From The Globe and Mail:
Via The Globe and Mail’s Android app
From The Globe and Mail:
Via The Globe and Mail’s Android app
British Columbia has no limits on political donations, leading critics to say the provincial government has become a lucrative business dominated by special interests. As the premier of British Columbia, Christy Clark is on the public payroll, pulling down a salary of 195,000 Canadian dollars in taxpayer money. But if that were not enough, she also gets an annual stipend of up to 50,000 Canadian dollars — nearly $40,000 — from her party, financed by political contributions. Personal enrichment from the handouts of wealthy donors, some of whom have paid tens of thousands of dollars to meet with her at private party fund-raisers? No conflict of interest here, according to a pair of rulings last year by the province’s conflict-of-interest commissioner — whose son works for Ms. Clark.
British Columbia has no limits on political donations, leading critics to say the provincial government has become a lucrative business dominated by special interests.
Source: British Columbia: The ‘Wild West’ of Canadian Political Cash – NYTimes.com
VANCOUVER, British Columbia — As the premier of British Columbia, Christy Clark is on the public payroll, pulling down a salary of 195,000 Canadian dollars in taxpayer money. But if that were not enough, she also gets an annual stipend of up to 50,000 Canadian dollars — nearly $40,000 — from her party, financed by political contributions.
Personal enrichment from the handouts of wealthy donors, some of whom have paid tens of thousands of dollars to meet with her at private party fund-raisers? No conflict of interest here, according to a pair of rulings last year by the province’s conflict-of-interest commissioner — whose son works for Ms. Clark.
“B.C. is the wild west,” said Duff Conacher, a founder of Democracy Watch, a Canadian civic organization that has petitioned the Supreme Court of British Columbia to void the commissioner’s decision. The group argues that there is a “reasonable apprehension of bias” because the commissioner’s son is a deputy minister in Ms. Clark’s cabinet. The court heard arguments in the case on Friday.
Ethics in politics is a hot topic right now in Ottawa. Prime Minister Justin Trudeau has faced criticism for attending exclusive fund-raisers, and other Canadian provinces are tightening the reins on political contributions. Against that backdrop, the case in British Columbia stands out for the unabashedly cozy relationship between private interests and government officials in the province, a political state of affairs that will be tested at the ballot box in May.
Unlike many other provinces in Canada, British Columbia has no limits on political donations. Wealthy individuals, corporations, unions and even foreigners are allowed to donate large amounts to political parties there. Critics of the premier and her party, the conservative British Columbia Liberal Party, say the provincial government has been transformed into a lucrative business, dominated by special interests that trade donations for political favors, undermining Canada’s reputation for functional, consensus-driven democracy.
“What it says to people is money talks and votes don’t,” said Dermod Travis, the executive director of IntegrityBC, a nonpartisan political watchdog group based in Victoria, the provincial capital. “When anyone anywhere in the world can donate as much as they want to the system, you have an even bigger threat to the system.”
Much of what is considered business as usual in British Columbia is illegal elsewhere in Canada. The federal government bars unions, corporations and foreigners from donating to candidates for federal office, and donations by individual citizens are limited to 1,525 Canadian dollars, about $1,150, a year. Those limits were imposed after a fund-raising scandal in the 1990s.
Provincial ethics rules are a patchwork of restrictions and loopholes. Corporate and union donations are banned in Nova Scotia, Manitoba, Alberta and, since Jan. 1, in Ontario. Ontario provincial officials, their staff members and party leaders are also barred from attending fund-raisers. Quebec goes even further, limiting party donations to 100 Canadian dollars, roughly $76 a year, and only by individual citizens.
British Columbia is not the only province to refuse to impose such tight limits, but democracy advocates say the large amounts of money flowing there are a particular cause for concern.
Critics say that big donors to Ms. Clark’s party often appear to have benefited financially from their political generosity. These include banks, Chinese real estate developers, and companies like Imperial Metals, the owner of a mine tailings pond that spilled billions of gallons of toxic debris in 2014, and was then permitted to operate an even larger mine. Imperial Metals did not respond to a request for comment.
On Thursday, Ms. Clark’s government approved the Kinder Morgan Trans Mountain oil pipeline project, after opposing the proposal at hearings last January. Political donation records show that Kinder Morgan and other oil industry supporters of the project had donated more than 718,000 Canadian dollars, about $546,000, to the BC Liberal party through March 2016.
Some pooled donations have ended up in the pockets of the premier, following a longstanding practice by her political party. Ms. Clark has received more than 277,000 Canadian dollars, or $210,000, from the BC Liberal Party since 2011, according to Canadian news media reports. No other party in British Columbia pays its leader a stipend, and only one other Canadian premier, in Saskatchewan, receives such funds; the practice has largely vanished elsewhere as the provinces have tightened their political finance rules.
Ms. Clark’s office declined to answer specific questions about her conduct and her relationship with the conflict-of-interest commissioner and his son. Instead, British Columbia’s minister of justice, Suzanne Anton, who is also its attorney general, sent a statement saying that the province’s standards “should give the public confidence in the electoral system.”
