Canada fighting fraud with new laws, enforcement

Canada's history and reputation as a "fraudster's playground" might finally be coming to an end as regulatory and enforcement authorities enter a more well-rounded anti-fraud regimen.

In the past, Canada's approach to fraud was plagued with inadequacies, which left investors vulnerable and victims with little chance of recovery. For instance, the Integrated Market Enforcement Team of the Royal Canadian Mounted Police (RCMP) has been deeply criticized for putting only a handful of white-collar criminals behind bars despite an annual budget of more than CAD$30 million. (See After Nortel verdict, RCMP's fraud unit racks up dismal conviction record, by Jeff Gray, The Global and Mail, Jan. 14, 2013, and the "Global Fraud Focus" column.)

In addition, the recent Sino Forest scandal, which spawned a trial that began in September 2014 and wrapped up in April 2016, demonstrated the significant shortcomings with Canada's approach to fraud investigations. (See Nobody will go to jail for Canada's biggest stock scandal, by Barrie McKenna, The Globe and Mail, April 22.)

The new era of fraud enforcement sees developments in three previously inadequate areas: enforcement, regulation and prosecution. Law enforcement will be able to more readily detect fraudsters and the crooks are more likely to be held accountable for their conduct. Fraud prevention, detection and recovery are becoming more realistic thanks to a greater focus on investigation and enforcement, the implementation of new regulatory tools and increasing tolerance of litigation funding.

Enforcement efforts are stepping up

Improvements in enforcement have come from both federal and provincial bodies. The RCMP, in an effort to improve competence federally, expanded the mandate of its Commercial Crime Program to cover a broader range of fraud files. (See the RCMP's Commercial Crime Mandate.) Those now include corporate fraud, investment fraud, securities fraud, mass marketing fraud and credit fraud. In addition, the new era of fraud enforcement sees more collaboration between federal and provincial bodies, including the RCMP.

On a provincial level, Ontario is at the forefront of change. In 2013, the Ontario Securities Commission (OSC) created the Joint Serious Offences Team (JSOT), which operates independently of the rest of the OSC's enforcement division. JSOT is a cross-discipline enforcement partnership among the OSC, the RCMP Financial Crime Program and the Ontario Provincial Police Anti-Rackets branch. It includes provincial and federal police officers, litigators, investigators and forensic accountants. (See Joint Serious Offences Team already having an impact, by Arshy Mann, Legal Feeds, Sept. 17, 2014.)

The first few years of JSOT's operation shows promise. In 2015 alone, JSOT executed 69 search warrants, had seven matters under investigation and commenced 31 cases. (See the 2015 Annual Report by the Ontario Securities Commission.)

The British Columbia Securities Commission (BCSC) is also ramping up its strategic enforcement efforts. In 2012, the BCSC implemented a three-year initiative (which has since been extended) to investigate the use of offshore secrecy jurisdictions to illegally trade inside information, manipulate the market or engage in other forms of capital market misconduct.

This initiative focuses on foreign financial institutions trading for British Columbia residents, brokers who conceal insider trading through offshore trading, and nominees and newsletter writers who facilitate market manipulations and insider trading by hiding the identity of the beneficial owner.

Despite the difficulty in investigating offshore secrecy jurisdictions, the BCSC's initiative has had significant success; it has ordered numerous bans from the trade or purchase of securities in British Columbia and has entered into a number of settlement agreements. Notably, in 2014 the BCSC entered into a settlement agreement with Bank Gutenberg who admitted to improperly trading securities on behalf of British Columbia residents with a total transaction volume of CAD$327.8 million. (See Swiss bank pays $850,000 penalty in BCSC crackdown of offshore accounts, by Janet McFarland, The Globe and Mail, Sept. 24, 2014.)

Regulatory reforms

Canada is notably the only G7 economy without a national securities regulator. Consequently, the regulatory approach to capital markets has been fragmented across the country. Any prospect of a unified national securities regulator appeared to die following the Supreme Court of Canada's 2011 decision in Reference re Securities Commission, 2011 SCC 66 (the "Securities Reference").

In the Securities Reference, the Supreme Court denied the federal government's then-proposed Canadian Securities Act because it infringed on provincial powers under the Constitution. In its decision, however, the Supreme Court left open the possibility of a cooperative approach between federal and provincial governments so long as it continued to recognize the provincial nature of securities regulation under the Constitution. The Cooperative Capital Markets Regulatory System (CCMRS) emerged as the creative solution.

Not yet implemented, the CCMRS is a collaborative approach that plans to harmonize and modernize aspects of capital markets regulation within participating jurisdictions while also coordinating regulatory frameworks to better protect investors. Overall, the CCMRS seeks to strengthen Canada's capacity to identify and manage systemic risk on a national basis.

Currently, the CCMRS is a joint initiative among British Columbia, Ontario, Saskatchewan, New Brunswick, Prince Edward Island, Yukon and the federal government. Alberta and Quebec are notably missing from this initiative.

