By Stanley Tromp, National
Post,
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Tax-free status tempts organized
crime, police say Organized crime groups could exploit banks
located on Canadian Native reserves to launder money and grow their profits, according to an RCMP
criminal intelligence report.
"A recent Supreme Court of
Canada decision created a new window of opportunity for organized crime
groups," the RCMP warned in the November 2011 report on cigarette
smuggling, obtained under the Access to Information Act.
That assessment followed a July 2011
ruling by Canada's top
court that interest income earned from deposits in banks located on reserves is not taxable under the
long-standing Section 87 of the Indian Act, a decision that overturned two
previous judgments, one from the Tax Court of Canada, and the other from the
Federal Court of Appeal.
The appellant (a legitimate
businessman) had earned interest on term deposits in an aboriginal credit union on the Mashteuiatsh Reserve in Quebec, even though he was a member
of the Obedjiwan Reserve, where there was no bank. The majority ruled his
membership location was unimportant, and also stated there was no need to
consider whether under Section 87 the property or the activity which generated
it "benefited the traditional Native way of life."
Yet two of the nine justices
dissented, writing: "To grant the exemption in such circumstances would be tantamount to turning the
reserve into a tax haven for Indians engaged in unspecified for-profit
activities off the reserve."
The RCMP agreed, writing that, as a
result of the ruling, "organized crime groups may seek to make
arrangements with individuals of Native status to benefit from this tax
protection. Such arrangements could
be used to conceal the
origins of illicit profits, as well as grow those proceeds with the tax
protection through further investments.
"This decision has the
potential to create barriers for law enforcement investigating the contraband
tobacco market in First Nations reserves, as it provides an opportunity to
launder earnings by
filtering it through on-reserve bank
accounts, and diverting the funds into the mainstream investment markets. It
also provides an opportunity for tax evasion, and the ability to profit
extensively from those earnings."
But some observers believe the RCMP
warning is overstated, because the same cash reporting rules apply to aboriginal banks just as they did before the
ruling, laundering is a separate topic from tax exemption and the judgment does
not deal with forms of investment income other than interest on bank deposits.
"I just don't see how earning
tax-free interest on the reserve would facilitate money laundering," said Jeffrey Pniowsky, a lawyer who intervened in the case for the
Assembly of Manitoba Chiefs and who formerly worked for the Integrated Proceeds
of Crime Unit of the Justice Department.
"That seems like a pretty far
stretch," Mr. Pniowsky said. "The tax-free
status was already happening, and this ruling only clarifies it. There is also
a big difference between lawful tax avoidance and criminal tax evasion.
Moreover, if there is a concern of natives increasing their exposure in the
mainstream commercial world, so be
it, and frankly speaking, their doing so is a good thing."
Aboriginal banks
were created in Canada as one means to help raise natives out of poverty and
economic dependence on the state. The National Aboriginal Capital Corporations Association ( NACCA) was founded as a voluntary network in 1993 to aid aboriginal financial
institutions. It has since developed into a formal association with 56 members,
and for its members' guidance, its website publishes a sample Code of Conduct
(modified from codes from the banking sector).
Point No. 11 states: "Prevent money laundering and fraud: we
must comply with local laws, regulations and AFI standards on money laundering and fraud
prevention."
On aboriginal banks'
activity, Inspector Jean Cormier, acting director of the RCMP Proceeds of Crime
Branch, said the ruling "would not change their reporting requirement
under the Proceeds of Crime Money
Laundering and Terrorist Financing Act."
Under the law, financial
institutions in Canada must track cash transactions of more than $10,000 daily
(or other large suspicious deposits) that could be
used to fund criminal or terrorist activities within and beyond Canada's
borders, and report them to the Financial Transactions and Reports Analysis
Centre of Canada (FINTRAC) within 15 days.
FINTRAC posts 22 administrative
penalties on its website (distinct from criminal penalties) that it imposed on
named financial institutions since 2009, ranging from $3,190 to $169,080, for
three credit unions but mostly money
service outlets.
"Our first concern would be the initial deposit and
introduction of any criminal proceeds of crime into accounts at any financial
institutions," Insp. Cormier added. "The accumulation of interest is
also of concern but secondary."
"The thing that might bring an
elevated risk of money
laundering," FINTRAC spokesperson Peter Lamey
said, "is lack of compliance with the [Proceeds of Crime act], which is a
separate matter from the court decision.
"This act applies to credit
unions operated by aboriginal groups. If they are
meeting their obligations under the law it should mitigate the risk that they might
be used by criminals to launder money."
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