In an email, the B.C. Liberal Party said its leader’s stipend was a longstanding tradition that previous conflict-of-interest commissioners had found acceptable.
Last April, Ms. Clark’s stipend was challenged by David Eby, a member of the provincial legislative assembly from the B.C. New Democratic Party. He filed complaints with the conflict-of-interest commissioner about the stipend and about Ms. Clark’s attendance at fund-raisers where donors paid thousands of dollars to meet with her privately.
“In practice, it means that if you’re part of a coterie of high-net-worth donors, your private interests get priority over what’s best for the province,” Mr. Eby said.
In nine years as British Columbia’s conflict of interest commissioner, Paul Fraser said he has never found any government official to be in violation of the province’s Conflict of Interest Act. Mr. Fraser has donated to Ms. Clark’s political party, and so has his son, John Paul Fraser, who worked on Ms. Clark’s election campaign and now serves in her cabinet as the deputy minister for government communications and public engagement.
The elder Mr. Fraser ruled in May that his son’s boss did not violate the act by accepting tens of thousands of dollars from her party while attending exclusive party fund-raisers, despite the law prohibiting actions by officials that may create even the “reasonable perception” that they might be affected by private interests.
Democracy Watch asked the provincial Supreme Court in October to overturn the ruling, arguing that the commissioner should have recused himself, as he did in a 2012 case against Ms. Clark.
In a telephone interview, Mr. Fraser rejected accusations of bias over his son’s job. “The issue, I guess, is, should people’s children and their career aspirations trump other considerations,” he said. He added that his 2012 recusal was a special case, because his son had been in business with the premier’s ex-husband.
Mr. Fraser’s lawyers have tried to get the case dismissed by arguing that the commissioner’s opinions are immune to judicial review.
How many shell companies exist in Canada? How many legal trusts? Who are the beneficial owners protected by such unnecessary veils of secrecy? No one knows because in most cases there is no legal requirement to disclose actual ownership even to regulators. In fact, more information is required to get a library card than to set up a company in most jurisdictions in Canada. What we do know is that Canada ranks near the bottom among our OECD partners in terms of corporate disclosure requirements to fight money laundering and tax evasion. A recent report from Transparency International detailed the dismal situation and why our country has become a haven for dubious offshore property speculation.
How many shell companies exist in Canada? How many legal trusts? Who are the beneficial owners protected by such unnecessary veils of secrecy? No one knows because in most cases there is no legal requirement to disclose actual ownership even to regulators. In fact, more information is required to get a library card than to set up a company in most jurisdictions in Canada.
What we do know is that Canada ranks near the bottom among our OECD partners in terms of corporate disclosure requirements to fight money laundering and tax evasion. A recent report from Transparency International detailed the dismal situation and why our country has become a haven for dubious offshore property speculation.
“The Canadian government must take immediate steps to require all companies and trusts in the country to identify their beneficial owners to ensure Canada does not become a haven for corrupt capital,” warns Transparency International Canada executive director Alesia Nahirny.
Canada is one of the few developed countries that does not require the identities of company directors to be verified or any information on shareholders. In most provinces, it is legal to use “nominee” directors or shareholders without disclosing that they are acting on someone else’s behalf.
A nominee is essentially a sock puppet — the proverbial student or homemaker often listed as the title owner of some of Canada’s most expensive homes. Why would someone list a multi-million dollar property in someone else’s name? Some plausible reasons include to avoid taxes or to launder money. This practice remains completely and inexplicably legal in most parts of our painfully polite country.
Lawyers can also act as nominee directors, offering their clients an additional level of secrecy under solicitor-client privilege unavailable in most other countries. A ruling from the Supreme Court of Canada in 2015 exempted lawyers and their firms from important parts of the Proceeds of Crime and Terrorist Financing Act, further widening the yawning loopholes in our laws meant to fight money laundering. According to an international oversight body, the Financial Action Task Force of which Canada is a member, “the legal profession in Canada is especially vulnerable to misuse.”
Toronto lawyer Simon Rosenfeld was secretly taped in 2002 during a meeting in a Miami bar with an undercover RCMP officer, who was posing as a member of a Columbian drug cartel needing money-laundering services. According to the officer’s testimony, after exchanging a token dollar to cement solicitor-client secrecy, Rosenfeld bragged that moving illegal funds through Canada was “20 times” easier than the U.S., where arrest and convictions are much more likely. He described the Canadian enforcement regime as “la la land” and said that five other lawyers in Vancouver laundered $200,000 per month through trust accounts for a seven per cent commission.
The transcript of this conversation did not endear Rosenfeld to the jury during his prosecution and he was sentenced to three years in jail. He appealed the conviction and the higher court judge increased his sentence to five years. This rare successful enforcement provides some fleeting schadenfreude, but Rosenfeld’s seasoned and sad assessment of “la la land” continues to ring true.
