Criminals may exploit native banks

By Stanley Tromp, National Post, 09 Oct 2012


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."