Introduction – Recent History of Money Laundering and Tax Evasion
If you're a criminal they will catch you, as the saying goes, they even managed to catch Al Capone on tax evasion. Of course, the laws of tax evasion have seen as many developments since the days of Al Capone as there have been developments in the world of crime. Beginning in the days after 9/11, governments throughout the world started cracking down heavily on the financial side of organized crime and terrorism; specifically, the laundering of proceeds of criminal activity. Shortly after the financial crisis in 2007 in the United States, and in 2010 in Europe, a greater level of political scrutiny has been aimed at tax evasion schemes and aggressive tax avoidance. This has not only resulted in various acts of vigilante justice, such as the release of the Panama papers and the Paradise papers, but has also resulted in real changes to law enforcement. Most recently, the laws in relation to tax evasion and money laundering became inter-connected when tax evasion was added as a predicate offence to money laundering.
Money laundering & Proceeds of Crime
Money laundering is a phrase that has for a long time been common parlance, however few people actually understand what specifically constitutes an act of money laundering. The offence of money laundering is found in section 462.31 of the Criminal Code of Canada:
Laundering proceeds of crime
462.31(1) every one commits an offence who uses, transfers the possession of, sends or delivers to any person or place, transports, transmits, alters, disposes of or otherwise deals with, in any manner and by any means, any property or any proceeds of any property with intent to conceal or convert that property or those proceeds, knowing or believing that all or a part of that property or of those proceeds was obtained or derived directly or indirectly as a result of
(a) the commission in Canada of a designated offence; or
(b) an act or omission anywhere that, if it had occurred in Canada, would have constituted a designated offence.
In plain English what this means is, should you participate in a crime ( a'designated offence') that produces proceeds you have committed an act of money laundering when, knowing that the proceeds were derived from crime, you undertake an act to conceal the criminal source of the funds or convert the funds into other types of assets for the purpose of concealing the original criminal source.
The jurisdiction of Canadian legislators obviously does not extend across the entire globe. However, if you are hoping to commit money laundering by simply utilizing off-shore bank accounts, or other off-shore assets, you're believing yourself to be cleverer than you really are. The case of R v. Libman is often cited as the leading precedent in Canada on the issue of jurisdiction of Canadian criminal law. In this case the Supreme Court summarized the modern approach to the issue as
[...] all that is necessary to make an offence subject to the jurisdiction of our courts is that a significant portion of the activities constituting that offence took place in Canada. As it is put by modern academics, it is sufficient that there be a "real and substantial link" between an offence and this country, a test well-known in public and private law
From a legal perspective the best defence to money laundering charges will often be a 'mistake of fact' defence. Claiming a mistake of fact requires that you honestly held a belief that the proceeds that were concealed or converted were not derived from a designated offence. The reason that this is an effective defence is the lack of knowledge as to the predicate offence from which the proceeds arose negates the possibility of intention to commit the money laundering, in legal parlance no mens rea.
Tax Evasion as a Predicate Offence
As stated in the Criminal Code, the proceeds of crime being concealed must relate to a 'designated offence' (predicate offence), which is any offence that may be prosecuted as an 'indictable offence' under the Criminal Code or any other federal penal statute. An indictable offence is roughly equivalent to a felony offence in the United States and generally involves a right to trial by judge and jury. Canada has followed the lead of many countries over the past 18-24 months by adding tax evasion and copyright offences to the list of designated predicate offence to money laundering.
Many people have an intuitive understanding of what constitutes tax evasion. The concept is simple enough to understand - a person who is committing tax evasion is a person who is not paying the full amount of taxes they lawfully owe. In practice, this black and white portrayal is in fact far from accurate. A very grey line exists between the actions rightfully called tax evasion and those actions that constitute ordinary tax planning. That grey line should be recognized as "tax avoidance". Strictly speaking, tax avoidance is wholly within the letter of the law; however, it is sometimes said that it is not conforming with the '"spirit" of the law.
When an expert Canadian tax lawyer finds a way to minimize the tax burden his or her client's business faces, that tax lawyer is properly serving their client by ensuring that the client does not incur any more tax burden than Canadian tax laws require them to. This tax planning, when done in the cleverest of ways, requires considerable time, effort and intellect. When anyone, especially a professional accountant or tax preparer, prepares a tax return while knowingly misrepresenting the amounts of income and expense, they are engaging in behaviour that is unlawful, morally reprehensible and frankly just lazy. Furthermore the Income Tax Act provides specific penalties for third party representatives such as tax planners and preparers of returns who know, or could reasonably be expected to know, of a false statement or omission being made in the client's return. The amount of the penalty for third parties for tax planning activity is the greater of $1000 and the amount of gross compensation received for the activity. The penalty for participating in the misrepresentation in the return is equal to $1000 plus the lesser of $100,000 or 50% of the tax that would otherwise have been avoided.