Legal black boxes
Millions of legal trusts are estimated to exist in Canada, but there is no way of knowing since there is no requirement for them to be registered or file any record of their existence — again an outlier among other countries. They are supposed to file information on assets and trustees with the Canada Revenue Agency but only a small fraction actually do.
A trust is the consummate legal black box. Considered a mere private contract under Canadian law, trusts do not need to keep records on beneficial owners, let alone file such documents with the federal government. Trustees can conduct transactions without disclosing their role as go-betweens, making it difficult or impossible for financial institutions to comply with money laundering regulations. To our international embarrassment, the Financial Action Task Force found in 2016 that Canada was less than fully compliant in 29 out of 40 anti-money laundering measures and “non-compliant” regarding transparency and beneficial ownership of such legal arrangements.
Real estate in Vancouver and Toronto is where the rubber really hits the road on these national regulatory failings. Transparency International looked at the title documents for the 100 most expensive homes in the Lower Mainland and unsurprisingly found a sampling of all these methods to conceal the beneficial owners. Twenty-nine properties were held by Canadian or offshore shell companies, 11 were owned by nominees with no obvious source of income, six more were held by trusts. In total, 49 of these luxury estates collectively worth more than $1 billion had opaque ownership.
Canada’s lax legal oversight coupled with a decades-long public policy effort to incentivize wealthy citizenship has turned Vancouver into a global hedge city. Like London, New York, and San Francisco, Vancouver’s luxury properties have become a favored place to stash cash for the world’s wealthiest.
According to professor David Ley at the University of British Columbia, Canada effectively sold Canadian citizenships to rich offshore investors through the now-cancelled Business Immigration Program. Ley described the scheme during a lecture last September, detailing how up to 200,000 of the world’s wealthiest may have arrived in the Lower Mainland as a result of these public policy efforts, inflating property values and contributing to our current housing woes.
According to Ley, Canada’s BIP was heavily oversubscribed because Canada was selling citizenships for far below the international market rate compared to other countries with similar citizenship-for-sale incentive programs. In the U.S., candidates had to invest $1,000,000 and employ up to 10 Americans before being granted citizenship. In Canada, investors only had to loan provincial governments $800,000 to be paid back in full after five years. This come-and-get-it attitude towards passports and global capital seems sadly similar to other national assets such as natural resources, but I digress.
Besides ballooning our housing prices, was there a net economic benefit to this citizenship fire sale? According to Ley, the federal immigration database showed that “of all immigration streams to Canada, the Business Immigration Program led to the lowest declared incomes, lower even than refugees.” This was in part because wealthy offshore investors are so skillful at avoiding taxation coupled with a shocking lack of enforcement from the CRA.
Defending against dubious lucre
What can Canada do to clean up this mess and avoid becoming an even more desirable destination for dubious global lucre? A low-cost first step would be to require all Canadian companies and trusts to declare beneficial owners and publish this information on a public searchable registry. The United Kingdom brought in such a system in 2016 to improve in law enforcement and tax collection, which will more than cover the cost of implementation.
Transparency International has several other practical suggestions that are also supported by the banking sector and law enforcement:
Besides money launderers, tax evaders and criminals, who could possibly oppose these sensible and long overdue reforms? Is the Trudeau government going to act quickly to plug these gapping holes and bring our country in line with the global fight against illicit capital? The recent cash-for-access events with wealthy offshore investors provide a telling opportunity to see on whose behalf Trudeau is acting. The whole country is watching.
Reading this article today, I am dumbfounded that Anbang managed to get this far in the purchase of B.C. commercial real-estate without red flags going up. This mysterious Chinese company, Anbang Insurance Group has attracted the attention of The New York Times, The Wall Street Journal, Forbes, Fortune Magazine, and government authorities in the United States and other countries. A months-long investigation by the New York Times revealed an extremely opaque structure, empty offices, obscure shareholders, and extensive political connections to the Chinese elite. Anbang has all the earmarks of Chinese money laundering, corruption at the highest levels, and mysterious shell companies. It is a cautionary tale for Canadian authorities fretting over foreign real-estate buyers and skyrocketing real-estate prices.
Reading this article today, I am dumbfounded that Anbang managed to get this far in the proposed purchase of B.C. commercial real-estate without red flags going up. This mysterious Chinese company, Anbang Insurance Group has attracted the attention of The New York Times, The Wall Street Journal, Forbes, Fortune Magazine, and government authorities in the United States and other countries. A months-long investigation by the New York Times revealed an extremely opaque structure, empty offices, obscure shareholders, and extensive political connections to the Chinese elite. Anbang has all the earmarks of Chinese money laundering, corruption at the highest levels, and mysterious shell companies. It is a cautionary tale for Canadian authorities fretting over foreign real-estate buyers and skyrocketing real-estate prices.
The dingy fourth floor of this building in Beijing houses two companies that control assets of Anbang Insurance Group worth more than $15 billion.
