MPs braced for battle with global accounting firm over naming wealthy Canadians behind offshore tax shelters

For years, ultra-wealthy Canadians aided byhigh-priced accounting and tax law firms have been setting up offshore shell companies in the Isle of Man sothey can dodgetaxes back home, avoid paying future creditors (such asex-spouses) and hide their identities.

Now, MPs on the House of Commons finance committee appear readyto try to dismantle that shield ofsecrecy.

Politicians from all parties agreed early in May to open a long-dormant probe into Isle of Man tax shelters. They were reacting torecent reports suggestingtheself-governing British Crown dependency's strict confidentiality laws didmore thanhelp rich Canadians avoidtaxes that theymay alsohave helped fraudsters embezzle more than $500 million from investors.

Global accounting firms have mostly managed to keep their clients' names secret by arguing thattheir codes of conduct preventthem from publicly naming the multimillionaires behind the shell companies theyhelped toset up.

But when KPMG Canada's head of tax, Lucy Iacovelli, testified beforethe House of Commons finance committee on May 6, she immediately found herself sparring with MPsfromacross the political spectrum.

MPs wanted to know thedetails ofa secret offshore tax scheme the Canadian accounting firm set up starting in the late 1990s one that Canada Revenue Agency officialscalled a "sham ...intended to deceive" federal authorities.

KPMG says it stopped selling the plan in the mid 2000s afteracknowledging its problems.At the same time, many of the shell companies KPMGhelped to set up remained active for more than a decade afterwards, until the plan was detected by the Canada Revenue Agency.

Iacovelli's refusal to name the Canadians behind the Isle of Man shell companies KPMG set up drew sharp rebukes from MPs on the committee.Bloc MP Gabriel Ste-Marie warnedKPMGthat it "cannot refuse to provide this information."

KPMG now has until the beginning of June to voluntarily comply with the request.MPs have the power to subpoena documents and witnesses.

CRA offered secret deal to KPMG clients

KPMG has a long history of opposing requests to name the beneficial owners of offshore companies it helped to create. In 2013, it appealed a judge's order to providenames to the Federal Court of Canada, citing client confidentiality.

That case dragged on for years.The CRA eventually offered a confidentialdeal to KPMG's wealthy clients that promised them no penalties if they paid back taxes and did not tell the public about the agreement.

KPMG now says it has complied with a judge's ruling in late 2016 to give CRAits list of clients.

Still, the judge recognized that KPMG was permitted to adviseits unnamed clients that they could, as a next legal step, try to claim solicitor-client privilege over certain documents held by the accounting firm.

In at least one case in B.C., that's exactly what happened.

In an email exchange from as far back as 2002, KPMG accountants revealed plans to route communication on tax shelter arrangements for billionaire brothers Caleb and Tom Chan outside of Canada as much as "humanly possible," and through a law firm that might allow the players to "claim solicitor/client privilege."

Questioned by Conservative MP Ed Fast during her committee appearance, Iacovelli declined to statethat KPMG created the offshore "product" to reduce taxes for its clients.

She told Fastthe answer to his questionwas "very complex" and couldn't be reduced to a"yes or no."

"I hate it when accountants try to hide behind complexity to avoid answering questions," Fast replied.

'They are trying to cover up'

MPsgrilledIacovelli over KPMG'sstatements denyingthat it helped toset up four companies in the Isle of Man two decades agosuspected of involvement in a massive fraud.

The Fifth Estate andRadio-Canada reported earlier this year that the four companies named after ancient swords Katar, Spatha, Sceax and Shashqua are suspected ofinvolvement in afraud operating out of Montreal known as the Cinar/Norshield/Mount Real affair.

Leaked emails from an Isle of Man service providersay that KPMG helped to set up thosecompanies for wealthy Canadian clients.Iacovelli and KPMG vehemently denythat claim and saythat the author of the emails was mistaken.

The emails were contained in an offshore leak of financial data obtained by the German newspaper Sddeutsche Zeitung and shared with the International Consortium of Investigative Journalists.

CBC/Radio-Canada also reported that other documents from the Isle of Man's public registry show links between the so-called "sword companies" and KPMG.

A company that KPMG acknowledges it did set up Parrhesia was registered in the Isle of Man at the exact time and date that three of the sword companies were registered. The Isle of Man's public registry also lists sequential corporate numbers for Parrhesia and those sword companies.

Iacovelli said CBC/Radio-Canada has been sent a notice of libel after publishing these details. Iacovelli told MPs that a thorough search of KPMG records found nothing to connect it with the sword companies.

"Any implication that KPMG was in any way involved with the sword companies ...is false,"she testified.

