Tax Risks From Underground Banks: Toronto Tax Lawyer Analysis – Tax

Introduction – Underground Banks and Hawalas

Canada has been criticized for failing to police and control the
growth of underground currency exchange and banking networks in
Toronto. These underground banks criticized are being used for
various illicit activities including drug money laundering,
financing terrorist groups, and supporting the Iranian regime. It
has been reported that there are up to 70 currency trading shops in
Toronto. One currency shop, owned by Farzam Mehdizadeh, was raided
in 2016 with Mehdizadeh charged for allegedly laundering $100
million in a single year. In response to some of these problems,
Canadian Public Safety Minister Bill Blair announced in December,
2020, that the federal government would be funding nearly $100
million for new anti-money laundering units in B.C., Alberta,
Ontario, and Quebec by the end of March, 2021.

Underground banks and Hawala networks are popular when the
regular banking system is unable to fulfill people’s needs. For
example, Canada has financial sanctions against Iran, making bank
to bank fund transfers impossible. Other countries such as Iraq and
Afghanistan have unstable financial systems which can also prevent
individuals from transferring funds to and from Canada.
Additionally, some countries such as China have limits on how much
money their nationals can send out of their countries. In these
situations, some of the only ways individuals who have funds in
these foreign countries can move their funds to Canada, be it
because they have immigrated to Canada or to help support their
family, is to use underground banks or Hawalas.

The basic idea is that someone in the foreign country pays an
amount of money to a Hawala broker who then provides them with a
code. Someone else in Canada can then go to a related Hawala broker
and use that code in order to receive a corresponding amount of
cash minus a commission. Other underground banks also tend to use
similar methods to allow people to bypass restrictions and move
funds into Canada. These underground banks and networks operate on
the basis of trust as, by nature, they are designed to fly under
the radar and avoid surveillance and currency restrictions.
However, beyond the risk of simply losing any money you pay into
the system, there can also be tax consequences of using these
systems. Furthermore, because of the difficulty identifying the
source of funds received through these systems, authorities may not
be able to easily differentiate between their use to by-pass
currency restrictions from money laundering or from terrorist
financing activities. This creates the additional risk for
individuals who use them for (relatively) legitimate currency
exchange purposes of being misidentified as participating in more
serious criminal activities.

Untraceable Funds and Unreported Income

To be clear, Canada does not tax transfers of money or gifts and
there is technically nothing wrong with using these underground
banking services from a purely tax perspective. However, the real
risk lies in that the CRA…