The Anbang Insurance takeover is currently under scrutiny by the federal government’s Investment Review Division because it exceeds the $600-million threshold and it will ultimately be up to Innovation Minister to make a decision.
Source: Chinese company Anbang buys stake in B.C.-based retirement home chain – The Globe and Mail
A massive Chinese insurance company with a murky ownership structure is buying a majority stake in one of British Columbia’s biggest retirement home chains, a deal believed to exceed $1-billion that would give Beijing-based Anbang Insurance an important role in the delivery of health care in B.C.
Anbang Insurance Group, which has emerged in recent years to launch a global buying spree, has cut a deal to buy Vancouver-based Retirement Concepts, a family-owned retirement home business established in 1988.
This foreign takeover is currently under scrutiny by the federal government’s Investment Review Division because it exceeds the $600-million threshold and it will ultimately be up to Innovation Minister Navdeep Bains to make a decision.
Retirement Concepts owns and operates about 24 retirement “communities,” mostly in B.C., except for several properties in Calgary and Montreal. What makes it even more attractive is that it also owns holdings of unused or partly developed land that would allow a major expansion of facilities in the future.
The company is an important part of B.C.’s health-care delivery system. Retirement Concepts is the highest-billing provider of assisted living and residential care services in the province. The B.C. government paid the company $86.5-million in the 2015-16 fiscal year, more than any other of the 130 similar providers.
A source familiar with the deal said it exceeds $1-billion, but Retirement Concepts declined to confirm the size of the transaction. “The terms of the proposed transaction have not been disclosed publicly and we cannot comment on the amount you refer to,” said Azim Jamal, president and chief executive of Retirement Concepts.
Foreign investments are reviewed to determine whether they provide a net benefit to Canada and are compatible with this country’s industrial, economic and cultural policies and what impact they will have on Canadian participation in the business.
The Canadian government is eager to attract foreign money to make up for insufficient investment capital within Canada and acquisitions by foreigners are rarely rejected. Prime Minister Justin Trudeau is particularly eager to attract more investment from China and has begun exploratory free-trade talks with Beijing. The Liberals have already signalled they are open to rolling back a ban on state-owned Chinese investment in the oil sands imposed by former prime minister Stephen Harper.
Anbang appears to have gone to some lengths to conduct this B.C. deal below the radar.
The name of the firm acquiring Retirement Concepts is Cedar Tree Investment Canada, which was incorporated as a federal Canadian company only in July. Cedar Tree’s registration initially gave the names of its two directors as Hong Zhao and Ye Zhang with their contact address as Suite 2560 at 200 Granville St. in downtown Vancouver. People with the same names and address are also the two listed directors for Maple Red Financial Management Canada Inc., the company that Anbang used to buy a controlling interest in all four towers of Vancouver’s Bentall Centre last year.
The directors have since changed, as has their address, and Cedar Tree’s contact information is now a major Canadian law firm’s downtown Vancouver office.
Telephone calls and e-mails to Cedar Tree Investment’s listed directors were not returned. The Globe and Mail was also unable to reach anyone at Anbang International, Anbang Insurance’s global investment arm, at its Vancouver number.
In April, after abruptly walking away from an effort to buy Starwood Hotels & Resorts, one the world’s largest hotel companies, Anbang appears to have been shifting its attention to the Canadian market with a bid for Innvest, one of this country’s biggest hotel owners. This came amid reports from China that Chinese regulators were looking into whether its foreign asset acquisition binge – including the Waldorf Astoria hotel in New York – exceeded allowable limits.
Bloomberg News, citing a source involved in the transaction, reported that the CEO of the firm that would go on to buy Innvest, Bluesky Hotels & Resorts’ Li Chen, had said at the outset of the acquisition talks that she was representing Anbang but did not wish this company to be publicly identified as the buyer. Anbang later publicly denied “any connection” between it and Bluesky.
An investigation by The New York Times earlier this year revealed that 92 per cent of Anbang is currently held by firms either fully or partly owned by relatives of Anbang’s chairman, Wu Xiaohui, or his wife, the granddaughter of the former Chinese leader Deng Xiaoping, or Chen Xiaolu, the son of a famous People’s Liberation Army leader.
The B.C. retirement home acquisition thrusts Anbang into a new area of business: Canada’s health-care system.
Under international trade deals that Canada has signed, the provinces retain the right to refuse to give health-care contracts to foreign companies. That’s because Canada reserved the right in trade agreements for governments to discriminate against foreign suppliers of services in the health-care sector and foreign investors when it comes to health care.
Retirement Concepts, however, says it will remain as operator under a deal with Cedar Tree. Asked about how the Beijing company conducted itself in the transaction, Mr. Jamal said, “Anbang was transparent in its bidding from the outset.”
Mr. Jamal said Retirement Concept’s existing corporate team will remain intact to “provide continuity” to residents and the business.
“Under the partnership agreement, Retirement Concepts will retain a minority share and will continue to manage the day-to-day operations of all of our seniors’ communities,” the CEO said.
