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Winter 2000  

Taxation of E-commerce
New Legislation to Combat Money Laundering
The Kiddie Tax

New Legislation to Combat Money-Laundering

Although it has not attracted a lot of attention in the press, the Chretien government recently introduced legislation in the House of Commons designed to combat money laundering. This article will examine their proposals and how it will leased to an expanded role for the Canada Customs and Revenue Agency (formerly Revenue Canada) in the years ahead.

Money laundering is an illegal activity that involves the transfer of funds between parties with the sole purpose of concealing their dubious origin. One example might be the profits that are earned by drug dealers who sell illicit drugs in our society. The money generated from such operations, which largely initially in the form of cash, must ultimately be returned to the larger economy, and it is at this pint that it becomes a problem for our law enforcement agencies.

The proposed legislation pledges to protect individual privacy while at the same time creating a mandatory reporting system of suspicious financial transactions involving the movement of large quantities of currency. A newly created body, the Financial Transactions and Reports Analysis Centre of Canada, will be established to receive and manage reported information from lawyers, accountants, financial institutions, currency-exchange dealers and other intermediaries regarding funds that are believed to be related to a money-laundering offense.

As the legislation is currently proposed, the Centre will analyze and assess such disclosed information as (a) the name of the party; (b) the date of the transaction; (c) the value of the transaction, and (d) the account number(s) of the financial institutions(s) involved. When and if warranted, they will be charged with the responsibility of providing such information to the proper authorities, including the Canada Customs and Revenue Agency, if tax evasion is suspected.

At this writing, some important details about the proposed legislation have yet to be tabled. However, if the Canadian legislation is modeled on that enacted in the U. S., dollar amount in excess of $10,000 will come under scrutiny and failure to disclose that transaction will result in the seizure of the currency or monetary instrument, fines that could reach up to $2 million and/or imprisonment for as long as five years.

The proposed legislation places the responsibility of determining what is private and what is suspicious clearly on the shoulders of those individuals who handle the transactions and not on those who initiate them. If this sounds familiar, couple this proposal with others contained in the 1999 Federal Budget aimed at introducing civil penalties upon tax advisors who make false statements or omissions in regard to another person’s income tax matters and you can see that the government has again found it expedient to lean on the "good guys" and have them do their policing for them.

It is obviously important to support the introductions of legislation to curb illegal activity. Money laundering continues to be a significant problem in Canada and in other parts of the world. However, as details of the proposals come out, it is obvious that the Canada Customs and Revenue Agency will ultimately become a large benefactor of the new reporting regime. We must be ever vigilant that whatever wording is finally passed into law it concentrates on its stated goal and does not open up Canada to further erosion of our individual right to privacy.

Some Examples of Money-Laundering

It is a fact that one kilogram of heroin can generate almost $1,000,000 in cash by the time it has worked its ways through the streets of our cities.

The drug baron is then left with bags of cash, in all denominations, that are of little use to him unless he can re-circulate them into the economy to afford him the things he wants. Depositing all that cash into a bank account or an account with an investment firm is out of question. The banks must report cash deposits and withdrawals of $10,000 or more and suspicious transactions are frowned upon by most reputable institutions.

So money laundering becomes the preferred means of changing banknotes into large, respectable-looking cheques that will be honored without creating suspicion.

Here are a few scenarios that are in use today: the mobster, fronting as a businessman in the community, offers to (a) buy a winning lottery ticket from its holder for a premium. If a ticket with a face value of $10,000 can be purchased for $12,500, the holder realizes an even greater return on his winnings and the mobster will now possess a legitimate cheque from the provincial lottery authorities that no financial institution will question; (b) purchase large ticket items such as automobiles or travel tickets for several family members from legitimate businesses who see this as an opportunity to make a very profitable business transaction. The items, after purchase, are returned, when allowed, for a refund that is issued in the form of a cheque or a re-sold, at a loss, to customers who can-not pass up a great deal just as long as they agree to pay for their purchases by cheque; (c) divide the cash among a few associates, called "Smurfs", into lots of less that $10,000 each and bring them to a casino. There, these accomplices can purchase chips that are to be used for gambling. After a short period of time, they approach a cashier to cash out and he gives them a cheque drawn upon a bank: and (d) approach a restaurant or other legitimate cash business with the proposition of selling say $35,000 in cheques for $40,000 cash. The legitimate business owner is pleased to make such an easy profit and agrees to the proposal. Dirty money is commingled with the legitimate deposits of the day over the course of a few days. The mobster is paid as a supplier by cheque over a similar length of time.

The warning signs that an individual with whom you are dealing is involved in a money laundering scheme are (a) he deals in an inordinate amount of cash; (b) the customer appears more interested in finding out the cancellation and refund terms of a transaction that the purposes for which the transaction was presented; (c) the customer commits himself to transactions that appear to be considerably beyond his means; and (d) the customer has difficulty in explaining the source of his funds.

Winter 2000: Private Health Insurance Premiums | Taxation of E-commerce | New Legislation to Combat Money Laundering | The Kiddie Tax

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