The offshore banking nightmare

It was a strategy born of sheer frustration, a chess move that failed. On Nov. 28, 2006, Michael Morris, a Canadian who runs a small offshore bank in the Bahamas, arrived at a bustling Starbucks in downtown Toronto expecting to meet a woman called Ginette Brown. The previous month, a woman by this name had called Morris at his offices in Nassau, where he runs Barrington Bank International Ltd., and told him she had a client seeking financing and would Morris agree to meet with her when he was next in Toronto? Weeks later, they arranged to rendezvous at the Starbucks while he was in town visiting family.
But soon after Morris sat down to wait for Brown, a bailiff server walked up and slapped him with a subpoena. The meeting with “Ginette Brown” had actually been a ruse. Morris was being ordered to testify about what assets the Barrington Bank held for Ronald Weinberg, the former co-CEO of Cinar Corp., the Montreal children’s animation company (of Arthur and The Busy World of Richard Scarry fame). The subpoena had been drafted by Davies Ward Phillips & Vineberg LLP, which was pursuing Weinberg on behalf of Cinar’s new owners for millions they claimed was missing from the company’s coffers — $11.3 million of which they believed was sitting in Morris’ bank.

This bit of guile backfired, however, when Weinberg’s lawyers went before Quebec Superior Court Justice André Denis and had the subpoena tossed out on the grounds it had been served using subterfuge. Denis was clearly displeased, saying the bait-and-switch with the bailiff server had the effect of “discrediting the administration of justice.”

But in the grand scheme of things, the ruse reflected the deep-seated exasperation felt by Cinar’s lawyers in trying to find the company’s missing millions, which had vanished into a maze of offshore bank accounts and obscure financial institutions like the Barrington Bank. “We couldn’t get [Morris] before the judicial system in Canada because he was outside of the country,” explains G. Wesley Voorheis, the Toronto-based securities lawyer who oversaw Cinar’s legal efforts to find the money. “Were we frustrated? Sure. We thought he was engaged in shenanigans helping Weinberg out and he wasn’t up for [talking to us]. . . . Absent a court order in a foreign jurisdiction, which we don’t know if you can get, that’s what we chose to do.”

In 2008, Cinar and Weinberg finally reached a settlement, the terms of which are secret (and early last year, Weinberg and his alleged co-conspirators were arrested by Quebec police and charged with defrauding the animation company). Meanwhile, two of his lawyers, Joe Groia and Pierre Fournier, are being sued by Cinar, which accuses them of helping Weinberg move his money out of Quebec and breaking a court injunction. Both lawyers deny the charges.

An all-too-common reality

Cinar’s pursuit of Weinberg and his lawyers over money that may have disappeared offshore is an all-too-common reality — one that inevitably embroils lawyers. Offshore banking and tax havens are becoming a hot political issue, especially as the global economy continues to totter. Governments in North America and Europe, facing crippling deficits, are turning their attention to assets which the rich and corporations have squirreled away offshore, hoping this cash will solve their fiscal woes. “In the U.K., for example, there are estimates of a so-called tax gap, monies that should be paid but isn’t for one reason or another, and that ranges from £50 to £100 billion annually,” says Nicholas Shaxson, author of a 2011 book on offshore banking, Treasure Islands, and who works for the Tax Justice Network in Zurich. “Of that, about £20 billion is in tax havens. It’s that order of magnitude.”

In fact, the European Union risks breaking apart largely because countries like Greece are unable to pay back their staggering government debts. Yet the Tax Justice Network estimates as much as €20 billion belonging to Greek tax dodgers is hiding in Swiss bank accounts and the amount of Greek-owned offshore companies tops 10,000, while the government estimates the evasion of tax and social-security contributions costs Greece €30 billion a year.

Overall, the Organisation for Economic Co-operation and Development claims that offshore banks globally hide some US$5 trillion to US$7 trillion from tax authorities, or about eight per cent of the world’s assets under management. Moreover, an estimated US$11.5 trillion is being stashed in offshore accounts worldwide for one purpose or another. The U.S. government claims it loses US$100 billion a year in tax revenue because of undisclosed tax-haven bank accounts.

