By Christian Leuprecht, Jamie Ferrill, Mikayla Ozga, Milind Tiwai, and Juakatha Karunakaran, February 22, 2025
Organized criminals need to launder their illicit gains. They integrate proceeds of crime into the legitimate economy by disguising their criminal origins. A common tactic involves using corporate vehicles, such as shell companies and front companies, to obscure the money trail. Transparency of actual beneficial ownership is thus an important means to impede organized crime.
Beneficial ownership policies establish requirements to register and disclosure details about individuals who directly or indirectly own or control a company. Loose beneficial ownership policies incentivize the misuse of corporate vehicles for illicit purposes, especially to launder funds from crimes such as sex trafficking – a predicate crime that drives money laundering by way of illicit massage parlours (IMBs). By concealing the true ownership or control of assets, opaque beneficial ownership structures make it harder for regulators, law enforcement, investigators, and financial institutions to track and trace illicit financial activities taking place.
Canada’s problem with OCGs
Canada has become a hotbed for money laundering and financial crime by individual white-collar criminals and organized crime groups. Much of Canada’s vulnerabilities to money laundering stem from gaps in our anti-money laundering legislation, Canada’s proximity to global markets, and Canada’s stable economy, which attracts legitimate and illegitimate business.
RCMP estimates peg the number of Organized Criminal Groups (OCGs) in Canada at around 2,000. OCGs are highly structured and strategic: often they operate just like legitimate businesses. Money-laundering crime syndicates hurt all Canadians by reducing tax revenue and heightening financial instability. They also tend to use violence during the course of their illegal activities, thereby jeopardizing public safety.
Organized crime and human trafficking
Proceeds to be laundered need to be generated first. Predicate crimes are the underlying criminal acts that drive money laundering schemes. Common predicate crimes include drug trafficking, arms trafficking, tax evasion, corruption, and human trafficking. Human trafficking is a predicate crime that is often shrouded in opaque ownership structures. The International Labour Organization and Walk Free Foundation estimate that approximately 24.9 million people around the globe are victims of trafficking, 4.8 million of whom are subjected to sexual exploitation. Within Canada, 3,996 cases of trafficking for sexual exploitation and forced labour were reported to police between 2012–2022. Due to the clandestine nature of trafficking, these figures likely underestimate the extent of the problem.
Corporate vehicles as a tool for organized crime
Organized criminals commit profit-driven crimes and need ways to hide the source of their illegal income. Corporate vehicles, with their often complex and unclear ownership structures, provide an effective means to conceal illicit gains. They provide the means to move funds through seemingly legitimate transactions, which makes illicit flows difficult to trace, intermingles money from legal and illicit gains, and disassociate gains from their criminal origins. As declared by the Financial Action Task Force (FATF) – an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing, and the financing of proliferation of weapons of mass destruction: “[t]he misuse of corporate vehicles could be significantly reduced if information regarding both the legal owner and the beneficial owner, the source of the corporate vehicle’s assets, and its activities were readily available to the authorities.” FATF has also flagged limited public and competent authorities’ (i.e., law enforcement and financial intelligence units) access to beneficial ownership information as a significant impediment to curbing abuse of corporate vehicles for money laundering.
Shell and front companies: illicit massage businesses
OCGs in Canada operate IMBs, which not only serve as front companies to launder high quantities as cash for OCGs but also double as sites for sexual exploitation of vulnerable persons, many of whom have been trafficked. Thus, the operation of IMBs and their opaque ownership pose a threat to public safety: vulnerable people are coerced or manipulated into performing forced sex work to which they have not consented; OCGs then use these funds to perpetuate their illicit activities. Beneficial ownership registries, which seek to reduce information asymmetry and make it easier for law enforcement to detect and deter sexual exploitation, impede money laundering through IMBs.
To be sure, human and sex trafficking takes many forms; not all massage businesses engage in trafficking and exploitation, and not all sex work within massage businesses is exploitative. Legitimate work in the sex industry can be a genuinely consensual manifestation of human agency. The concern here are businesses that are operating illicitly with the express intent of exploiting vulnerable humans for the purpose of sexual activities.
