Past Session:

Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade

Issue 19 - Evidence - Meeting of December 6, 2012

OTTAWA, Thursday, December 6, 2012

The Standing Senate Committee on Foreign Affairs and International Trade, to which was referred Bill C-24, An Act to implement the Free Trade Agreement between Canada and the Republic of Panama, the Agreement on the Environment between Canada and the Republic of Panama and the Agreement on Labour Cooperation between Canada and the Republic of Panama, met this day at 10:33 a.m. to give consideration to the bill.

Senator A. Raynell Andreychuk (Chair) in the chair.

[English]

The Chair: Honourable senators, today the Standing Senate Committee on Foreign Affairs and International Trade is continuing its examination of Bill C-24, an act to implement the Free Trade Agreement between Canada and the Republic of Panama, the Agreement on the Environment between Canada and the Republic of Panama and the Agreement on Labour Cooperation between Canada and the Republic of Panama, also known as the Canada-Panama Economic Growth and Prosperity Act.

I welcome to this session Ms. Brigitte Alepin; and, by video conference, and we hope it all works, that everyone is hearing us, and that we will be able to handle the two video conference locations, Mr. Alain Deneault from Quebec City; and Mr. Ben Beachy, Research Director with Public Citizen's Global Trade Watch, who is joining us from Washington, D.C.

We will hear from each of the panelists. I trust your opening comments can be as brief as possible so that we can turn to questions. Welcome to the committee, and I will start with Ms. Alepin.

[Translation]

Brigitte Alepin, as an individual: Honourable senators, thank you for the invitation to appear.

Today you are asking a very relevant question, which is whether or not Canada should pursue this free trade agreement with the Republic of Panama.

I assume I am here today to answer that question, to which you are asking me to respond as the author of books such as La crise fiscale qui vient, written in 2010, when the fiscal crises were not even on the radar for most experts, as well as the book I recently authored called Bill Gates, pay your fair share of taxes just like we do.

As we can see, a fiscal crisis may be dawning for Canada, and several other countries are already in a state of fiscal crisis. If those countries are in crisis and if Canada is at risk, it is for many reasons. People will tell you the specific reasons with great certainty, but they do not know what they are talking about since this phenomenon is entirely new, and taxation is also a new phenomenon in the history of humanity. We are therefore facing new situations and must come up with new solutions.

The Harper government's current policy is an approach strictly based upon an understanding of current crises being caused solely by problematic public spending. I however, am of the opinion — and statistics back me up — as an expert in fiscal policy for many years, that if Canada is on the brink of a fiscal crisis and if several other countries already find themselves in fiscal crises, it is because of revenue-related problems.

This problem is mainly caused by the fact that the new world order is combined with this new phenomenon, that is electronic currency, and that these two factors are also combined with the appearance and growing popularity of tax shelters. All this leads to tax leakage in the public accounts. At the same time, these three phenomena together create a service lane in taxation systems; in this service lane, it is possible to be under-taxed or not taxed at all. And who do we mainly see in this service lane? Ultra-rich individuals and corporations.

I would like to draw your attention to three Canadian statistics that are extremely important. In Canada, the most recent statistics for individuals, going back to 2009, show that the actual tax rate for the top 1 per cent of Canadian taxpayers, that is to say the 35,000 Canadian taxpayers whose average income was $475,000 in 2009, was 14 per cent, rather than the 24 per cent prescribed by law.

By comparison, just five years earlier, the same statistics from the Canadian government showed that the top 1 per cent of taxpayers paid 18.5 per cent in taxes.

At the corporate level, to demonstrate once again the growing under-taxation of ultra-rich individuals and corporations, as you all know, much has been said about the fact that tax rates for large corporations have been cut in half since the year 2000, going from 30 per cent to 15 per cent.

As for the repercussions for fiscal statistics, I invite you to take note of an OECD statistic which records, once again, the 2009 numbers: the portion of public finances contributed by corporations went from 12.5 per cent in 2000 to 10 per cent in 2009. That is a drop of nearly 25 per cent and whether one is in favour of or opposed to taxation, whether one is on the left or on the right, the numbers do not lie.