The Canada Revenue Agency refuses to divulge estimates of monies lost due to Canadian tax cheaters hiding cash offshore, but evidence suggests it’s a vast sum. In 2005, Statistics Canada produced a study showing that from 1990 to 2003, Canadian companies invested “substantial and growing amounts” in tax havens, mostly in the Caribbean — a total sum that grew to $88 billion from $11 billion during that time period, largely for tax reasons. As The Financial Post’s Diane Francis once noted, “Thousands of fabulously wealthy Canadians sit on yachts in tax havens without paying any taxes on wealth made in Canada.” According to evidence gathered by a U.S. Senate subcommittee, the Swiss financial services company UBS had accumulated about $6 billion from wealthy Canadians that had not been reported to tax authorities.

In 2009, then-minister of National Revenue Jean-Pierre Blackburn, said that 106 wealthy people had used RBC Dominion Securities Inc., the brokerage house of the Royal Bank of Canada, to set up offshore accounts in the European principality of Liechtenstein. As much as $100 million was sitting in these accounts. An investigation by CRA discovered that at least three RBC Dominion Securities advisers had helped people hide this money.

Using offshore havens for evading taxes is a time-honoured tradition among Canada’s political and business elites. Former prime minister Brian Mulroney received cash payments from German arms wheeler dealer Karlheinz Schreiber totaling $300,000 (Mulroney claimed it was $225,000) in 1993 and 1994, which he didn’t bother declaring to the CRA until 1999. For a period of time much of this money sat in a safety deposit box in a New York bank. And Canada Steamship Lines Inc., the family business of former prime minister (and lawyer) Paul Martin, has an international division registered in the Caribbean tax shelter of Barbados. The Barbadian corporation is owned by a holding company in Bermuda, another offshore haven. This complicated setup allows Canada Steamship Lines to escape paying millions in Canadian taxes. Even former media mogul (and lawyer) Conrad Black is accused of using offshore havens to hide his compensation.

But it’s not just tax cheats availing themselves of offshore banking centres: white-collar criminals do the same. “We see that all of the time in criminal investigations,” says Biagio Carrese, the inspector in charge of the RCMP’s Integrated Proceeds of Crime division in Ottawa. “The offshore component, when it comes to big money, is always there.” And the reasons are obvious. “Very few victims of fraud receive any of their money back regardless of where it’s committed,” remarks David Marchant, the editor of the Florida-based investigative newsletter OffshoreAlert. “If they put the money offshore, it’s just more expensive to recover it.” Indeed, most of the major frauds that have afflicted Canada’s capital markets in recent years have contained an offshore component.

The real nightmare

But for those lawyers representing victims of fraud, offshore banking havens pose a legal nightmare.

Finding the money is rarely an easy task, as evidenced in the fallout from the collapse of the Montreal-based hedge fund Norshield Asset Management (Canada) Ltd., which went bust in the summer of 2005. Norshield had attracted retail and institutional investors who were now missing at least $159 million.

Even before its demise, Norshield had been a source of controversy, having been tied to the scandal that had engulfed Cinar a few years earlier. In 1999, the co-CEOs of Cinar, Ronald Weinberg and Micheline Charest, had invested US$108 million in one of Norshield’s funds based in the Bahamas. There was one glaring problem, however: they had failed to inform Cinar’s board about the transaction, let alone get its approval. When this offshore transaction was discovered, Weinberg and Charest were pushed out of the company and Cinar’s board demanded the hedge fund give back the money. Of the US$108 million, as much as US$30 million was never recovered.

In 2004, Cinar was sold to a consortium and the new owners strongly suspected Weinberg, Charest, and the company’s former chief financial officer had hidden as much as $100 million in offshore accounts, including in Norshield. They set up a committee, led by Voorheis, to hunt for the cash.

One of the lawyers tasked to find this money was William Brock, a Montreal-based partner with Davies, who has sought money in offshore havens many times during his career. “It’s not always as easy to get effective recourse in those foreign countries,” explains Brock. “The reality is if the defendant is willing to lie it’s very difficult to track the assets. . . . If you’re smart it’s very, very easy to move funds. And it’s fast to move funds. Assuming that you’re moving funds from Canada to some Caribbean country or to a Swiss bank, faster than a blink of an eye you can wire the money again. I have seen cases where there’ve been multiple transfers of funds. And you’re always playing catch-up.”

Getting missing money back

How do lawyers like Brock find money offshore? For one thing, you have to establish that someone has hidden money inappropriately — money that belongs to someone else, in other words. This means obtaining a court order in Canada that spells this out, convincing a judge that money is owed and needs to be returned to its rightful owners. To this end, if you can get the perpetrator on the stand in a Canadian court and force them to divulge under oath the extent of their assets and where they went, this can help enormously in finding the money. It also ensures that if they lie, it’s on the record.

