UPDATE May 5, 2106: National Public Radio’s Takeaway news analysis program, today interviewed James Henry, senior adviser at the Tax Justice Network and a senior fellow at the Columbia Center for Sustainable Investment. James’ interview specifically discusses the foreign dark money driving the Vancouver housing market, providing further confirmation of my points in this post. Audio of the interview begins at 19:45 in the podcast below.
The release of the Panama Papers is of such potential significance and magnitude that it is difficult to know where to begin. I have decided that I will begin with the most interesting and relevant topic for me, the Canadian angle: possible links from Mossack Fonseca‘s tax haven shell companies to the Vancouver BC real estate market, the current Canada Revenue Agency investigation of KPMG‘s Canadian offshore tax haven scheme, and potential conflicts of interest within CRA. The KPMG and CRA issues have been extensively investigated and reported by CBC News, and also discussed on this site.
London, Miami, New York City, San Francisco and Vancouver: Similar Market Dynamics
With regard to the Vancouver housing bubble and links to shell companies in offshore tax havens, the probability of such links has already been suggested by other overheated real estate markets, notably in Miami, New York City and San Francisco. The high-end Manhattan real estate market has been overheated by a dramatic influx of foreign shell companies, as first reported by The New York Times in February 2015. The U.S. Treasury announced later in 2015 that it would begin identifying and tracking secret shell company buyers of New York and Florida real estate, which would likely expand to include the San Francisco market.
National Public Radio in the United States, recently interviewed the vice president of Transparency International, on the subject of shadow money in real estate markets. The guest talked about how the offshore deals impact ordinary people – and the first thing discussed was housing in cities like New York and San Francisco. The shadowy banking system allows people with illegal money – money from arms trading, money from drug sales, money stolen from the people of a struggling country – to launder it and use it, among other things, to buy real estate.
So the bidding wars that are driving up the cost of housing in cities, and the mega-priced condos that are shoving out other types of housing in places with scarce real estate, are directly linked to this dark money.
The Miami Herald documented this nicely.
“Money from people linked to wrongdoing abroad is helping to power the gleaming condo towers rising on South Florida’s waterfront and pushing home prices far beyond what most locals can afford.”
The Vancouver Real Estate Connection
Anyone familiar with the Vancouver real estate market would be naive to assume that the same dynamics at work in the United States are not at work in Vancouver.
This Grey’s Point “tear down” property shown here, recently sold for over $9 Million, more than $1 Million over the asking price of $7.8 Million. There were 11 offers, all cash, and no offer included any contingencies.
While the U.S. Treasury and the New York Housing Authority took action nearly a year ago to stem the offshore secret shell company real estate activity, Canadian authorities have been much slower to act. B.C. Premier Christy Clark has been sharply criticized for her failure to act, which may be linked to political payments to Clark related to the B.C. real estate industry.
The Dark Foreign Money Connections
It is, therefore, now no secret that foreigners, keen to avoid publicity, are behind many of these real estate transactions. The New York Times noted that the Manhattan market has been significantly influenced by money from Russian oligarchs, one of whom was denied entry to Canada for suspected organized crime connections. The Miami market, not surprisingly, is seen to be influenced by drug cartel money and corrupt Latin American Billionaires.
The San Francisco Bay Area, while also influenced by Silicon Valley money, has seen its own influx of dark money in the real estate market. At first, the money was aimed at Silicon Valley and suspected to be focused on industrial espionage. The People’s Liberation Army has massive financial resources of its own from its ownership of a mobile phone network, and international weapons trading by PLA companies like Norinco. It is suspected of involvement in Silicon Valley espionage, and the establishment of “front” companies. In one particular case, a California high-tech startup without any apparent external funding was led by the son of a prominent PLA General. Think of the PLA as its own venture capital firm. Today, the emphasis seems to have shifted to cyber espionage, and the dark money has grown exponentially, evolving into real estate as elsewhere.
Vancouver and China
Vancouver’s connection to Asia is perhaps now greater than that of the San Francisco Bay Area, which was formerly seen as the West Coast’s top Asian cultural metropolis. The Vancouver connection goes back generations, as with San Francisco. Vancouver’s importance has been enhanced recently by two major events: the 1997 return of Hong Kong to China, and the dramatic rise of Chinese capitalism, wherein lie the seeds of Vancouver’s real estate dilemma. As Deng Zhao Ping said many years ago, “To get rich is glorious.”
The Panama Papers have exposed the names of numerous members of Chinese Premier Li Xinping’s family with Mossack Fonseca secret offshore accounts. This is only the outermost layer of the onion. Recent investigative reports in The New Yorker (February 22, 2016) “The Golden Generation,” and in The New York Times (April 12, 2016), have identified a significant local Vancouver population of billionaire Chinese “fuerdai,” or “second generation of the rich,” many are the children of officials from the outlying provinces in China, not the Beijing or Shanghai elite. The numbers support the notion that the influence of dark Chinese money on the Vancouver economy is much larger than previously understood. We have also seen how real estate firms and others have been only too eager to serve this money, and to engage in their own “shadow flipping” schemes to drive up real estate prices even further.