If Canada was a multinational corporation with that kind of loss of revenues over a single decade, one could say that that organization was in financial difficulty. So, how must one interpret the Panama-Canada Convention? This is just a crumb that allows the implementation of this entire structure so that certain very rich taxpayers may be exempt from paying taxes. By deciding against signing this convention, will such tax exemption be halted? Probably not.

Do you have access to more efficient and better ways to counter the problem of fiscal crises and to deal this minority of taxpayers who manage to escape the fiscal system, not only in Canada but abroad as well? Yes, you probably have more effective ways to go about that. But if you wish to make a symbolic gesture, if you wish to take a first step towards resolving the crisis in public finance, you have the opportunity to do so by refusing to implement Bill C-24.

[English]

The Chair: I will turn now to Mr. Deneault. Welcome.

[Translation]

Alain Deneault, as an individual: Honourable senators, my name is Alain Deneault, and I teach at the Department of Political Science at the University of Montreal. I am also the author of the book Off Shore: Paradis fiscaux et souveraineté criminelle, published in 2010 in Canada by Écosociété, in France by La Fabrique, and in the U.S. by The New Press under the title Tax Havens and the Rule of Global Crime.

The cozy relationship observed over the last few decades between Canada and tax shelters could not be better confirmed than by the free trade agreement that Canada has negotiated and is about to implement with Panama. In the eyes of the most serious criminologists of the Western world, Panama is a beacon of money laundering for drug traffickers across the world. Its free zone, free port and offshore banking sector have made it a notorious hub for drugs and drug-related money.

Patrick Meyzonnier, police commissioner at La Direction centrale de la police judiciaire in France, wrote of Panama that it was evidently a drug trafficking, money laundering state for some of the dirty money in the world. He further stated that thanks to sleazy law firms, limited companies may exist for only a few hours and that a few hours is all that is required to obtain a nationality.

In fact, the Republic of Panama poses three problems: first of all, the free zone of Colon is the world's second largest hub for goods after Hong Kong, but it is mainly a lawless place which itself faces a Columbian area that is ungoverned and unpoliced. About one third of the country's trade goes through it. And the criminal nature of Colon's economy is quite clear. People converge there in order to launder money through the hotel industry, in fictitious shopping centres or through fictitious rental income, and gold smuggling is also a major activity there.

Marie-Christine Dupuis-Danon, who was an anti-laundering advisor to the United Nations against drugs and crime from 2000 to 2003, also presents Panama as being a key transition country for drugs between the Caribbean and North America. She mainly attributes this to the free zone of Colon, which acts as a regional money laundering centre when comes the time to integrate drug trafficking revenues into the real economy. She notes that there is no customs duty paid in Colon and that the bottom line in the free zone never stops growing, having reached $18.6 billion in 2008. That was my first point.

The second point is that the Colon free zone is next to three cargo ports and container terminals. However, Panama is the most popular flag of convenience in the world, and more than 8,000 ships are registered in that country. These free ports allow shipowners around the world to get around any regulations worthy of the name in the maritime transportation sector. And it is through the maritime transportation sector that Panama plays a pivotal role in the transportation of drugs between the north and the south. The Mexican-Columbian and Jamaican mafia, who are very active in Canada, funnel their cocaine through Panama. The Government of Canada's Criminal Intelligence Service, CISC, outlines this in its 2010 report on organized crime.

Thirdly, the Colon free zone owes its success to its connection with an offshore financial centre. Panama is home to no less than 150 international financial institutions. It is as easy to open a bank in Panama as it is an insurance company. Panama allows different industrialists and financiers from around the world to remotely open anonymous accounts, to create offshore companies, as well as to set up trusts and holdings that allow them to conduct all sorts of transactions, alone, with perfect anonymity. Banking secrecy prevails.

And in the case of activities considered to be unlawful elsewhere, for example in Canada, Panama guarantees immunity. Furthermore, a Panamanian company is not required to maintain its head office in that country, only to have a lawyer who resides there. Eighty per cent of Panama's economy is based on these various offshore sectors.

