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This article originally appeared in The Bottom Line.
A new whistleblower line designed to uncover hidden offshore assets is a great first step, but there’s still a long way to go in combatting a financial fraud problem that is largely of unknown proportions in Canada.
The Offshore Tax Informant Program (OTIP) has received a steady stream of calls since its January launch, but it could be years before it pays out rewards to informants.
As of June 30, OTIP had received more than 900 calls, 278 of which were from tipsters, and more than 180 case numbers have been issued. There have also been 119 written submissions, said Philippe Brideau, spokesman for Canada Revenue Agency.
“We are analyzing 85 active cases and a number of others have been referred to other areas within CRA for compliance action. The CRA believes this is a good start to the program,” he said. “We strongly encourage those who have information related to international tax evasion and aggressive tax avoidance to come forward — we want to hear from you.”
The program is modeled on a more generous counterpart in the U.S. which offers rewards up to 30 per cent of the amount recovered. In one high-profile case, the Internal Revenue Service paid out $104 million US to one informant after collecting $5 billion US in back taxes from Swiss banks.
The Offshore Tax Informant Program, by comparison, will pay out rewards of between five and 15 per cent only if the CRA successfully collects more than $100,000 in taxes owed. The tipster must also pay income tax on the reward. (Some classes of informants are excluded, including most public servants or criminals.)
The whistleblower must also reveal their identity, unlike the CRA’s whistleblower line on domestic tax fraud, which doesn’t pay out rewards.
Jonathan Garbutt, a Toronto-based lawyer at Dominion Tax Law, was an initial critic of OTIP, regarding it as a knee-jerk reaction upon its announcement in a 2013 federal budget that contained no details about it. “It wasn’t halfbaked, it wasn’t even an attempt at baking,” he said.
However, Garbutt has come around and as calls are streaming in he’s more optimistic about OTIP’s future success. He said the mere existence of a whistleblower program changes the dynamic. Previously, the focus of Canadians trying to hide assets offshore was on being able to get away with something.
“Now it’s a question of when somebody is going to sell you out. Somebody is out there hunting you. You better get your butt onside,” he said.
Garbutt feels there is still room for improvement. For example, he believes the Canadian government is being “cheap” by offering such relatively meager rewards.
“Being cheap is also being inefficient. They have the U.S. government system in front of them, it’s working and it’s easy to copy. (The U.S. government) is cracking open Swiss banks,” he said.
The other fundamental difference between the two programs is whistleblowers in the U.S. need to be represented by legal counsel before officials will talk to them.
“They use lawyers to separate the wheat from the chaff. The lawyers act as the screening mechanism and do all the work for them. They screen to make sure the whistleblower has the goods, has the documents, the information, ongoing access to get what they need and they can put together the case in its entirety and say, ‘go get them.’ The IRS doesn’t see any chaff. It sees solid gold,” he said, adding that in return for their work, lawyers’ fees in the U.S. run up to 40 per cent of the amount recovered.
Garbutt is also concerned because the CRA has eliminated 2,500 jobs in recent years at the same time as the government wants to balance the budget. He says a typical CRA investigator brings in 20 times their salary every year.
The Offshore Tax Informant Program has an annual budget of about $700,000, but he doesn’t think it’s being used as efficiently as possible because only 10 per cent of whistleblower calls have been worth following up on.
“You have to spend money to make money. If they made it more lucrative, it would be efficient for lawyers to be the screening process,” he said. “The government is all excited about cutting back on tax evasion but they’re cutting back on auditors. It’s still early days but they could change the program and make it better overnight.”
Leigh Beijer, Toronto-based senior manager in MNP’s investigative and forensics group, is a fan of OTIP, wrinkles and all. “From a fraud forensics point of view, it’s a great step forward in fighting the financial crime world. Whistleblower lines are typically one of the most effective ways to identify things that couldn’t be identified normally,” she said.
So, what’s an accountant to do if they discover or suspect that a client is hiding offshore assets from the Canadian government? OTIP doesn’t change anything here. If you’re aware of any wrongdoing, it’s your professional duty to report it.
“We have obligations that require us to prepare tax information based on what we know. We have professional standards. Under the proceeds of crime, money laundering and terrorist financing act, if something suspicious comes up through the course of our services, we have an obligation to report back to the Financial Transactional Reporting Analysis Centre,” she said.
Of course, an accountant can only report on what’s given to them. If a client withholds damning information, they’re no more guilty than anybody else, she said.
Beijer isn’t sure if larger payouts would convince more Canadians to turn people in. She says most people call into the domestic tax-tip line because it’s the right thing to do. The fact whistleblowers could be called witnesses as the process goes forward could keep some people from picking up the phone, she said.
Regardless of the size of any payouts, informants will need to be patient. Assuming a would-be perpetrator is flagged, the expected appeals could drag the entire process out for seven or eight years, she said.
It’s a bit of an odd situation, she admits, because nobody really knows just how much financial crime is being perpetrated by Canadians in offshore accounts. All they know is that it’s happening and the bad guys are a step or two ahead of the authorities.
“Canada is often thought to be (a difficult) country from a money-laundering perspective. It’s clear, though, that we’re seeing a little more activity in Canada than people tend to believe is occurring. It’s hard to say how bad the problem is until an investigation determines (the gravity of the situation). You can only surmise at this point.”
Categories:Tax; Valuation, Forensics and Litigation Support
Related Topics:Fraud; Canada Revenue Agency
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