Pasquale Cusano, the proprietor of Montecristo Jewellers, sells high-end watches and other gem-encrusted baubles to the very wealthy. He also publishes Montecristo Magazine which covers fashion, culture, food and wine under the tagline “a Vancouver state of mind.”
And for a second time, Cusano finds himself in hot water over how he conducts business with his rich clientele, in this instance facing nearly a quarter million dollars in fines for allegedly running afoul of federal money laundering laws.
The accusations have not been proven in court and Cusano’s Vancouver state of mind is to say the feds are picking on an innocent small fry, and to gear up for a tough legal fight.
Whacked for wrist watches
Back in 2018, Cusano was in the Tax Court of Canada defending a peculiar sales practice that allowed wealthy customers from China to buy luxury wrist watches without paying GST on sales worth hundreds of thousands of dollars.
"The bulk of our customers are residents of Canada who have their families living in Canada but they have maintained and retained their business in China and they commute back and forth four or five times a year," Cusano testified at the time.
"Customers who seem to acquire the higher ticket items are customers that are quite sophisticated and travel the world and of course their main focus is to obtain a good price, ask for a discount and also make reference that ‘because I'm taking this back to China there should be no taxes charged to me.’”
Unlike Europe, however, Canada doesn’t allow non-residents to skirt so-called value-added taxes. This posed a problem for Cusano and his clientele. To solve it, Cusano developed a procedure to deliver big-ticket items to customers at the airport prior to their departure from Canada, classifying the jewelry as “exports” that weren’t subject to GST. His employees made hundreds of these deliveries a year with the co-operation of the Canada Border Service Agency, whose agents took delivery of a customer’s jewelry and handed it over before they got on a plane.
Eventually, this practice caught the eye of a CBSA agent and landed in the crosshairs of the Canada Revenue Agency. Many customers, the agent found, had been lying about their residency status in Canada, leading to a concern that they’d return to Canada without having paid taxes on, say, a watch worth $500,000.
In short order, the CRA deemed the jewelry sales had indeed occurred in Canada and were therefore subject to GST, assessing Montecristo for more than $2.9 million in unpaid sales taxes over a three-year period. The company fought the assessments in tax court, but lost in 2019, and again a year later in the Federal Court of Appeal.
Losing those cases didn’t end Montecristo’s legal troubles.
New charges of lax monitoring
In February this year, Canada’s anti-money laundering agency, the Financial Transactions and Reports Analysis Centre of Canada, levied more than $222,000 in administrative monetary penalties for four alleged violations of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
FINTRAC and Montecristo both say they’re under legal constraints about how much can be publicly revealed about the exact nature of the alleged violations. But one of the four violations involved a client who FINTRAC claims “consistently” made cash purchases that were just under the $10,000 reporting threshold for large-cash transactions, according to an appeal Montecristo filed in the Federal Court of Canada in March 2022.
The agency claims the violations happened between October 2018 and March 2019, which Montecristo denies in their appeal. According to the appeal, the decision to penalize the jeweller exceeds what is outlined in the act, relying in part on “unwritten requirements and standards which are more stringent than those contained in the law.”
FINTRAC examiners allege the company had failed to “develop and maintain a written, ongoing compliance training program for its employees.” Compliance programs are meant to ensure that employees are familiar with the salient points of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. According to the jeweller’s lawyers, Montecristo’s includes the appointment of a compliance officer, a compliance manual, a compliance quiz for employees and a one-year supervision period for all sales. Employees are expected to be able to gauge the potential money laundering-related risk associated with their business.
FINTRAC alleges there were “significant gaps” in employees’ understanding of the program, but Montecristo claims this finding was based on “impromptu and unregulated” testing of employees beyond the time frame of the examination.
Moreover, Montecristo counters FINTRAC ignored important facts, including the “cultural and ethnic background and spending habits of Montecristo’s customer base.”
When it comes to the client who “consistently” made cash purchases just under the reporting threshold, for example, Montecristo says she “did so only twice, and provided reasons for her purchases.”
Montecristo also maintains in their appeal that they “exercised due diligence,” while FINTRAC’s director failed, in their decision to levy fines, to specify what further actions should have been taken in order to be diligent.
After setbacks, FINTRAC’s ‘laser-like focus’
In a written statement to The Tyee, FINTRAC stated that businesses like Montecristo had particular obligations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. “They are required to establish a compliance program, identify clients, keep records and report certain types of financial transactions to FINTRAC, including large cash transactions, large virtual currency transactions and suspicious transactions, which have no monetary threshold for reporting,” the statement read in part.
“FINTRAC has the legislative authority to issue administrative monetary penalties to entities that are found to be non-compliant with their obligations under the [act].”
From 2016 to 2018, FINTRAC briefly stopped levying fines after being shot down by the courts in several decisions over how they were calculating penalties, says Amber Scott, a Toronto-based anti-money laundering consultant.
But the agency has since reupped its efforts with new guidance — and a seemingly greater focus on the problem of unreported suspicious transactions, she adds.
FINTRAC examiners have been zeroing in on these transactions at entities like jewelry stores over the last year or two, according to Scott.
“This idea of unreported suspicious transactions is something that FINTRAC is really focusing in on with a laser-like focus,” Scott told The Tyee in a phone interview.
“I think it’s rare to see an examination recently where FINTRAC does not focus in on the idea of unreported suspicious transactions,” she added. “And if they’re seeing this repeatedly, there’s a much higher likelihood that it will lead to a penalty.”
Asserting unfairness, Cusano’s lawyers say target big fish
Cusano, through his lawyers, refused to be interviewed for this story. In response to written questions sent by The Tyee, Montecristo’s lawyers claimed FINTRAC had unfairly withheld information from Montecristo about the exact nature of the alleged violations.
The company has been examined by FINTRAC twice in the last decade but had never been subject to penalties, they said.
“If the government wishes to seriously pursue money laundering, it should consider separate rules for high-risk industries, such as banks and real estate, where the transaction values are much higher and for which there is a much higher documented risk of money laundering involving much larger amounts,” the lawyers’ response states.
As “reporting entities” to FINTRAC, dealers of precious metals come under unique pressures as customer-service oriented businesses, says Amber Scott. They cater to wealthy people, yet are expected to treat their purchases with suspicion.
Industry-wide, Scott says, dealers in precious metals and stones are underreporting suspicious transactions, and should be more diligent about reporting them to FINTRAC.
“Montecristo as a jeweller would be on FINTRAC’s radar already as being high-risk,” she said.
While some jewelry loses value as soon as a customer walks out the door, luxury watches — especially special editions and collector’s editions — can actually hold value and go up in price with age. This makes dealers in luxury watches especially susceptible to suspicious transactions, Scott says, since a luxury watch worth hundreds of thousands of dollars can be moved across borders a lot easier than suitcases full of cash.
The company’s previously publicized tax troubles likely would have clued FINTRAC into the fact the business was selling millions of dollars in watches, and would have made it incumbent on FINTRAC to investigate further, according to Scott.
“FINTRAC has a number of ways in which they decide who they’re going to examine. They don’t have the resources to examine everyone every year, so they have to pick and choose some sort of sample.”
Should the company lose in court again, Montecristo’s lawyers said the company will “comply with the law” if the penalties are upheld in court.
“Depending on the outcome and the Federal Court’s reasoning, Montecristo may explore whether a further appeal is available. However, of course if required to pay the penalties and there were no open appeal, Montecristo would do so.”