Offshore 'mastermind' ran $300M 'shadow bank' for clients' tax-haven money, draft CRA report says

Scores of wealthy Canadians had access to a Vancouver-based "shadow bank" that they used to buy homes, vacation properties, cars and airplane tickets with funds stashed in tax havens, according to a confidential draft report by the Canada Revenue Agency.

The organization allegedly operated stealthily for years and was designed to hide money from authorities.

The entities at the heart of the operation, known as the Corporate House group, opened dozens of shell companies and accounts in tax havens around the world, paid people thousands of dollars a month to front the companies and sign cheques without knowing what they were for, and even bought more than $8 million in untraceable gold coins in a seven-month span in 2013, the draft report says.

Bank records show more than $338 million flowed through the organization's Canadian accounts between 2010 and 2016 alone, much of it coming directly from accounts in the Caribbean and Switzerland, according to the December 2018 document, a copy of which was obtained by CBC News.

"Corporate House can be described as a shadow bank because it provides bank-like services to its clients, such as receiving and sending funds, making bill payments, and providing loans," the document reads. "Corporate House is structured in such a way to disguise true ownership, mask its activities and confuse those attempting to understand the relationships."

Corporate House is no longer operating under that name, and it's unclear if any successor entities are still running the business.

But while it was active, the "mastermind behind the Corporate House operation," the CRA says, was a West Vancouver millionaire and ex-lawyer named Fred Sharp.

CRA draft report details findings

CBC/Radio-Canada first reported in 2016 that Sharp was the top Canadian offshore middleman in the Panama Papers leak and ran what was known as the "go to" investment firm for wealthy Canadians wanting privacy, and minimal tax, for their assets. He's also in the recent Pandora Papers leak and this past summer was charged in the United States with setting up offshore shell companies for a colossal pump-and-dump stock fraud.

But the extent of his dealings in Canada and what the Canada Revenue Agency (CRA) knew and was doing about his organization have never been revealed with this much granularity.

Among the details in the CRA's draft findings:

• The CEO of a publicly traded mining company used Corporate House's services to disguise his income. Starting in 2011, instead of the mining company paying his salary directly, it was routed through a shell corporation registered in the Caribbean island of Nevis that billed $20,000 a month for the CEO's "consulting services." The executive declared only minimal income on his tax returns for the next four years but received $807,500 from a purported line of credit with a succession of Corporate House companies. The report calls the loans a "sham" designed "to give the impression to a third party, the CRA, that a credit facility existed between [Sharp] and the taxpayer, whereas ... everyone party to the arrangement knew the source of the money came not from loans but from the taxpayer's unreported income."
• A Corporate House company called Charterhouse Capital Inc. routed $26 million through the trust account of a Vancouver lawyer during a seven-month span in 2013, and millions more in earlier years. Much of the money came from tax havens such as Belize, Nevis and the Marshall Islands. In one transaction, $2 million that came from a Samoa-registered company was used to pay down a Corporate House client's line of credit at TD Bank and a mortgage at Bank of Montreal. The report says Corporate House made "extensive use" of multiple lawyers' trust accounts. "Trust accounts are open to abuse because the claim of solicitor-client privilege has been used to shield them from CRA scrutiny," the report says. Lawyers' trust accounts "were merely a convenient conduit for funds that provided a veil of legitimacy."
• One of the front people, also known as "nominees," hired by Corporate House was paid to serve on paper as a director of a Delaware company. He told auditors he signed cheques without knowing what they were for. "There was never any source documentation in support of the cheques. All [he] was required to do was sign the cheques and not ask questions," the draft report says. "[His] payment for this service was to be based on 1/8 or 1/4 of a per cent of the amount of funds that flowed through the account. This normally amounted to a payment to [him] of $3,000 to $4,000 a month." His signature was also on some authorizations to transfer funds out of a bank account, but he told auditors that he never signed them, the report says. The auditors determined the signatures were identical and that they had simply been copied onto each authorization, by whoever was arranging the transfers.
• In his lone conversation with a CRA auditor, Sharp claimed that "Corporate House does not operate a business in Vancouver," the report says. Instead, its various Canadian-registered corporations are just "agents" of foreign entities, he reportedly said. As a result, most of those Canadian entities would either file tax returns claiming no revenue known as "nil returns" or not file tax returns at all. "Given the fact that multi-millions of dollars flowed through their Canadian bank accounts, nil returns are highly suspect," the report says.