Anyone who has seen the Lamborghini dealership near Granville Island may ask themselves rhetorically how many cities in the World can support a Lamborghini dealership. When combined with the publicly disclosed $1 Trillion (U.S. dollars) that fled China in 2015 alone, and the artificially low value of the renminbi, you have a frenzy to buy hard assets offshore and the makings of a real estate nightmare in Vancouver. Li Xinping has personally expressed his displeasure with both the capital flight and the “fuerdai” living abroad, but despite his extraordinary personal power as the “new Mao”, he seems powerless to stop the trend, even the offshore secret accounts among his own family. Since the release of the Panama Papers revelations about Li Xinping’s family, Chinese Internet censors have blocked all access to this information at the “Great Firewall.”
The Offshore Tax Haven Market and the Canadian Connection
The other important aspect of the Canadian connection to the Panama Papers and Mossack Fonseca is the huge market opportunity to offer offshore tax havens. This opportunity has grown ever larger as the 1% has solidified its control of global wealth. Even assuming that there is no direct connection between Canadian firms and Mossack Fonseca, there is likely immense market pressure to compete or lose wealthy clients. On the other hand, a direct connection is not impossible, though not yet proven. We are about to learn of substantial links from global banks like HSBC, UBS, Credit Suisse and others to Mossack Fonseca. By way of example, Vladimir Putin and his Russian oligarch friends did not directly set up their secret offshore tax havens. They hired their financial institutions and friends to do it for them, secretly. What is clear is that at least one Canadian accounting firm, KPMG, has in fact set up its own offshore tax haven on the Isle of Man, which is now being formally investigated by the Canada Revenue Agency. In a separate but related matter, four KPMG senior partners were arrested in the UK, for their part in another tax evasion scheme.
History Of Offshore Tax Havens
The offshore tax haven market has been around for decades in other forms, and as some like to point out, is not always illegal or designed for dark criminal money. That said, it is undeniable that secret tax evasion schemes have an obvious appeal to those with dark money. Long before the Panama Papers revelations, there were the Swiss banks, which became famous for such secret accounts. The Swiss system was not immune from illegal and unsavory clients and their money, but the Swiss banks were immune from any exposure thanks to their policy of absolute secrecy for their clients. However, eventually, the Swiss banks were prosecuted by the U.S. government and the European Union, wealthy clients were exposed and prosecuted for tax evasion and worse. UBS was the most prominent Swiss bank to be prosecuted and paid a $1.5 Billion fine for its sophisticated tax evasion scheme for corporations and individuals. At the time, former U.S. Senator Phil Gramm, and former Chairman of the Senate Banking Committee was Vice-Chairman of UBS. The global links to tax evasion fraud became apparent, and Swiss banking secrecy became a thing of the past.
At the same time, as the sheer amount of plutocrat, drug cartel, and political oligarch money skyrocketed, the need for such tax evasion schemes also skyrocketed. For corporations, obliging countries like Ireland, for example, established highly favorable tax laws to attract corporations to base their operations there. Google, Facebook, and LinkedIn have operations there explicitly designed to evade taxation, and as the corporate location for much of their intellectual property, also to avoid taxes. Elaborate tax evasion schemes with colorful names like the “Dutch Sandwich,” or the “Double Irish” became popular with accounting firms. In the case of Ireland, the culmination was the announcement that Pfizer would acquire Allergan, an Irish pharmaceutical company, and transfer its corporate headquarters from New Jersey to Ireland, in a tax evasion scheme known as “corporate tax inversion.” The public outrage was so vociferous that this week the Obama Administration announced strict regulation against “tax inversions,” which led Pfizer to abandon its plan. In the case of Canada, we have had Burger King acquiring Tim Horton’s and relocating to Canada for the same reason.
KPMG Tax Haven Scheme, CBC News, And Canada Revenue Agency Investigation
In the case of wealthy individual tax evasion schemes, this is where UBS and Mossack Fonseca come into play as the global market opportunity for tax evasion grew exponentially. In Canada, the first hint of that something might be wrong, driven by the global market for tax evasion schemes, has been CBC News ongoing investigation into KPMG, its Isle of Man tax haven scheme, and the formal Canada Revenue Agency investigation and probable criminal charges against KPMG. This story has been extensively reported in a number of CBC News investigative stories and reported here on this blog.
In the last two weeks, we have seen new developments in the Canadian offshore tax haven melodrama that include CBC News revelation of a secret CRA amnesty offer to wealthy KPMG clients, conflicts of interest with CRA officials and accounting firms, and further delays in the CRA’s prosecution of the case against KPMG. It is worth noting that KPMG’s key defense argument is their right to client confidentiality, as with the Swiss banks. The argument failed in Switzerland and is likely to fail in Canada. The CRA case also languished under the Harper government, as both Joe Oliver and Stephen Harper engaged in activities with KPMG that have been seen as inappropriate and potential conflicts of interest. In a rather strange development this week, the CRA requested a copy of the Panama Papers from CBC News, which was refused. The CRA request seems to me more like a classic case of “a day late, and a dollar short.”
My summary assessment is that the Panama Papers Canadian Connection will not go away, and there are likely to be more revelations.