In conclusion, by signing a free trade agreement with Panama, Canada is voluntarily integrating its jurisdiction into the Panamanian structures which facilitate the laundering of proceeds of crime in that country. Studies done by Marie- Christine Dupuis-Danon, or Alain Delpirou, Eduardo MacKenzie and others show that free trade agreements promote drug trafficking just as much as money laundering. Rights and controls are compromised, while the volume of activity increases. It then becomes easier to hide unlawful activities from the authorities. In the case of NAFTA, for example, road convoys have increased, and we can anticipate, in the case of the Canada-Panama agreement, that import-export companies, which are largely controlled by organized crime, will soon be called upon to organize drug trafficking from Colon to various Canadian ports.

Bill C-24, which gives effect to this agreement in the Canadian Parliament, to my mind, ostensibly attempts to promote, by increasing reciprocal trade, the harmonious development of economic relationships between Canada and the Republic of Panama. It is as though the investors involved in Panama were practising what was once called doux commerce. However, one wonders if the harmony so highly vaunted by Canadian legislators is not, in reality, the result of a cognitive dissonance.

With this agreement, Canada will indeed find itself promoting everything it claims to fight, be it corruption among political elites, economic and financial crime, and drug trafficking.

[English]

The Chair: Thank you. Mr. Beachy, please.

Ben Beachy, Research Director, Public Citizen's Global Trade Watch: On behalf of Public Citizen's Global Trade Watch, thank you for the invitation to testify on Bill C-24. Public Citizen is a national, non-profit, public interest organization in the United States with 150,000 members and supporters who champion citizen interests before the three branches of the U.S. federal government. We have conducted extensive analysis on the U.S.-Panama trade agreement, which entered into force in October of this year and is virtually identical to the Canada-Panama trade pact.

I would like to make two main points. First, Panama remains widely recognized as a tax haven, and the pact would make it more difficult for Canada to use policies to curb tax evasion by Canadian firms with Panamanian accounts and subsidiaries.

Second, the investment provisions of the treaty invite Panama-registered investors to directly challenge Canada's public health, environmental and other public interest policies as an increasing number of U.S. firms are doing under the North American Free Trade Agreement.

To my first point, the Panamanian government has pursued an intentional tax haven strategy for decades. It offers foreign banks and firms a special offshore licence to conduct business. Not only are these businesses not taxed, but as the OECD concluded in its most recent tax transparency review of Panama, they are widely allowed to conceal ownership and accounting information. Such non-transparency has made it easier for corporations from Canada and elsewhere to hide profits earned at home in offshore shell corporations in Panama.

As a result, Panama is now estimated to have over 400,000 registered corporations, including offshore subsidiaries, which is equivalent to one corporation for every nine Panamanians.

While Canada is currently negotiating a tax information exchange agreement with Panama in an attempt to ameliorate tax evasion, the U.S.-Panama tax agreement being used as a model has fatal flaws that make it unlikely to change long-standing tax evasion. Rather than require Panama to automatically exchange information with U.S. authorities about tax dodgers, the tax treaty requires U.S. authorities to gather a great deal of information about the tax dodgers first and then solicit further information from Panama on a case-by-case basis.

In addition, a large loophole in the tax agreement allows Panama to sidestep new tax transparency provisions if they are ``contrary to the public policy of Panama,'' a curious phrase for a country that earns much of its revenue by providing strict banking secrecy to foreign firms. Indeed, since the tax deal went into effect, there has been little evidence of on-the-ground change in Panama. In June of this year, the OECD reported that Panama remains one of a handful of countries in the world that has not passed a first-stage review of its tax transparency measures due to nearly unparalleled non-conformity on six of nine regulatory checks against tax evasion. Even the Cayman Islands did not earn that dubious distinction.

Against this context, the Canada-Panama Trade Agreement would make it more difficult for Canadian policy- makers to curb Panama-based tax evasion. Should Canada, for example, try to limit Canadian firms from transferring money to Panama-based subsidiaries deemed to be shell corporations established for tax evasion, the policy could be challenged as a violation of Article 9.10 of the pact, which says, ``Each party shall permit transfers related to a covered investment to be made freely and without delay into and out of its territory.''

Anti-tax evasion policies could also be challenged as a violation of the indirect expropriation or national treatment provisions of the deal.

