You could make a case that in the absence of illegal laundered money, there would be almost no risk investment capital in Canada.
The problem with laundered money is huge. Recent estimates put the value of laundered money in Canada at $46.7 billion; other more realistic estimates have it in the range of $130 billion.
And Canadian efforts at stopping the inflow of illegal money are so inadequate that the C.D. Howe Institute titled its recent report Why We Fail to Catch Money Launderers 99.9 per cent of the Time.
The irony is that laundered money presents something of a dilemma for Canadians. Canada’s pathetic record at stemming the flow of hot money might have something to do with the fact that Canadians show no desire to make higher risk, productive investments in their own country.
According to University of Ottawa economist (and former Parliamentary Budget Officer) Kevin Page, a major impediment to growth in Canada is lack of productive investment, i.e. direct investments into companies that are used to hire new staff, build new products and services, etc.
In fact, investment in Canadian industries, other than resources and property, flat-lined years ago at very low levels. This has left many sectors of our economy severely undercapitalized.
Ironically, there’s no shortage of savings in Canada.
Canada’s public and private sector financial institutions and RRSPs/TFSAs holdings are more than capable of getting the job done. For example, according to Statistics Canada just over six million Canadians have RRSPs (registered retirement savings plans). Given that the average amount held in an RRSP plan was $101,155 (2018), the total RRSP savings pool runs to the mega billions.
When combined with national TFSA (tax free savings account) holdings, the numbers approach $1 trillion. And this doesn’t account for government and private pension plans, trusts, mutual fund investments, etc.
Unfortunately, the vast majority of these savings are wasting away, paying high fees and earning low returns.
Canada needs to channel some of these savings into the domestic economy.
So what’s the problem?
It’s often said that we in the Western world have highly sophisticated equity markets. In fact, one of the most popular myths of modern capitalism is that stock markets exist to connect investors’ savings with companies needing that capital to grow their businesses, build new factories, launch new products or hire new staff.
Regrettably, this is almost entirely false.
Most stock market transactions are speculative investment, not productive investment. Sadly, almost none of Canadians’ invested capital ends up in the treasuries of companies needing capital for growth and development.
The vast majority of savings in our economy are parked on the sidelines, making passive side bets on a (hopefully) rising stock market.
If you’re part of a managed pension fund, or perhaps invest your savings in RRSPs or TFSAs, or if you buy mutual funds or other wealth management services, you might imagine you’re productively investing in the economy.
The global financial services industry, which didn’t exist 60 years ago, manages almost $70 trillion worldwide. That represents the vast majority of capital in the economy.
But one of the reasons Western economies are stagnating is that very little of these savings are available for productive investment.
However, there is a source of investment capital that’s not parked on the sidelines: laundered money.
Criminals and, quite frankly, plenty of prudent legal business people operating in authoritarian regimes like communist China or post-Soviet Russia have an existential fear of losing their hard-earned wealth to confiscation.
They’re moving their assets out of their home countries by any means possible.
Why do they choose Canada?
Canada is a Western liberal democracy where the rule of law prevents (OK, limits) arbitrary confiscation. In other words, although China, Russia and other economies around the world are, at the moment, great places to make money, Canada is one of the better places to preserve capital value.
Canadian prime ministers, almost all provincial premiers and other government officials spend an enormous amount of time and political capital appealing to Wall Street investment banks, desperately selling Canada as a great country to invest in.
The pity is, Canadians don’t (or aren’t able) to follow this advice.
Not surprisingly, global investment goes elsewhere in search of higher returns.
The only real sources of investment capital that seem willing to bet on Canada are a few angel investor networks and laundered money.
No wonder Canadian officials are loath to stem the flow of laundered money.
Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.