Secondly, Brock recommends obtaining a worldwide Mareva injunction, which freezes the perpetrator’s assets wherever those monies are hidden. In the case of Weinberg, Cinar’s lawyers were able to get an injunction in 2005 freezing his accounts, convincing a judge he was moving his assets out of the country to the Caribbean to keep it out of reach from his creditors.

But proving someone owes you money in Canada is one thing. Getting that order implemented in another country is a whole other matter. Canadian lawyers have to hire local counsel in the country where they think the money has vanished. “So, for instance, you have to retain lawyers in the Bahamas to obtain an order to get access to the Bahamian bank account,” explains Brock. “But if the money was immediately transferred to a bank account in the Turks and Caicos, you then go to the Turks and Caicos and retain lawyers there.” Moreover, the quality of the counsel in these island countries can vary enormously. Says Brock: “There are great lawyers and there are not great lawyers.” Either way, it becomes an expensive and time-consuming process.

Indeed, the wheels of justice in these foreign lands can be slow and unpredictable. The search for Weinberg’s money eventually led Brock to Bahamas-based Barrington Bank International and Lochaven Financial Ltd. in Turks and Caicos. Brian Trowbridge, a Canadian lawyer, is the CEO of both Lochaven and a another financial institution, Hallmark Trust Ltd. Cinar has claimed in court documents that Weinberg and Charest, after the company sued the couple over missing money, put $11.3 million in Barrington Bank and nearly $2 million in Lochaven — which was why Cinar’s lawyers subpoenaed Michael Morris at the Toronto Starbucks outlet in 2006.

Trowbridge’s company Hallmark, in particular, has been tied to its share of scandals in recent years. A Ponzi scheme was run out of it by David Smith, a Jamaican national who pled guilty in 2011 for masterminding a US$220-million scam that defrauded 6,000 investors (he received a 30-year sentence). In a civil lawsuit filed in 2007 in Hawaii, the U.S. Internal Revenue Service also alleged that two American accounting firms advised clients to evade taxes by moving money out of the country by means of MasterCards issued by Hallmark.

In the end, the pressure brought to bear on Weinberg led to the settlement in 2008. Even then, Cinar continues to pursue Weinberg’s lawyers based on the suspicion that the former CEO may have misled them about the extent of his assets.

The need for criminal links

The nightmare of trying to obtain money in offshore jurisdictions is one Allan Bell is very familiar with. A Canadian lawyer based out of Hong Kong, he advises the World Bank and Government of Indonesia on asset recovery. One case that Bell has studied is the missing fortune of former Indonesian dictator Suharto, who was ousted from power in 1998 and accused of pillaging US$15 billion to $35 billion of state assets during his 32-year reign. One of Suharto’s sons, Hutomo Mandala Putra, known as Tommy, was accused of pocketing US$800 million of this sum.

In 1994, Tommy Suharto had bought a controlling interest in the sports car company Lamborghini. In 1998, as his family was being pushed out of power in Indonesia, Tommy sold his share in the company for US$48 million and parked it in a French bank subsidiary located in the offshore banking haven of Guernsey, one of the Channel Islands. In 2000, Tommy was convicted in Indonesia of corruption and, two years later, of assassinating a supreme court judge. He was jailed. At that time, one of Tommy’s holding companies, which was registered in the British Virgin Islands, ordered the French bank to transfer €36 million out of Guernsey. The bank refused, and Guernsey’s Financial Intelligence Service (FIS), which had been set up to combat the illegal use of offshore accounts, also refused to allow Tommy’s account to be emptied.

In 2006, Tommy launched a case in the Guernsey courts demanding the money be released. After lengthy legal battles, last year, over the objections of the Indonesian government, the Guernsey courts allowed Tommy to remove his money, claiming his property rights had been violated by FIS in preventing him from doing so. One of the problems the FIS faced is that the Indonesian government had failed to prove Tommy’s wealth was derived from corruption. “Indonesia faces huge problems with their legal system, including the corruption of judges and prosecutors, and although there should be ample evidence available to support a cause of action against Tommy given the estimated US$800 million he alone netted during the 32 years of his father’s regime, the Indonesian authorities have until now been unable to make a case stick,” says Bell. “Without a domestic conviction, or at least the provision by Indonesia to the Guernsey authorities of some kind of clear evidence linking Tommy to criminal enterprise, it was impossible to secure a confiscation order for the funds in Guernsey.”