Who would raise such a challenge? Chapter 9 of the pact replicates the investor state dispute resolution model of NAFTA's Chapter 11, which elevates an individual foreign firm or investor to equal status with a sovereign nation, granting it the power to privately enforce a public treaty. Under the provisions of this chapter, the Panama-based subsidiary of a Canadian firm established for tax evasion purposes could directly challenge Canadian tax evasion controls before a three-person foreign tribunal outside of the Canadian domestic court system.

While Article 9.15 would seem to bar this possibility by requiring that the Panama-based claimants have ``substantial business activities'' in Panama, rather than being a mere shell corporation, prior investor state cases have found that as little as two employees and a paper trail can qualify as substantial business activities. If the tribunal would find in favour of the firm, Canadian taxpayers would need to compensate the tax dodging firm for Canada's anti-tax evasion policy.

The threats to this investor state system are not hypothetical. Under NAFTA, investor state cases have cost Canada hundreds of millions of dollars in legal fees and compensation to U.S. firms. U.S. investors are currently seeking an additional $5 billion in taxpayer compensation in pending investor state cases against Canada.

Finally, this investor state system poses risks for policy making that are not limited to tax evasion measures. Canadian policies that have been successfully challenged and undermined by NAFTA's investor state provisions concern water rights, research and development financing and control of toxics.

The pace of investor state cases launched against Canada is increasing. Only last month, three U.S. firms filed intents to launch three new cases against Canada: Eli Lilly's case against a Canadian federal court decision to permit production of a generic anti-schizophrenia drug, Windstream Energy's case against Ontario's moratorium on offshore wind farms, and Lone Pine's case against Quebec's moratorium on natural gas fracking.

The Panama-Canada pact would now extend NAFTA's extreme investor privileges to the over 400,000 corporations registered in Panama. A 21st century trade deal should correct NAFTA's mistakes, not expand them.

Thank you and I look forward to questions.

[Translation]

Senator Fortin-Duplessis: I would like to tell all three of you that it has been a pleasure to hear your briefs. I was surprized to hear that you are really anti-free trade between Canada and Panama. Personally, I believe that when we implemented free trade with the United States, it was just as beneficial for Canadians as for Americans and our economy.

Canada is currently pursuing its objective of opening new markets in the Americas, in order to create opportunities for Canadian businesses and workers. That is because in an economy, one needs businesses; that is what allows workers to find jobs.

How can we achieve this goal, while ensuring that we fight money laundering and tax evasion?

Mr. Deneault: One thing that seems important to me is that one should not be deceived by the classic terms of political economy. We are talking about a country where 80 per cent of the economy depends on offshore-type activities; 80 per cent of its economy is based on money laundering operations, drug trafficking money, or some orchestrated form of tax evasion from countries in the north to countries in the south, and so on.

If Canada is so desperate in its search for markets that it is ready to make deals with a state that is the essence of so many problems, the word ``investor'' is poorly chosen. Because investing in a real economy means taking capital and investing it in activities that generate goods and services for communities. Over there, what they call ``investment'' is nothing more than transactions to transfer capital so as to get around constraints enforced in Canada or constitutional states in general. When Panamanian investors invest capital in Canada, be it in property or all sorts of established activities, most often it is to launder the proceeds of the drug trade. That is the type of investors that Canada is opening its doors to.

Conversely, when Canadians ``invest'' — with enormous quotation marks — in Panama, it is not to generate fruitful and relevant commercial activity in Panama; it is to get around Canadian tax law. That is what we are talking about.

If the Senate decides to bring this agreement into force, it should at least modify the terms and stop talking about investors, and start talking about tax evaders and drug traffickers; at least then we will know what we are voting on.

[English]

Mr. Beachy: Obviously everyone would like to stimulate businesses and create jobs. There are three quick points to that. First, Panama is a relatively small market. The population is the size of Metro Montreal. Either way, whether good or bad, the increased trade will not be enormous.

Second, that increased trade goes both ways. Not only might you see an increase in exports, but of course an increase in imports. In the United States, our free trade agreements of the same style as the Panama-Canada FTA have actually shown a decrease in exports in some countries, for example, the U.S.-Korea FTA. Since we have implemented that measure, exports to Korea from the United States have gone down.

