Mining Offshore – Jurisdictions, That Is

May 13, 2016 | By admin | Filed in: Economics & Taxation.

“The scandal is what’s legal.” – Edward Snowden

The massive leak of secret banking information tagged “The
Panama Papers” has made a lot of waves in the weeks since its
contents started being made public, and they were renewed this
week with the release of a searchable database of leaked
material.

Those waves may yet prove strong enough to overcome the sandbag
redoubts created by banks and wealth individuals and
corporations (who are also legally people, right?) to protect
their wealth from marauding tax collectors.

If they do, it will be because the public decides that it has
finally had enough of those who are pleased to benefit from
public services and public goods (like mineral deposits) – but
will go to extraordinary lengths to avoid contributing to those
public services.

The leak of client information from the Panama law firm Mossack
Fonseca shines a very bright light on the unfairness of an
international system that creates shrouds of secrecy around the
movement of money and facilitates the spread of tax evasion
(illegal) and tax avoidance (legal, but reprehensible). The
more people find out, the less they like it.

Where’s Canada?

Some Canadians – both individuals and corporates – do appear in
the database, but not many. Initially, CBC said it would not
publish the names of some 350 Canadians exposed through the
leaks, not out of concern for their reputations, but because
they weren’t famous enough. CBC did confirm that they included
mining and oil and gas executives, lawyers, and even known
fraudsters.

ICIJ – the International Coalition of Investigative
Journalists, who received the leaked documents and controlled
the media coverage – did publish a partial database of leaked
information
just this week. They are revealing only names
and locations, and will only release other details from the
leaked documents (e-mails, transactions etc.) as they see fit.

One Canadian company that did jump out of the database was
Ivanhoe Mines, led by mining promoter Robert Friedland. The
leaks show the structure that Ivanhoe used to operate in Burma
(Myanmar) for many years
in violation of international sanctions
against that
country’s military dictatorship, and how Friedland eventually
sold the property to Rio Tinto.

Bearing in mind that Mossack Fonseca is only one of a number of
law firms that specialise in secret accounts – and far from the
largest, apparently – even this huge data leak still only
represents a small portion of the world of secret offshore
investment. Even so, it seems curious that Canada and the US
are so underrepresented. There are good explanations, however –
as the Tax Justice Network has
pointed out
, there are good reasons that US money would not
hide in Panama, including the fact that states like Delaware
and Nevada are major, and more accessible, secrecy
jurisdictions.

Panama is not the main destination for Canadian dollars seeking
to avoid community service work, either. Business in
Vancouver’s Jen St. Denis
explains nicely
how Barbados gets the lion’s share,
followed by the Cayman Islands and Luxembourg. Canadians for
Tax Fairness notes that the amounts are growing rapidly,

now over $40 billion a year
, and lately more has been going
to the Cayman Islands (see graphic).

Canada does have a significant interest in Panama, however – in
mining. First Quantum Minerals’ multibillion dollar “Cobre
Panama” is the only operating mine, but several more are at
different stages of development. Their investments are
protected by the Canada-Panama Free Trade Agreement, which,
like most modern free trade agreements, has precious little to
do with free trade – or in this case, any trade at all – and
more to do with investment protection.

We were one of few groups to raise the alarm when the
Canada-Panama FTA was debated in Parliament in 2012. We warned
that Panamanians, especially the peasant farmers and indigenous
peoples with the most to lose, would lose any possibility of
pressing their government to put their interests ahead of
international investors, thanks to the agreement’s NAFTA-like
investment protection provisions.

There was a link to financial secrecy and corruption, too, of
course. Todd Tucker of Public Citizen’s Global Trade Watch

warned
that the pact “would give new rights to the
Government of Panama, and to the hundreds of thousands of
offshore corporations located there, to challenge Canadian
anti-tax-haven initiatives outside of the Canadian judicial
system.”

Justin Trudeau and the Liberals joined the Conservative
government of the day in supporting
ratification
of the deal; the NDP, Bloc Québécois, and
Greens opposed it.

Beyond Panama

Pressure to end secrecy around “beneficial ownership” (the
actual owners of these accounts and businesses) and to impose
transparency on payments to governments are vital steps toward
exposing corruption in the hope that once exposed, it will be
too embarrassing to continue. However, the crucial issue in the
mining sector (as opposed to, say narcotics trafficking) is
corporations’ ability to move money around to take advantage of
the most favourable legal tax applications. There is
certainly fraud and corruption, but it is actually less
important than what is pillaged legally or semi-legally, and
what corporations legally avoid contributing to the countries
where they actually operate – and incur massive public
liabilities, for damage to workers’ health, water supplies,
etc.

Global Financial Integrity outlines illicit
financial flows
in a fairly easy to understand way,
estimating that in 2013 $1.1 trillion left developing
countries. GFI says this is a conservative estimate, which is
quite an understatement as it doesn’t include huge but even
harder to quantify flows in money laundering or mispricing of
services. GFI has found that illicit flows out of Africa are
probably significantly greater than development aid and foreign
direct investment combined.

Crucially, complex subsidiary structures also allow
corporations to avoid liability. Nevsun, for example, is being
sued over allegations that the company was complicit in the
Eritrean government’s use of conscripted labour and other human
rights abuses at the company’s Bisha mine. As
Business in Vancouver recently noted
:

Nevsun…owns the Bisha mine in Eritrea indirectly through a
complex link of subsidiaries. Nevsun Resources (Canada) owns
100% of Nevsun (Barbados) Holdings Ltd., which owns Nevsun
Africa (Barbados) Ltd., which owns 100% of Nevsun Resources
(Eritrea) Ltd., which owns 60% of the Bisha Mine Co. The
Eritrean National Mining Corp. owns the remaining 40% of the
Bisha Mine Co.

This isn’t even secret; like Nevsun, many companies lay out
their subsidiary structures in their annual reports and
regulatory filings. But they don’t publicise the financial
flows between those subsidiaries, which is where profits are
shifted from one shell company to another to avoid taxation –
and even show losses to take advantage of subsidies and tax
credits.

What needs to happen is as simple as it is politically
difficult, given the confluence of powerful interests with a
lot of money at stake. Bruce Livesey has outlined in the

National Observer
how difficult it will be to change this.

Full transparency is essential, revealing the actual owners of
secret accounts, but it is only a first step. There needs to be
a legitimacy test, to ensure that corporate subsidiaries have a
legitimate business purpose or economically substantial role.
Canada should simply not allow corporations to route money
through shell companies or “mailbox” subsidiaries in tax havens
and secrecy jurisdictions. Other than tax avoidance and evasion
– or money laundering – there is no legitimate reason for it.
NDP MP Murray Rankin tried to introduce such a test to the
Income Tax Act with a private member’s
bill (C-621)
in 2014, but why not apply it to corporations?

As the Tax Justice
Network
commented with respect to individuals, “We are
unaware of any legitimate reason as to why individuals need to
incorporate companies in secrecy jurisdictions. It is now time
for that practice to end.”


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