The Portus case

Another offshore case that’s entangled Canadian lawyers on both sides of the ramparts is Portus Alternative Asset Management Inc., a Toronto-based hedge fund set up by Michael Mendolson and Boaz Manor in 2003. Portus managed to raise $800 million from 26,000 investors before it was shut down in 2005 amid  allegations it was no more than a sophisticated Ponzi scheme.

Of the money raised, about US$53 million was invested offshore by Manor, mostly in the Cayman Islands and Turks and Caicos. “We could not glean any legitimate business purpose of doing that,” says John Finnigan, a founding partner with Thornton Grout Finnigan LLP who was hired by bankruptcy receiver KPMG Inc. to find the Portus money. “Absolutely [Manor] was trying to hide it.”

Because it was closed down by the Ontario Securities Commission for reasons of fraud, obtaining orders in Canada seeking offshore funds was not terribly difficult, but it turned out to be a long and expensive ordeal for Finnigan to find the money. For example, after hiring local counsel in the Cayman Islands, and getting the Canadian order recognized there, they discovered the money had been moved to the Turks and Caicos. “And so we had to go back before the Canadian judge and get the order amended, and local counsel would have it lined up with the judges in the Caribbean,” says Finnigan. “We did that four or five times as we traced the money through these various jurisdictions before we ended up at this account in the Turks and Caicos. And we got the funds frozen before they could be moved again.” Finnigan says they lucked out when the judge in the Turks and Caicos was also a former school chum of the Canadian judge overseeing the Portus bankruptcy, and he expedited the retrieval of the money.

In the end, they pursued the Portus money through jurisdictions that, along with the Caribbean region, included Cyprus, Hong Kong, Israel, Italy, and France. And they had to fight in the Israeli courts to get permission to interview Boaz Manor himself, who had fled to Israel in 2005.

But there was another wrinkle to the Portus affair that involved a lawyer. The person who set up Portus’ offshore accounts was T.R. Anthony Malcolm, a veteran Montreal sole practitioner. All told, Malcolm was paid US$2.7 million to carry out this task, an amount Finnigan found to be suspiciously steep. KPMG concluded that at least US$1.2 million of the amount Malcolm invoiced “had no apparent connection to the Portus Group.”

“Malcolm was setting up the architecture offshore and he had contacts with the bankers and individuals who established these accounts,” says Finnigan. “It struck us as a large amount of money to do that kind of work.”

Of the US$53 million that had gone missing offshore, Finnigan finally found US$35 million of it in the Turks and Caicos. But that still meant US$17.6 million was missing, an amount that’s never been accounted for to this day (Manor apparently used $9 million of it to buy diamonds, which were not recovered).

In 2007, KPMG launched a suit against Malcolm seeking $25 million over his involvement in the Portus scam. While the case was never pursued, the statement of claim alleges that Malcolm assisted Manor in diverting Portus funds offshore and that the lawyer “knew or ought to have known that the establishment of the Offshore Accounts and the transfer of tens of millions of dollars through these accounts were not acts in furtherance of and legitimate business purpose of the Portus Group.” The claim alleges that Malcolm continued to assist Manor in his efforts to steal Portus funds even after Portus was placed in receivership in March of 2005 and Manor had bolted from Canada.

When Manor was interviewed in Israel by Finnigan in 2006, Manor blamed the entire Portus scandal on Malcolm, saying the Montreal lawyer engineered the fraud. The receiver found no evidence this was true (and Malcolm has denied any knowledge of the Portus swindle). The 37-year-old Manor was forced to return to Canada and, last year, was sentenced to four years in prison.

In total, it cost a whopping $13.7 million in legal and other fees to hunt down and repatriate the Portus cash.

“The courts in the Caribbean do not act quickly,” says Finnigan. “It’s exceedingly difficult to get a court date and very difficult to move things along. So you have this sort of 18th- and 19th-century machinery trying to catch up to 20th-century technology of moving funds around with a few keystrokes. So if the money is moved offshore there is no easy way to get your money back. It can be very costly, time-consuming, and frustrating.” 

With files from Nicole Brewster.

Bruce Livesey is a Toronto-based journalist whose book about investment fraud in Canada,
Thieves of Bay Street, is being published by Random House in April.

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