“As a result, there will be no change to staffing plans, the quality of care provided to our residents, nor to our policies, procedures and other operating standards.”
British Columbia’s Liberal government, however, says it is not concerned about the Retirement Concepts deal because it does not believe the patients at the company’s facilities will see a difference in the care they receive.
“Cedar Tree has assured patients, families and staff that it does not intend to make any changes to day to day operations, patient care, staff or leadership. In fact, they will all remain in operation as they are today,” B.C. Minister of Health Terry Lake said in a statement.
“We expect this change to be seamless, and that the patients residing in these facilities will continue to get the same quality of care.”
The B.C. government said nothing also prevents a foreign-owned company from owning a health-care provider.
“The Community Care and Assisted Living Act does not prohibit facilities from being sold to an out-of-province, or to an off-shore purchaser,” spokeswoman Kristy Anderson of B.C.’s Health Ministry said.
The Investment Review Division at the federal department of Innovation confirmed it’s reviewing the acquisition before Mr. Bains makes a decision. “Cedar Tree Investment Canada has filed an application for review under the Investment Canada Act of its proposed acquisition of Retirement Concepts,” spokeswoman Stéfanie Power said in a statement.
“Due to the confidentiality provisions of the Investment Canada Act, we cannot comment further on the timing of the review.”
The department likely received the application in late September or early October but it will not confirm the date the review began. “In general terms, the Minister has 45 days from the date the application is received to make a decision. However, the Minister can extend this period by 30 days. Further extensions are possible with the investor’s consent,” Ms. Power said.
China itself faces a daunting retirement-care challenge with a rapidly graying population and it is seeking the expertise and capacity to design the vast system necessary to look after its elderly.
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In the last three days, both The Globe & Mail and CBC News have published disturbing stories about the scale of the Chinese infiltration of the Vancouver housing market that go well beyond anything understood or encompassed by BC government or federal government action on the problem. The CBC reported that at least $13.5 Million in cash has been confiscated from Chinese recently entering Canada at Vancouver International Airport. The following story, reblogged from The Globe & Mail, tells a tale of fraud, manipulation, and tax evasion on a massive scale. It also tells an embarrassing tale of gross incompetence by Canadian authorities. All of this is consistent with other investigative journalists reports from the United States on other similar fraudulent Chinese real-estate activities. Some of these reports go back years. The original Mossack Fonseca “Panama Papers” revelations that indicated that many of the Chinese elite with family links to Li Xinping, and The People’s Liberation Army had Mossack Fonseca accounts should have been a red flag for Canada, but was not. We are living in an entirely new global economy manipulated by dark forces. What will we do now that Vancouver has been ruined for decades to come?
Documents shown to The Globe and Mail reveal that one-time developer Kenny Gu buys and flips homes in deals that are financed with investor money from China and mortgages issued to those investors by Canadian banks. His activities were brought to the attention of the Vancouver Police and Canada Revenue Agency who chose to do nothing.
BEN NELMS FOR THE GLOBE AND MAIL
Kathy Tomlinson reveals how loopholes and lax oversight are making it easy for a network of local and foreign speculators to play the system, and, in the process, fuel the steep rise in Vancouver home prices
Demetre Lazos says he couldn’t just stand by and watch real-estate speculation, as he puts it, destroy his city.
Convinced that his boss, a local speculator, was dodging taxes and misleading lenders, he decided to act, approaching both the police and the Canada Revenue Agency (CRA) to divulge what he knows. Mr. Lazos, who has built luxury homes in Vancouver for three decades, offered documented evidence of possible fraud and tax evasion.
And yet, as he tells it, both the cops and the tax men blew him off: A CRA official who met him in the lobby of the agency’s downtown office told him to write to Ottawa; at Vancouver police headquarters, he was advised to call the Crime Stoppers hotline. (He did, he says, and got no results.)
“I am very angry at the system,” says Mr. Lazos, who has since quit his job. “I love this country – and it is my country – but I think we are Mickey Mouse.”
And so, next, he came to The Globe and Mail and, over the course of several months, delivered a large, and disturbing, cache of documents that expose how speculators can maximize – and conceal – their profits.
As a result of Globe investigations into Vancouver’s supercharged real-estate market, others have come forward, too, including a federal tax auditor, as well as an accountant who says he regularly files tax returns for wealthy clients who buy and sell houses – and appear to declare far less than they earn. “Canada,” he says, “is like a Swiss bank account” for his clients. (It is important to note that Swiss banking secrecy laws no longer exist due to aggressive enforcement by the EU and the United States)
Ottawa says it is “studying” the issue, and B.C. has brought in a tax on foreigners who buy residential real estate in Vancouver. But those who see firsthand how real estate is traded like stocks and bonds say this isn’t nearly enough. “We have governments that are not doing their job,” argues Mr. Lazos, who acquired his inside knowledge while working for Jun Gang Gu, also known as Kenny Gu, a former civil servant originally from Nanjing, near Shanghai.