"I don't believe you at all," respondedSte-Marie, citing the proximity between KPMG's Parrhesia and the sword companies.

"They are trying to cover up,"NDP finance critic Peter Julian observed after the hearing.

MPs on thecommittee say they're determined to identifythe Canadians behind the sword companies and find outwho helped toset them up.

'We are not going to give up'

That's the assurance they gaveJanet Watson, a victim of the Cinar/Norshield/Mount Real fraudwho lost her retirement savings and who has fought on behalf of other victims for years.

Watson testified that some of herfellow investorshad to go back to work in their 70s, experiencedmarital breakdownsand sufferedstress-related illnesses. She saidshe knows of at leastone who committedsuicide.

"Where did all the money go?" she asked MPs.

"I would like to tell you that we're going to do everything we can to get to the heart of this," Ste-Marie told Watson. "We are not going to give up ...regardless of the time that it will take."

"We owe it to the many victims of this massive fraud and the associated tax evasion, and secretive transfers of funds, to get to the bottom of what transpired here," saidJulian.

Juliansaid he planned to call Serge Bilodeau, KPMG Montreal's senior partner, to testify before MPsabout Parrhesia and its proximity to the sword companies.

Offshore 'nominees' protecting identities of wealthy Canadians

So who did help set up the sword companies, if not KPMG?Public documents in the Isle of Man's registry provide the names of numerous offshore directors and officials who could solve the mystery.

Those names include former KPMG employees Sandra Georgeson and Anne Couper Woods. Woods and Georgeson are listed as directors of numerous KPMG companies set up in the Isle of Man for wealthy Canadians, and arenamed in the sword company documents.Georgeson is the author of the leaked emailsthatsaid KPMG Canada helped toset up the sword companies.

Woods wasmade a director of a company called "KPMG CEE Management Services Limited" in 2004, when she was alsoa director of the sword companies.

Michael Morris, a Canadian living in Nassau and running the Barrington Bank, is listed as a director of one of the sword companies, Shashqua, withWoods and Georgeson.Morris was also identified in the Cinar/Norshield/Mount Real scandal ashaving helped Ronald Weinberg, a Montreal business executive, move money offshore ahead of creditors.

The documents also show that Susan Gibbons, a Canadian working in Bermuda, was on the board of Katar, Sceax and Spatha. Gibbons' boss, William Maycock, is also listed as the person who transferred funds out of three of the sword companies.

Maycock was educated at Dalhousie University in Halifax and McMaster University in Hamilton and was, or is, a member of the Canadian Tax Foundation.Today, he runs a Bermuda-based trust company.

KPMG Canada did not respond specificallyto CBC'squestions about whether it made efforts to contact Morris, Gibbonsor Maycock before determining thatno one at the accounting firm had any involvement with the sword companies.

"We repeat that we are confident in our thorough and well-considered diligence, particularly but not limited to our detailed review of the best source of information our own records which confirmed KPMG Canada had no involvement in the Sword companies," the company said in a media statement.

In an email to CBC/Radio-Canada, KPMG Canada also saidthat whenIacovelli denied any association with the sword companies, she was referring onlyto KPMG Canada.

KPMGis headquartered in theNetherlands but itbills itself as a network of firms each with itsown legal liability.

Iacovelli "attended the Finance Committee meeting as a representative of KPMG Canada (and her comments, like ours, rightly reflect KPMG Canada's position)," KPMGmedia relations officer Tenille Kennedywrote in an email to CBC'sThe Fifth Estate.

Kennedy declined to statewhether anyone atKPMG's Isle of Man offices including its former head of tax, Greg Jones knew about the sword companies.

KPMG Canada and its lawyersfrequentlypointto an "independent" report the companycommissioned fromformer Supreme Court judge Ian Binnie. It statesthat the sword companies, along withothershell companies identified by journalists, "are not clients of KPMG."

Binnie wrote his report before theIsle of Man emailsstating the sword companies were KPMGclientsbecame public. Binnie later said he spoke with KPMG Canada's legal counsel about the leaked emails and did not see a reason to change his conclusion.

Binnie said KPMG had obtained manyrecords from the Isle of Man in advance of his review.

"I have no reason to doubt the due diligence undertaken by KPMG," Binnie wrote CBC/Radio-Canada in an email.

KPMGCanada has declined to saywhether the accounting firmprovidedBinniewith the corporate documents forParrhesia when the retired judge conducted his 2017 review.

When asked recently about Parrhesia and the swords being set up at the same time, Binniesaidthey could have been set up together simply because the Isle of Man service providerput together a "batch" of documents that were then physically delivered to the Isle of Man public registry at the same time.

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