Meanwhile, across the board, in most countries we had free trade agreements with, our trade deficits have gone up. It is important to consider not only the flow of goods going out of Canada and to Panama but the flow of goods that will be coming from Panama to the United States and the displacing effect that can have as already seen under NAFTA, the extent to which NAFTA displaced the manufacturing base. Rising deficits is a net cost to jobs, not a net gain.

The last point is that even if there was a small net gain, it must be balanced against these various costs that all three of us have raised this morning of facilitating further tax evasion at a moment of fiscal crisis, in addition to exposing vast realms of Canadian regulatory policy to investor state attacks in private tribunals.

[Translation]

Senator Fortin-Duplessis: Ms. Alepin?

Ms. Alepin: The last part of your question was intended to find out if it is possible to keep doing business with Panamanian businesses while avoiding the disadvantages, such as money laundering. I would say that no, it is not possible. I think that the testimony you heard in November illustrated that the economic spin-offs of that trade, such as it is, is not very significant for Canada, although I am well aware that we cannot dismiss it; we have to do everything we can to help our economy. But the net disadvantages that this will mean for Canadian public finances are much higher than the economic advantages.

Senator Fortin-Duplessis: My second question is: which measures should we negotiate to reduce tax evasion? But I imagine that you will not want to answer it, because we are going ahead, we are moving towards voting on the agreement. So, do you have any suggestions to make about that? Which measures should we negotiate?

Ms. Alepin: Do you mean in addition to that agreement or integrated into it?

Senator Fortin-Duplessis: Yes.

Ms. Alepin: Indeed, this agreement must also be analyzed using information exchange agreements that Canada is currently signing with different countries — you are aware of information exchange agreements. It must also be understood that these information exchange agreements are also interpreted as tax treaties under the Income Tax Act, and as it stands, they allow Canadian businesses to not pay taxes, not in Canada and not in these countries, on income made in those countries. If, for example, Canada soon signs a tax information exchange agreement with Panama — and, as you know, that is another document, separate from the free trade treaty, and it is an agreement that is also being passed now — this would make it perfectly legal for anything considered to be income, which Canadian multinationals are currently paying tax on, if it is earned in Panama, when it is repatriated to Canada, not to be taxed at all. That is how it is under current tax laws.

To your question, ``what could we add to this agreement to prevent tax evasion?'' I would answer that it is not just this agreement that is problematic, it is also the information exchange agreements that are currently being negotiated with Panama. We have to see it as part of a whole. How can we avoid that? We have to stop signing information exchange agreements and change current tax laws that allow these information exchange agreements to also be interpreted as tax treaties with tax havens.

Your question is very relevant, but it must be analyzed within a global context, and it is not just by refusing to sign this agreement that we will stop tax evasion with Panama. We also have to look at the information exchange agreements.

[English]

Senator Finley: I have a couple of questions for clarification. I may have misheard the gentleman from Quebec City. He mentioned the fact, I think, that 80 per cent of Panama's economy is based on money laundering. Is that what you said?

[Translation]

Mr. Deneault: No, I said that, according to an economist, Michael Planck, who is someone who supports the free market — he is not a harsh critic of the market economy — and who says so himself with a great many reservations, 80 per cent of Panama's economic activity depends upon its various offshore activities. As I said, there is a free zone which is a hub for goods that is outside of any kind of control; there is a free port that registers a large number of ships, especially freighters, from all over the world, and which thus allows shippers to circumvent all the serious laws that exist in the world governing marine transport; and there are banking activities. And that is what I, like Michael Planck, define as offshore activities.

[English]

Senator Finley: That was one heck of a long answer to a very simple statement that you made and I would certainly challenge you to go back to the transcript to read what was actually said.

I understand that Panama has had some history of this, but we have been assured through various witnesses that Panama has made great efforts and has been recognized by, I believe, the OECD that this is very much an improving situation in terms of tax havens with Panama. The question I would ask of each of the three witnesses, or if anyone cares to take their place, is, in balance, would we prefer not to have a free trade agreement to protect as against a potential tax haven? Which is more important in the balance? Is it an improving situation on tax havens, which has been universally recognized, or is it Canada's continuing efforts to build a strong and stable economy through, among other things, free trade agreements? What is the balance? Would you say no to this free trade agreement because of the tax thing?