In Canada, the basis of a charge of tax evasion is typically either paragraph 239(1)(a) of the Income Tax Act, making a false or deceptive statement in a return, or paragraph 239(1)(d) wilfully, in any manner, evaded or attempted to evade compliance with the Income Tax Act or the payment of tax imposed by the Income Tax Act (similar provisions exist under the Excise Tax Act). The Income Tax Act gives the Canada Revenue Agency ("CRA") the option of initiating proceedings either by way of summary conviction or indictment.
The investigation of a tax evasion case begins with an audit by the Verification and Enforcement Division of the CRA. Once it is determined that the case is to be pursued, the Verification and Enforcement Division refers the case to the Investigations Division of the CRA. This referral is done without notice to the taxpayer. After referral, the Investigations Division will undertake a preliminary review of the case and, if accepted, will begin a full investigation. It is at this point that a taxpayers Charter rights arguably begin to apply restrictions on evidence gathering, meaning the investigator can no longer rely on the administrative powers to compel evidence from the taxpayer and any evidence obtained must be done so by way of a lawfully executed search warrant.
At the end of the investigation, the investigator will prepare a prosecution report and send a letter to the Department of Justice recommending that charges be laid (or rarely, not). The Justice Department has discretion on this decision to determine whether it is in the interest of justice to pursue the case. It is at this point in the process that the decision between indictment and summary conviction is to be made.
Penalties & Asset Forfeiture
The difference between indictment and summary offence will have a huge impact on the consequences for a taxpayer should they be found guilty. For example, summary proceedings have much more favourable limitations compared with indictments. Subsection 244(4) of the Income Tax Act places a limitation period on summary conviction offences of 8 years, while no such limitation exists for indictable offences. Minimum sentences exist for both summary and indictment convictions, however the maximum penalty for summary conviction is limited to 2 years in prison OR 50-200% of the tax sought to be evaded. The maximum penalty by way of an indictment is 5 years in prison AND 100-200% of the tax sought to be evaded.
Conviction on indictment can also lead to asset seizure and/or forfeiture. Section 462.32 of the Criminal Code gives judges the discretion to issue a warrant for the search and seizure of property where a peace officer believes on reasonable grounds that an order of forfeiture may be made for proceeds of crime. The Attorney General need only file an application with the Court ex parte (meaning without notice to the opposing party) to have a judge consider the use of this discretion.
Recently, the CRA has chosen to use this method of collection for the first time against two individuals operating a rental business in Ottawa, Chi Van Ho and Thanh Ha Thi Nguyen. The CRA confirmed to reporters that this was the first time the proceeds of crime provisions had been used to go after an individual charged with tax evasion. The proceeds of crime provisions were enacted for the primary purpose of law enforcement's targeting of terrorist financiers and money laundering schemes related to terrorism. The fact that the CRA is threatening ordinary Canadians with these extreme measures is unquestionably a reach beyond what the administration of income tax rightfully calls for. Unfortunately, it is not likely that the Courts are going to do anything to stop the CRA from advancing the use of these provisions without strong advocacy from Canadian tax lawyers.
Unlike the United States Bill of Rights, Canada does not provide express economic rights in the Charter. Further, it is unlikely that section 8 (unreasonable search and seizure) would be invoked by a Court to invalidate court-ordered forfeitures. This has so far been the case whenever provincial government are exercising the provision in what is often referred to as 'civil forfeiture'. Provincial governments have often been accused of making a zealous cash grab whenever using the proceeds of crime provisions to seize the assets of a Canadian resident, and those criticisms are mostly justified. The use of the proceeds-of-crime provisions to seize assets is clearly intended to be reserved for extreme circumstances. However, as it is possible for law enforcement to use this method of seizure, even when the owner of the property is not involved in the offence, it is essential that tax payers seek out counsel from Canadian tax lawyers early on when faced with possible investigative action.
Tax Tip: Engage with a Canadian Tax Lawyer
Every lawyer has their own area of expertise and tax law is one of the more complex areas that typically doesn't enable lawyers to just dabble in the subject here and there. If you are facing prosecution of tax crimes, it is imperative that you seek advice from an experienced Canadian tax lawyer. Regular criminal defence lawyers will understand the ins and outs of the Justice system and the trial process, but it is highly unlikely that they will understand the details of the tax prosecution. Ordinary criminal defence lawyers will lack an understanding of tax and accounting principles, they will not have experience in conducting in-depth review of CRA auditor/investigator work and will struggle with interpreting the evidentiary documentation involved. Criminal defence lawyers will certainly bring their area of expertise to your case and have a lot to offer, but relying exclusively on their understanding of tax issues is not a sound course of action.