In April 1986, the Swiss authorities and courts – at a time when Switzerland was already under scrutiny for similar affairs – took the highly unusual step of freezing the Duvalier accounts. The Duvaliers now “required a fail-safe system for replenishing their cash supply from their deeply buried fortune. And there was a complicating factor. Things were heating up on the legal front.” The couple turned to Canada. On September 23, 1986, Alain Le Fort, a lawyer from the Geneva law firm of Patry, Junet, Simon, and Le Fort, showed up at RBC headquarters in Toronto. Le Fort was one of a handful of advisers who had successfully laundered some of the millions that the Duvaliers and their entourage required to enjoy a pleasant life in exile. The goal of these advisers was now to convert into cash a sum of $41.8 million held by their famous clients in Canadian treasury bills. Most importantly, they proposed to do so “without disclosing the funds’ origins or owners.” The use of Canadian financial documents made the money more difficult to trace, and perhaps more importantly, Canadian treasury bills are the kind of security that doesn’t attract the attention of international inspectors because they are seen as respectable. This is how the RCMP and the U.S. Drug Enforcement Agency, in a joint report, explained why the funds had been moved through Canada. To put it in a nutshell, Canada’s worthy reputation was for sale.

Once converted into Canadian treasury bills, the Duvaliers’ assets could no longer be scrutinized. Internationally, these securities are acknowledged money-laundering tools. “Canadian treasury bills – popular internationally for, among other things, the ease with which they’re bought and sold – are virtually anonymous. The Duvaliers’ bonds could have been purchased anywhere.” Le Fort worked with a Swiss colleague, Jean Patry, and John Stephen Matlin from the British law firm of Turner and Company to take full advantage of the Canadian connection as part of an operation that would involve as many jurisdictions as possible. The dictator’s money was moved from Canada to the tax haven of Jersey, where it was received by the Royal Trust Bank, a subsidiary of Canada’s Royal Trust Company. A deposit was then made to an account that was part of a larger account held by the Manufacturers Hanover Bank of Canada, a financial institution with its headquarters in Toronto a few steps away from the RBC where the whole operation had been set in motion. The operation became more complex, with securities being split from their ownership records and further movements between the HSBC Bank in Jersey, the RBC in London, the Banque Nationale de Paris, and sundry Swiss institutions. Despite guidelines requiring banks to determine their customers’ identity, the RBC admits that it simply relied on the impeccable credentials of the two lawyers, Le Fort and Matlin, who were conducting the operation. The bank later claimed that it would have refused the money had it known who the true beneficiaries were. According to Possamai, “That it did not highlights the limitations of a cornerstone of the strategy used by both the federal government and Canadian banks to combat money laundering.” He also says that it is unlikely any other Canadian bank would have turned down the Duvaliers’ money, and that all this happened before the 1989 law “intended to crack down on the practice.” An American investigator from the Stroock & Stroock & Lavan firm, sent to Port-au-Prince in 1986 to audit government accounts, remarked with bitter irony that “the exiled Duvaliers were probably better off than they had been in Port-au-Prince: they had all the benefits of the Haitian treasury with none of the headaches of governing.” While Haitian government representatives were trying to track down public funds wherever they might be, financial technicians in the Duvaliers’ pay “had set up an intricately concealed flow of money through a bevy of banks and accounts, most of them Canadian.”

In 1992, then, we already had all the information we needed to understand that Canada – like many other former colonies – was completely incorporated into the network of tax havens that it had played a key role in developing. Today, we are finally tackling the job of studying this phenomenon. Each chapter of this book details the connections established by Canada with one of the tax havens in the British Caribbean, from the late nineteenth century to today. In each case, we identify the agents involved and analyze the offshore stratagems they developed with the help of local authorities, until the time when Canada began to model entire sections of its own laws on this offshore model.

Canada: A New Tax Haven is available from Talonbooks for $29.95.

Also see Denault interviewed in the 2015 documentary, The Price We Pay.