Sharp's lawyers did not reply to a request for comment. Last month, when CBC News and the Toronto Star sent a list of questions about his role in the Pandora Papers and the U.S. charges against him, a lawyer replied that Sharp had no comment.

In 2016, Sharp said that offshore havens help "protect the privacy of people from journalists who will stop at nothing to publish a good story."

Associates failed to report nearly $5M in income:CRA

Corporate House had a roster of staff, agents and associates over the years, many of whom the CRA is now trying to audit.

Richard Hethey and his late wife, Mary Hethey, were both accountants who "appear to be close associates of ... Sharp and play an active role in setting up offshore structures on behalf of Corporate House clients," the report says.

But separate court filings suggest they also benefited from Corporate House's services. (Mary Hethey died on Sunday, according to one of her lawyers.)

"You have been receiving wire transfers into your domestic bank accounts from various offshore entities located in Barbados, Saint Kitts and Nevis, Belize, the Bahamas, Samoa and the Marshall Islands. The reference field on some of the wire transfer documents indicate that these are consulting fees," says a December 2017 letter to Richard Hethey from a CRA auditor, filed in the Federal Court of Canada. The letter also mentions wire transfers and cheques for tens of thousands of dollars from various Corporate House entities.

The court filings note that Hethey's explanation for the payments is that they are a line of credit with Fred Sharp, but the auditor rejects that, stating they are not a bona fide loan but rather "a method of repatriating offshore funds and the income you earned offshore."

All in all, the CRA claims that Richard Hethey did not report more than $2.8 million in income from offshore sources between 2007 and 2015.

A similar letter to Mary Hethey calculated her unreported offshore income at a little over $2 million between 2009 and 2015.

A lawyer for the Hetheys said on Monday that it would not be appropriate to comment, citing an ongoing court case between the federal government and Sharp and a number of his associates and clients, which will be heard Wednesday in the Federal Court of Appeal.

Besides Sharp and the Hetheys, the CRA is also auditing Sharp's wife and at least nine other people or companies associated with Corporate House.

Audits in Canada hit roadblocks

The U.S. criminal case against Sharp charges him, two other people with ties to Corporate House and a U.S. lawyer living in Mexico with organizing a long-running penny stock pump-and-dump scheme. The FBI alleges Sharp and people at Corporate House set up shell companies to disguise the ownership of shares as part of the scheme.

A parallel civil fraud case brought by the U.S. Securities and Exchange Commission against Sharp and five people with ties to Corporate House has led to their assets being ordered frozen worldwide.

While those cases are moving ahead in courts in the U.S., the CRA's attempts to audit Sharp and those same associates have hit roadblocks.

Since 2016, they've filed more than 80 court challenges against auditors' attempts to get their bank, credit card and other financial records.

Sharp and the others claim the CRA is using its audit powers under which it can compel documents from them and their financial institutions to illegally pursue what is really a criminal investigation into them.

"Many of the clients under audit have also hired criminal lawyers. Legal bills submitted by Fred Sharp for GST purposes demonstrate there has been close co-ordination between these criminal lawyers from the outset in respect of these civil audits," the CRA's internal draft report states.

WATCH | 'Pandora Papers' leak reveals offshore tax havens:

Pandora Papers leak reveals offshore tax havens of the rich and famous

3 years ago

Duration 2:33

A massive new leak of documents dubbed 'The Pandora Papers' is shedding light on how the rich and famous are hiding their money, and how a world of off-shore tax havens is still thriving. The documents were obtained by the International Consortium of Investigative Journalists, which includes the CBC. Among the Canadians named in the documents are figure skater Elvis Stojko and race-car driver Jacques Villeneuve.

Discussing the case, a senior CRA official told CBC News in a background briefing three years ago that it is "symptomatic" of some of the challenges the agency faces when looking into taxpayers who might have hidden money offshore.

"We at the audit stage are encountering significant litigation from taxpayers," the official said, "who are refusing to collaborate and provide information once the audit has started."