The Chair: I think the question was to all three, but we will start with Mr. Deneault.

[Translation]

Mr. Deneault: I would like to come back to the sophisticated methods of money laundering that exist today in the economic world. I think that the primary concern of parliamentarians is precaution. Of course, we can convince ourselves, by reading documents here and there, that things are getting better, or are on the way to getting better, or that we are showing good will. I have often observed that the Canadian government has, shall we say, varying degrees of indulgence depending on the different regions and countries in the world. The fact remains that, when we consider the question of money laundering from a technical viewpoint, we realize that laundering money is disguising an illegal and even criminal transaction as a legal one.

When we read the works of sociologists such as Favarel-Garrigues, Lascoumes, Godefroy, and other people who have done work on the ground, who have studied how bankers must in principle know their clients and track fraud cases themselves because they are often the ones who are entrusted with these cases, we realize today, from a sociological viewpoint, that it does not work, it is not conclusive. A country with a money-laundering history like Panama has cannot, in a few years, completely overhaul its economy. Its economy has been utterly corrupted by offshore activity, and I think that the mission of parliamentarians today is to take precautions with regard to these phenomena.

[English]

Senator Finley: You expect that we should accept the view of authors of papers and books that I have never heard of — and I make no apologies for that; I can only read so many books in a day — as against the evaluation of the OECD, which is an international organization that I have heard of, saying that the situation vis-à-vis tax haven and money laundering is improving considerably in Panama? It was the same kind of quotes you were using which led to my previous question about 80 per cent of the economy being based on money laundering. I have a problem with what these sources really represent that are saying this. I am looking for some kind of established, internationally recognized body that would underscore your particular arguments, if you follow what I mean. I do not know who these other people are that you are talking about.

[Translation]

Mr. Deneault: As concerns the first point, I think that I have explained where you were mistaken. On the one hand, it was not solely money laundering that gave rise to my statistic of 80 per cent. On the other hand, the OECD is not exactly a reference for understanding what is happening with regard to offshore activities. In any case, I think it would be better if the UN had full authority regarding the management of this problem. But that is something else that I will not get into today.

Aside from some very stereotypical statements made by the OECD, there are some voluminous studies. My job is to read them and what I am saying is that with regard to money laundering, what is currently essential, if one is politically judicious, is to respect the precautionary principle. No, we do not have free trade agreements or tax treaties with countries who are notorious for participating in the laundering of money made through drug trafficking. It is unacceptable to do so.

[English]

Senator Finley: You are saying ``notorious,'' but the OECD has taken them off the gray list. You are using the word ``precaution.'' Are we to say that I as a senator should not, over the next two days, vote in favour of this Canada- Panama Free Trade Agreement because of — as far as I can see — allegations about what is becoming an improving situation in terms of tax havens? Am I to say to Canadian importers and exporters, ``Do not do business with Panama; it is too dangerous.'' Is that what you would have me say?

[Translation]

Mr. Deneault: I think that you understood me clearly.

[English]

Senator Finley: I do not think so.

Ms. Alepin: I will try to answer Senator Finley. I would not sign this agreement, because I think it is not logical for Canada to sign a business deal with a tax haven.

Senator Finley: Did you object when we signed the FTA agreement that included Switzerland?

Ms. Alepin: Sorry?

Senator Finley: I believe before my time, the Senate discussed an EFT agreement with Switzerland. Did you appear before the committee then?

Ms. Alepin: I think Panama is for corporate income tax. It is much more — I am trying to use the proper word — like there is almost no income tax for corporations.

Switzerland is not such a huge tax haven, so it is not like zero tax. For now, Canada is signing tax agreements and free trade agreements with tax havens, which is causing a problem for the public finances of Canada and the statistics are showing it.

On the one part, your question is really good: Should we say for economic purposes we should open even with tax havens, or should we really be careful and say, no, we should not do that with tax havens?