Mr. Gu came to Canada in 2009 under Ottawa’s now-defunct immigrant-investor program, which gave permanent residency to applicants who agreed to lend a significant amount of money to the federal government. He started out here as a developer, but the documents show that his business evolved to buying homes – using other people’s money– and then flipping them. His deals are financed with investor money from China and mortgages issued to those investors by Canadian banks.
The papers that Mr. Lazos provided The Globe paint a fascinating picture, revealing a network of players – local and foreign – who are parking money in Canadian real estate. They also show how loopholes and lax oversight make it easy for the speculators to play the system – and profit tax-free – by obscuring their ownership and earnings, all the while treating the properties as commodities, not homes.
Many people assume that speculators flip homes very quickly, but Mr. Gu and others have created a unique market in which they hold properties long enough for them to rise significantly in value. The Globe has examined numerous transactions involving properties held for years while prices in the city rose as more investors bought in. Some properties were developed, some rented out, and others left vacant.
Mr. Gu did not respond to several requests for an interview, but Chinese-language contracts with his clients provide key insights into how his system works.
Translated for The Globe, they show that Mr. Gu, or his companies, are hidden – the legal term is “beneficial” – owners of certain properties, even though absentee foreign clients bankroll everything from the down payment and mortgage payments to property-related taxes and other expenses. The homes and mortgages are registered in the names of his clients, their companies or spouses.
The financing Mr. Gu’s companies receive from those clients comes in the form of loans that are not taxable, and that fall within what’s known as “shadow banking” – an unregulated system that has exploded in popularity in China, and now appears to be getting a toehold in Canada. Such “peer-to-peer” loans, as they are also called, sidestep banks entirely, and promise lenders significantly higher returns than they can get elsewhere.
Mr. Gu’s lender clients earn their wealth primarily in China, while coming and going from Vancouver, according to Mr. Lazos. Records show that they give Mr. Gu power of attorney to facilitate everything through his small, nondescript Vancouver office, but his stake in the properties remains hidden. And although he is not licensed to broker mortgages or manage investments, records suggest he does both.
Those records also link him and his clients to activity involving at least 36 properties over the past five years. Yet Mr. Gu, 45, paid next to nothing in taxes last year, while millions of dollars flowed through his business and personal accounts.
An in-depth look at five of his deals this year reveals that he sold the properties for a cool $5-million more, in total, than he paid for them. One of those homes sat vacant for three years, in a city where many people can’t find a place to live. (The documents include two orders from the city to clean up the site.)
In addition, Mr. Gu has billed some clients up to $1.2-million, per property, for “management” and “commissions,” in the last two years. Over that same period, he and his wife have moved large sums of money between their bank accounts, up to $600,000 at a time. As well, Mr. Gu made credit-card payments totalling $310,000 in a brief period. The family’s vehicles include a BMW and a Mercedes.
Tax returns, among the documents, show that Mr. Gu, now a Canadian citizen, reported personal income of $45,865 last year. His wife, Min Tang, reported $23,612.
And yet, Ms. Tang recently bought a brand new house in West Vancouver – one of Canada’s richest municipalities, known for its mansions and stunning views – for $2.1-million. She listed her occupation on the title as “homemaker.” And she didn’t need a mortgage. Records show she bought the property from one of Mr. Gu’s clients – and for significantly less than the market value for other homes in the upscale area.
One of the Vancouver homes Mr. Gu flipped sat vacant for three years, in a city where many people can’t find a place to live. (The documents include two orders from the city to clean up the site.)
JOHN LEHMANN/THE GLOBE AND MAIL
Mr. Gu’s three corporations all reported losses, in unaudited financial statements ending last year. Photocopies of some cheques made out to his companies – a fraction of the total – show that those companies received a minimum of $7.6-million in large payments between 2014 and 2016, many marked as “loans” from clients.
When Mr. Gu flips a property, his contracts stipulate that lender clients get back what they put in, plus a set return – 15 per cent in one instance. After the mortgage and the bills are paid, Mr. Gu keeps whatever is left, which, in some cases, appears to be hundreds of thousands of dollars.
According to legal and tax experts, this arrangement would allow him to avoid taxes, because the properties are not in his name. Mr. Gu can also maximize financing, because individual clients applying for mortgages, ostensibly to buy the homes, can borrow more money collectively than Mr. Gu could if he tried to finance properties on his own.
On the tax front, records suggest that the clients classify some of the properties as their principal residences, even though they do not live in them. That’s despite the fact that Canadian rules stipulate that a taxpayer cannot call a home a principal residence and sell it tax-free, unless they purchased it to live in it, and didn’t sell it within the same year.
“If you are buying and selling these homes as a business practice, that is business income and it’s taxable,” says Toronto-area accountant David Cramer, one of several experts The Globe consulted while reporting this story. He suggests that both Mr. Gu and his clients should be declaring that income. “If these guys paid proper taxes, these transactions would not go on as they do,” he explains. “It wouldn’t be nearly as profitable as it is.”