Thomson Reuters Special Services estimates that there are about 700 IMBs in Canada. Two cases in particular illustrate the clandestine nature of IMBs in Canada, and their dual-purpose: as financial vehicles for criminals and hubs for sexual exploitation. The first person in Canada to be arrested for human trafficking was Michael Ng, who owned King City Massage Parlour in Vancouver. He was arrested in 2004 after it turned out that his parlour was falsely registered as an acupuncture clinic. In reality, it was a prostitution business staffed by women who had been trafficked from China. In 2016, Halton police arrested the owner of Dynasty Wellness Centre for receiving material benefits from sexual services. The parlour had previously been closed due to numerous bylaw violations, but reopened months later under different ownership structures. This deceptive business technique is known as ‘phoenixing’: owners transfer their business and activity to a seemingly new corporation.
The role of beneficial ownership registers in combating organized financial crime and human trafficking
When IMBs are shrouded in corporate opacity, it is difficult for investigative authorities to discover who is ultimately profiting from crimes associated with human trafficking and sexual exploitation. This makes it difficult to see how money is being laundered and where: whether through the purchase of real estate, wiring money abroad, or purchasing casino chips. There has been increased support for more transparent beneficial ownership information as a mechanism of human trafficking and sexual exploitation prevention. For example, the International Consortium of Investigative Journalism, Transparency International and the Canadian Centre to End Human Trafficking support publicly accessible ownership registers. However, in accordance with recommendations by FATF and a recent decision by the European Court of Justice on public disclosure, beneficial ownership registers should be fully accessible to competent authorities to law enforcement, but with limited information also accessible to the public at large, such as journalists. This approach balances the public interest in streamlined and access, with the right to privacy and business interests in protecting information.
What is being done?
Countries are heeding the call: beneficial ownership transparency laws have been gaining traction across the world, including in Canada. Since November 2023 Canadian federal legislation has mandated public access to corporate beneficial ownership information. Bill C-42 requires companies incorporated under the Canadian Business Corporations Act to disclose beneficial ownership information. However, this legislation does not capture 90 per cent of corporations in Canada, which fall under provincial jurisdiction. Beneficial ownership transparency varies across Canada’s 10 provinces and 3 territories: only Quebec and British Columbia have set up their own beneficial ownership collection regimes. This asymmetry leaves gaps for criminals to exploit.
Yet, beneficial ownership registers are no silver bullet on their own. Rather, they are a force multiplier that enhances visibility and knowledge into businesses that are notoriously vulnerable to crime and money laundering, such as massage parlours. They not only help combat human trafficking, but also deter organized crime and money laundering, thereby diverting illicit funds away from Canada. Canada needs a comprehensive register that incorporates data from all provinces and territories, rather than separate registers – with which thresholds – for federally and provincially-incorporated companies. A centralized beneficial ownership register that collates information between provincially- and federally incorporated businesses, would prove a major force multiplier in containing financial crime. For Canada to step up the fight against organized crime and money laundering, a comprehensive beneficial ownership register is indispensable.
This study is based on a forthcoming open access article in the scholarly journal Current Issues in Criminal Justice, titled “Detecting, Disrupting and Deterring Sexual Exploitation of Trafficked Persons: Leveraging Beneficial Ownership Registries to Reduce Criminogenic Information Asymmetry and Raise Public Expectations.”
Christian Leuprecht is distinguished professor at the Royal Military College, director of the Institute of Intergovernmental Relations, and senior fellow at the Macdonald-Laurier Institute.
Jamie Ferrill is senior lecturer at the Australian Graduate School of Policing and Security at Charles Sturt University.
Mikayla Ozga is a research coordinator at the Institute of Intergovernmental Relations at Queen’s University.
Milind Tiwai is senior lecturer at the Australian Graduate School of Policing and Security at Charles Sturt University.
Juakatha Karunakaran is a practicing lawyer and affiliated with the Institute of Intergovernmental Relations at Queen’s University.