A sweeping criminal probe into offshore tax evasion has ensnared the director of a natural gas producer financed with Chinese capital whose bankruptcy has exposed major regulatory lapses in Alberta’s oil patch.
Court documents show properties in Calgary, West Vancouver and north Toronto owned by, or affiliated with, Wentao Yang and his wife, Rong Catherine Lu, were targeted in February raids by the Canada Revenue Agency, the RCMP and West Vancouver Police.
CRA investigators allege that Mr. Yang and Ms. Lu received payments totalling $2,666,865 through a series of transfers involving foreign corporations that he is either directly or indirectly involved with, and that Mr. Yang did not report income tied to the transactions on his 2016 personal returns. As a result, it says he evaded income tax totalling $736,562. Mr. Yang also failed to report and remit $126,993, according to the documents filed in Provincial Court in Calgary.
Mr. Yang did not respond to an e-mail and phone messages seeking comment Thursday. A lawyer representing Mr. Yang did not immediately respond to an e-mail. Ms. Lu did not respond to a LinkedIn message. Nobody answered the phone at the suburban Toronto accounting office that investigators searched. None of the allegations have been tested in court.
The CRA probe is one of dozens launched by the agency in connection with a trove of leaked financial and legal documents known as the Panama Papers. The information used to obtain a search warrant for the Feb. 14 raids also cites a Globe and Mail investigation that detailed a series of acquisitions of oil and gas assets by a handful of private Chinese investors, including Mr. Yang.
The investigation by the CRA sheds fresh light on the tangle of companies, numbered firms and offshore entities used by private investors with Chinese ties such as Mr. Yang to snap up thousands of aging oil and gas sites in Alberta through the energy-price downturn.
Mr. Yang is one of two named directors of Sequoia Resources Corp., which filed for bankruptcy in March and has left behind hundreds of millions of dollars in environmental liabilities and other claims.
Its collapse exposed failings by the Alberta Energy Regulator, which signed off on Sequoia’s acquisition of 3,200 gas wells even though the company appeared to lack the financial wherewithal to pay for cleanup. Sequoia now owes the regulator $225-million, making it by far the largest creditor of a total $244.5-million in claims against the failed company.
The CRA probe comes as the federal government is under fire from opposition parties, tax experts and non-governmental organizations for its failure to deal adequately with tax evasion and aggressive tax avoidance.
Criminal investigations such as the continuing one in Calgary and Vancouver show the extent to which the CRA relies on leaks such as the Panama Papers to find Canadian connections and see whether the named individuals and companies have paid all required taxes.
“We are committed to protecting Canada’s revenue base and take appropriate action to address all cases of non-compliance with Canada’s tax laws,” said Revenue Minister Diane Lebouthillier’s press secretary, Jeremy Ghio.
“This investigation is one of the 42 international/offshore tax evasion cases that CRA is currently investigating, which is consistent with our priority of focusing on sophisticated and well-organized tax -vasion schemes.”
The federal government has announced nearly $1-billion in new funding to the CRA in recent years to increase the number of auditors and investigators. At the same time, the CRA is restricting its voluntary disclosure program, under which taxpayers used to pay limited penalties for disclosing unreported income.
As part of the investigation into Mr. Yang’s deal making, court documents filed by CRA investigators detail payments tied to the acquisition, announced in December, 2015, of struggling Calgary oil producer Long Run Exploration Ltd.
This week, the CRA searched Long Run’s Calgary offices seeking information about Mr. Yang, according to an internal e-mail seen by The Globe. “Please note that Long Run Exploration is co-operating with Canada Revenue Agency on an investigation,” company managing director Lake Deng told staff.
She said investigators were targeting a “third party” and not Chinese-backed Long Run and its affiliate, New Star Energy. “Daily business activities will continue as usual,” she wrote on Wednesday. Ms. Deng did not immediately respond to a phone message on Thursday.
Long Run was teetering close to insolvency when it was purchased by Chinese-financed Calgary Sinoenergy Investment Corp. (CSIC). The deal was dubbed a Christmas miracle, reflecting Long Run’s precarious finances. The purchase price included $103-million in cash plus about $60-million for debtholders. The acquisition closed in June, 2016.
The little-known acquirer was incorporated days before the deal was announced. Its registered address was a Springbank-district house west of Calgary owned by Mr. Yang, who at the time was a director with the firm. The company was controlled by Sinoenergy Oil Investment Ltd., which is based in the British Virgin Islands, corporate registry documents show.
CRA investigators gathered information through surveillance and with the help of the Financial Transactions and Reports Analysis Centre of Canada, which is designed to stamp out money laundering and the financing of terrorism.
A land-title search conducted by the CRA shows that on May 18, 2016, a home in West Vancouver was purchased for $4.69-million. The registered owners were Mr. Yang and Ms. Lu, with a mortgage of $2.69-million, according to the documents.
Investigators staking out the home on the morning of Jan. 16, 2018, observed a 2011 model BMW X3 registered to Mr. Yang leaving the driveway. A 2008 Acura MDX registered to Mr. Yang had been observed at his Calgary address several days earlier.
The CRA alleges that between May 31 and June 29, 2016, Sinoenergy Oil Investment moved $305-million in eight electronic transfers to CSIC, with the funds held in two accounts at an Alberta Treasury Branch bank in Edmonton. After the Long Run deal was finalized, between Oct. 6 and Nov. 17, 2016, CSIC shifted about $11.5-million to a Hong Kong bank account, itself registered to an entity headquartered in the Cayman Islands called Marquee Financial Services Inc., according to the CRA court filing.
It is unclear who owns that company, but a website – marqueefinancialservices.com – was registered in August, 2016, using an e-mail tied to Mr. Yang as well as his Calgary address, according to the CRA. Marquee then wired money in two instalments from a Hong Kong bank to Mr. Yang, totalling roughly $2.6-million.
About half of the total was identified as “consulting fees” and ended up in a joint account shared with Ms. Lu at Toronto-Dominion Bank, according to the CRA.