Tax lawyer Jonathan Garbutt estimates that the tax revenue lost through such activity is massive, particularly in pricey Toronto and Vancouver. “I think this is yet another example of non-enforcement of penalties under the law. It’s pervasive and it’s systematic,” Mr. Garbutt says. “Unless it changes, this will get worse. We will have a corrupt system.”
While many Canadians have come to resent the impact of foreign buyers on the real-estate market, the documents suggest that Mr. Gu pocketed much more than his clients did on some of his deals.
In one contract involving a rental property, his client was guaranteed a return of one per cent a month for paying the down payment and property-transfer tax upon purchase. Mr. Gu would collect the rent and pay the mortgage, then keep the rest of the profits when the duplex sold.
Mr. Gu sold the property two years later for $850,000 more than he paid for it, because the market price had jumped by that much. But according to the terms of the contract, his client stood to receive less than $90,000 of that windfall.
Documents show some of Mr. Gu’s clients also pay very little tax in Canada, despite having significant cash flow and assets. For example, in 2014, records show that client Shen Lin Zhang paid $2,594 in Canadian taxes on $59,711 in reported income, while his “homemaker” wife owned and lived in a Vancouver house worth $2-million.
Documents link Mr. Gu and his clients to activity involving at least 36 properties over the past five years.
JOHN LEHMANN/THE GLOBE AND MAIL
In the same period, Mr. Zhang sold another house worth $3-million and backed the purchase of two more, worth almost $4-million, in deals facilitated by Mr. Gu. Documents show that Mr. Zhang also owns foreign property and has almost $3-million in Canadian and Chinese banks.
Mr. Lazos says that Mr. Zhang earns his living in China. His CRA tax filing shows he is not a Canadian citizen, but he claims in it that he’s a B.C. resident. That allows him or his family members to classify any Canadian property as a principal residence and not report the profit when they sell.
Mr. Zhang declined The Globe’s request for an interview.
A Chinese-Canadian accountant in Vancouver estimates that he has filed tax returns for 1,000 clients just like Mr. Zhang in the past five years. He does not want to be named because he fears repercussions but says the CRA is partly to blame for lost revenue, because it doesn’t require taxpayers to report the sale of any principal residence.
“Every one of [those client families] has more than one house – two, three, four, sometimes more,” he says. “They don’t have to tell me. The CRA says they don’t have to tell anybody.”
The accountant says that people like Mr. Zhang who work abroad but declare on their Canadian tax returns that they are residents of Canada are legally required to report their worldwide income as well. He says that most, however, do not, and because those financial records are in China, they are impossible to check.
“They say, ‘I just want to pay around $5,000 in tax. How much does that work out to be in income?’ he says. “And then they say, ‘I have this much interest income from money I deposit with the Canadian bank or the company or whatever.’ That’s it.”
“I have in my hands people who claim to be residents. They never live here for more than a month of the year,” he says. “These people can be buying and selling homes and claiming to be a resident all the time without getting into any trouble. The CRA doesn’t look to find out.”
In fact, he believes the problem is so huge that the government should overhaul the tax code to get rid of the principal-residence exemption in its current form, which he acknowledges would be a very unpopular move. And one that would be a political non-starter: If the exemption were removed entirely, millions of Canadians would face the prospect of going deeply into debt – or, at minimum, forfeiting a major portion of their planned retirement incomes.
Another Vancouver accountant told The Globe that she and her colleagues see questionable real-estate transactions all the time, which they believe have contributed to skyrocketing prices. “This has become a huge mess. You have no idea how angry I am,” says Corina Ciortan. “A generation of people has been screwed. It’s so obvious. Everyone I work with is so angry because there is a select group of people who have profited from this.”
Federal figures reviewed by The Globe and confirmed by the tax agency show that auditors discovered $14.3-million in unpaid taxes from 339 individuals and companies last year through increased scrutiny of flips and other real-estate transactions in Vancouver.
A CRA auditor who came forward to The Globe with concerns about enforcement said that that is barely scratching the surface of the dodging going on. “CRA will catch very few people, because the [inexperienced] auditors … have no idea of foreign income and how individuals hide income,” says the auditor, who requested anonymity, for fear of being fired.
“Management has known of this issue for at least three years but did not want to pursue the real estate flips, because most of the auditees were Chinese in descent. They were scared of being racist … I can confirm this fact, based on meetings held.”
In a statement sent to The Globe, the CRA said that 2,203 files related to real estate were audited last year in Ontario and B.C., and that the agency plans to do “as many or more” next year. “The Canada Revenue Agency takes non-compliance very seriously, and is committed to protecting the fairness and integrity of the tax system,” it says.
In addition to holes in the tax system, speculators like Mr. Gu also rely heavily on Canadian financial institutions to give their clients multimillion-dollar loans. “They are using this money temporarily – to make more money – instead of using their own money,” Mr. Lazos says. “Then prices go up. We are making the bank richer and the Canadians poorer.”