Now, since we are getting into these big crises and we are looking for public revenues, I think if we keep going in that way of thinking, it is offensive for other taxpayers because we are losing public revenues with these agreements. However, as I said in my opening statement, we understand that even if we do not sign this, we will not solve the problem because now there is a way for multi-national corporations to not pay income tax through — I think it is — 14 tax havens now.

Senator Finley: I would like to ask one more question, because at the beginning of the meeting I did not quite understand or hear whether you are appearing as an individual or on behalf of an organization. It strikes me that your implicit answer to this fiscal cliff equals ``we need more revenue'' equals ``close down tax havens even at the expense of trade.''

Ms. Alepin: In this case, the trade with Panama is not such — we will not lose that much.

Senator Finley: There are other free trade agreements.

Ms. Alepin: I will just tell you that I am chartered accountant. That is my first degree. I have been working with corporations all my life and I am pro-business. However, I am not pro-business with a free trade agreement with a tiny country that will not give us that much trade and will allow Canadian taxpayers to avoid taxes. It is a lot of money we are talking about here. These revenues we will lose are much more important than the trade advantage we will get from the agreement.

I think that we have to stop thinking that way, because we are getting in these huge problems of fiscal crises. I wrote The Looming Fiscal Crisis in 2010, when there was no fiscal crisis. I thought mathematically we would go into fiscal crisis, not only in Canada but many other countries that have this tax system because part of this situation is mathematical. We are losing so much revenue with this global system involving tax havens, e-commerce, e-money, et cetera, and we have to address this problem now.

The Chair: Thank you.

Senator Wallace: I will be quick.

Mr. Deneault and Mr. Beachy, when I listened to your comments — and to some extent with Ms. Alepin — my sense of it is that the concerns you express go beyond Panama and that you have difficulty in supporting any free trade agreement that Canada would enter into. I am wondering if your concerns are that broad.

Mr. Beachy: I can respond.

I would say it is broader than Panama but not so broad as to encompass any possible, conceivable trade agreement.

The investor state provisions of this deal replicating the same provisions in NAFTA expose Canada to a continual attack, even if Panama is improving right now as a tax haven. As a side note, they have not yet passed their first phase of review by the OECD, which is merely a check on whether there is a regulatory regime to stop tax haven abuses, much less the second phase, which would be checking whether that regime is actually being implemented. Therefore, I would temper the estimation of progress.

Even if there were to be progress, should tax haven abuses occur in the future, the provisions of this deal restrict any prohibition on transfers. Any regulation that Canada would like to pursue saying, ``We will not allow tax evasion by Canadian corporations sending their money back to shell corporation subsidiaries based in Panama'' — that sort of provision would not be allowed by the transfers provision of this deal.

The crux of the matter is the investor state chapter, which allows a private investor to directly challenge the Canadian federal government on the basis of these transfer provisions and on the basis, as I mentioned, of a host of other public health and environmental provisions.

It is not about trade with Panama. I am pro-trade. I am opposed to this model of trade that elevates a foreign investor to the level of a sovereign government to directly challenge vast swaths of regulatory policy to be judged by private tribunals sitting outside a domestic court system.

Notably, Australia has said they will not be signing any future trade agreements that contain this investor state provision. It is possible to have trade agreements without these fairly radical provisions that allow an investor to directly challenge the Canadian government and Australia is leading the way in saying, with regard to the Trans-Pacific Partnership, for example, they will not accept a repetition of these provisions. Canada could do the same and say, ``We are not against trade; we are for trade, but we are against the subjugation of Canadian law to the investor state chapter of these trade deals.''

[Translation]

Mr. Deneault: I would say that my position has nothing to do with a statement of ideological principles on the matter of free trade. Instead, I focused on what Panama and its economy represent as such. If we want to talk about other free trade agreements, we will do so in other circumstances with regard to specific cases.

What interests me is determining what the signing of a free trade agreement means in the context of an economy that is based on the laundering of proceeds from drug trafficking. This means that there are drugs that transit through the Colon free zone, through the free ports of Panama, that are brought into Canada by import-export companies controlled by the Mafia, which then sells these drugs in Canada and then invests the money in Panama once again. All criminologists, UN representatives, who work in major countries governed by the rule of law, tell us that free trade agreements foster money laundering and drug trafficking operations, because criminal economic transactions are disguised as official legal and lawful investments. And we know that with free trade agreements like this one, that contain so few precautionary measures, we are throwing the doors wide open to drug traffickers and welcoming them in. That is the problem right now and it has nothing to do with ideology as it concerns free trade.