Correspondence in the documents that Mr. Lazos supplied suggests that lenders think they are approving mortgages for his investor clients, not for Mr. Gu. If lenders are in the dark, experts say, they may be unwittingly violating anti-money-laundering laws, which require them to know detailed information about all their clients – which, in this instance, should include Mr. Gu.
The bank thinks it’s complying with anti-money-laundering laws in knowing its client, but it isn’t. No bank likes being lied to
Christine Duhaime an expert on anti-money-laundering laws
“If the client defaults, who are they going to collect from? Because they don’t know who the beneficial owner is of these properties,” says Christine Duhaime, an expert on anti-money-laundering laws. “The bank thinks it’s complying with anti-money-laundering laws in knowing its client, but it isn’t. No bank likes being lied to.”
E-mails in the records show that RBC questioned Mr. Gu when it realized mortgage payments from a bank client were coming from Mr. Gu’s business account, but let it continue after the client gave his permission for the payments to continue. The Globe asked RBC about this; it declined to comment.
Meanwhile, more recent documents show that Mr. Gu is moving into more sophisticated ventures. A recent business plan, written in Chinese, suggests he is crowdfunding to buy real estate, a practice that has been under scrutiny by regulators.
The plan states that Mr. Gu finds properties to buy, and his clients cover the down payments. The rest of the money comes from bank financing and money raised through “social finance.” Properties are then flipped, loans paid off, and profits shared by all.
Mr. Gu also persuaded investor clients to lend him a total of $1.4-million so that his company could invest in a B.C. jade-mining operation.
Contracts show that 28 clients were promised a 12-per-cent return if they each lent $50,000 to Mr. Gu’s company for less than a year. That amount is interesting: It matches, to the dollar, the maximum a citizen can take out of China in a year.
Mr. Gu solicited the deals without giving his investors a prospectus, which is required by law unless those investors are close associates or wealthy enough to bear the risk. Records show that Mr. Gu is now under investigation by B.C.’s securities regulator over this scheme.
As a result of The Globe’s inquiries, both B.C.’s Financial Institutions Commission, which regulates mortgage brokers, and the B.C. Securities Commission have expressed interest in the kind of real-estate activities Mr. Gu engages in.
Mr. Lazos says that his whistle-blowing will be worth it only if it jolts Ottawa and B.C. into action. And his reasons, at least in part, lie close to home: “I hate the fact that for my daughter and my grandchildren, there is no way they can own a house in this city.”
Kathy Tomlinson is a Globe and Mail reporter based in Vancouver. You can join her for a Facebook Live chat on Vancouver real estate on Sept. 13 at 11 a.m. PT/2 p.m. ET at facebook.com/theglobeandmail.
This has just hit the wires tonight, September 11th. The South China Morning Post, perhaps the most influential and important bilingual, English and Chinese, media outlet in Hong Kong has suddenly and somewhat mysteriously announced that it is ceasing operations of its Chinese-language website nanzao.com. SCMP is owned by Jack Ma and Alibaba. It should also be noted that local elections in Hong Kong last week elected at least six new “pro-democracy” legislators.
In one fell swoop, years of reporting from the Chinese-language website of Hong Kong’s main English newspaper, the South China Morning Post, is gone.
This is the notice that users saw when they went to the Chinese site, nanzao.com, on Friday (Sept. 9) afternoon:
“We thank you for your past support,” the notice adds.
Current and past employees of the SCMP told Quartz that they were not told about the decision to shutter the site.
One story that has disappeared with the SCMP’s Chinese site is a controversial interview with Zhao Wei, a lawyer linked to human rights defender Li Heping, who were both arrested by Chinese authorities last year. The interview, which carried no byline, was first published on SCMP’s Chinese site in July before being translated for its English site. David Bandurski of the University of Hong Kong’s China Media Project J questioned how the SCMP managed to interview Zhao when she was still held incommunicado. No one close to Zhao had been able to confirm her release at the time.
The interview with Zhao is seen by some as part of a growing trend of forced and often televised confessions of Chinese dissidents, which are appearing in Hong Kong media outlets with growing frequency.
“Will the South China Morning Post now open itself up to moonlighting as a pawn of the mainland authorities in sensitive political cases? Will it allow itself to become a cog in China’s mea culpa machine?” wrote Bandurski.
The South China Morning Post was acquired by Jack Ma, one of China’s richest men and the founder of e-commerce platform Alibaba, in December 2015. Joseph Tsai, the executive vice-chairman of Alibaba,told the New York Times then that the decision to purchase the newspaper was made in order to provide coverage of China that was untouched by the “negative” bias of the Western media.
In 2013, Jack Ma was reportedly furious at the Chinese language website of the South China Morning Post after it ran an interview with him, in which he said that the 1989 crackdown on pro-democracy protesters in Beijing’s Tiananmen Square was “the most correct decision.”
A spokesperson said in response to a query from Quartz regarding the closure of the site that the four staffers working on the Chinese site would be reassigned to jobs elsewhere in the company, and that the “closure… enables us to align resources towards further growth.”
Zheping Huang contributed reporting