[English]

Senator Downe: Could Mr. Beachy tell us about the first OECD phase that Panama has failed? You said six of the nine; I thought it was five of the nine. Why have they not met those conditions? Is it a refusal on their part? Do you have any additional information why Panama has failed to move beyond step one?

Mr. Beachy: You mentioned the discrepancy between five and six. It depends on how you interpret it. The OECD said that five were not even in place. The sixth one is in place but not to the extent the OECD would like.

The first couple of provisions were with regard to either there was a law on the books that completely had no teeth to it or there was actually no law on the books with regard to revealing ownership information. With many of these shell corporations, it is impossible to know who actually owns them because they were not required to report that information.

As I recall, one of the six flaws that the OECD found was that, while a law was on the books, no one actually checked up on these corporations to see whether they were regularly reporting this information and there was no penalty for not doing so.

As to why they are resistant, it would require me to speculate on Panama's motives. As I mentioned, it pursued a fairly intentional tax haven strategy for a long time since a significant share of its economy is based on the incorporation and registration of subsidiaries of corporations from around the world, which has allowed there to be one international corporation for every nine Panamanians.

I cannot fully speculate on Panama's motivations, but the reality is it is not fair to say that they are no longer a tax haven. If you look down the OECD report which was released in June 2012 and look at the number of those nine checks, of the number of countries that have not met five or six of those nine checks, Panama stands nearly alone. Panama is one of only a few countries in the world that is at that level of non-compliance.

The Chair: Thank you to all three of our panellists.

Mr. Beachy, if I had more time, I would like to engage you in your comments that investors should not have any capability of challenging governments. I think in the international law sphere we need transparency and this challenge of what governments do as well as anyone else. New methodologies are being created internationally for other voices than simply the sovereign state voices. Perhaps we will have an opportunity somewhere, in Washington or elsewhere, to pursue those comments on NAFTA and otherwise.

Senator Downe: I think we should hear a brief rebuttal from the witness now.

The Chair: I was inviting Mr. Beachy to continue the dialogue, but if you would like it right now, that is fine. Do you want to briefly answer?

Mr. Beachy: Sure. First, the question of whether a private investor should be able to directly challenge a state versus another state challenging a state, I disagree that we would like to see that kind of international legal system. The World Trade Organization is premised and based on the idea that states only can press claims against other states and I think for good reason. These trade deals go beyond the World Trade Organization and are radical in saying that a private investor can directly challenge a sovereign government.

A second point, even if you do not accept that one, is the process under which this happens. It is a private tribunal made up of three arbiters that hear these cases, three arbiters that typically in many of these cases are acting as judges in the cases and meanwhile circulate between being judges on these tribunals and being lawyers for the very firms that are challenging Canadian policy. That kind of conflict of interest is not permitted in most domestic court systems but is permitted in this international system of investment arbitration.

The idea that these three individuals on an arbitral tribunal are accountable to any electorate is, of course, false. They are not. I believe that even if you think that an investor should be raised to the level of a sovereign state and be able to press a claim against another sovereign state, the forum in which that claim should be pressed should not be an unaccountable tribunal.

The Chair: Our debate is then to be continued.

I would like to thank Mr. Deneault, Mr. Beachy and Ms. Alepin for bringing your perspectives on broader issues and also Bill C-24.

Honourable senators, as we have no further witnesses, is it agreed that the committee proceed to clause-by-clause consideration of Bill C-24, the proposed Canada-Panama economic growth and prosperity act.

Hon. Senators: Agreed.

The Chair: With leave, is it agreed that I group clauses as they appear in the table of provisions and that the schedules be grouped?

Hon. Senators: Agreed.

The Chair: Carried.

Shall the title stand postponed?

Hon. Senators: Agreed.

The Chair: Carried.

Shall clause 1, which contains the short title, stand postponed?

Hon. Senators: Agreed.

The Chair: Carried.

Shall clause 2 carry?

Some Hon. Senators: Agreed.