OSC Whistleblower Program

Effective July 14, 2016, the OSC formally adopted its Whistleblower Program. The program provides individuals with financial incentives to report securities misconduct to the OSC. A whistleblower may receive a monetary award between 15 percent of the total monetary sanctions ordered, up to a maximum of $1.5 million.

If the sanctions ordered exceed $10 million, the maximum award may increase up to $5 million if it's determined that the submitted information was meaningful in investigating the matter and resulted in a monetary sanctions of $1 million or more. (See The Long-Awaited OSC Whistleblower Program Is Now In Force, by Lawrence E. Ritchie, Shawn Irving, Raphael Eghan and Vanessa Cotric, Risk Management & Crisis Response, Sept. 20.)

The OSC's Whistleblower Program — the first of its kind in Canada — is strongly influenced by the success of the U.S. whistleblower initiative under the Dodd-Frank Act. The program is expected to significantly enhance the commission's ability to protect investors.

No-contest settlement

In 2014 the OSC introduced its no-contest settlement program, which, in limited circumstances, allows alleged wrongdoers to settle cases without admitting to any wrongdoing or liability. This offer doesn't extend to those who've engaged in criminal, abusive and fraudulent market conduct. The program is a pragmatic tool that's meant to enhance regulator capabilities by allowing them to utilize their resources more strategically. (See The OSC's introduction of no-contest settlement proceedings, by David Gadsden and John Pirie, Canadian Fraud Law, June 17, 2014.)

In theory, the program incentivizes market participants to reach a settlement by limiting their exposure to litigation. The OSC has already approved a number of "no-contest" settlements, including a large $156.1 million settlement with CI Investments Inc. in February, as well as a $13.5 million settlement with TD Waterhouse and related entities in November 2014. (See Ontario's no-contest settlement with CI Investments a lesson in self-policing, by Daniel Seleanu, Feb. 25 and TD units agree to pay $650,000 for overcharging clients, by Janet McFarland, The Globe and Mail, Nov. 13, 2014.)

Progress in victim recovery efforts

Access to justice has been an ongoing issue for victims of fraud in Canada. The expense of litigation, inequalities between fraudsters and their victims, and the difficulty of tracing depleted or hidden money have all played a role in preventing victims from bringing successful claims.

In the past, victims were required to maintain autonomous control over their claims. By contrast, deep-pocketed, third-party facilitators financed fraudsters so they could invoke strong merit-based defenses and aggressive defense tactics, which made recovery a long and expensive process for victims.

Canadian courts have recently relaxed their prohibition on litigation funding. Funding arrangements allow institutional investors to finance litigation in exchange for the opportunity to participate in recovery. In particular, they enable victims to retain specialized counsel equipped with knowledge in the intricate field of fraud, conduct more thorough investigations and protect their downside risks. This shift is significant; it offers new opportunities for victims to bring their claims to court and is poised to put victims and fraudsters on a more even playing field.

An increased use of litigation funding might also lead to a shift toward more progressive legal principles in fraud cases. Because of the traditional barriers preventing victims from pursuing claims, Canadian courts have had little opportunity to hear sophisticated and progressive legal arguments on behalf of victims. This has resulted in a predominantly conservative judicial approach to fraud cases.

The recent Ontario Court of Appeal decision in Livent Inc v Deloitte & Touche (2016 ONCA 11) demonstrates the impact that litigation funding arrangements can have on re-shaping the courts' approach to fraud. In that case, Livent Inc.'s principals fraudulently manipulated the company's financial books to attract investments. Following the company's collapse, Livent's receiver brought an action against Deloitte & Touche for damages in contract and negligence on the basis that they issued clean audited financial statements throughout the period of fraudulent mishandling.

In 2012, the Supreme Court of Ontario allowed a litigation funding arrangement that permitted the Livent's receiver to enlist creditors to post security for costs. In exchange, the creditors were granted super priority status in the underlying bankruptcy proceedings (2012 ONSC 7007).

This funding arrangement ultimately allowed Livent's receiver to pursue a costly 68-day trial against Deloitte. The trial judge awarded Livent damages in the amount of more than $84 million plus interest. (See Livent decision a cautionary tale for auditors, by Brian Radnoff, Accounting for Law.) The Ontario Court of Appeal upheld this decision (appeal to the Supreme Court of Canada pending).

Livent is a notable example of the potential impacts of litigation funding. It not only demonstrates support for litigation funding arrangements in the commercial context but also provides precedent for victims seeking to recover against third-party facilitators.

Taking the steps toward change

The Canadian fraud investigation, enforcement and recovery landscape has undergone significant changes in recent years. While the changes are coming from various actors, the fraud enforcement regime in Canada is evolving as a whole. Most notably, federal and provincial parties are collaborating to tackle Canada's fraud issues from all angles. The increased use of specialized enforcement and investigation teams, the coordination and unification of provincial securities regulation through the CCMRS, and the recent support for litigation funding arrangements indicate a change in landscape for fraudsters in Canada.

Brigeeta Richdale, J.D., CFE, is a securities and fraud litigator at Bennett Jones LLP in British Columbia, Canada. Her email address is: RichdaleB@bennettjones.com. 

Charlotte Teal is a student at law with Bennett Jones LLP in British Columbia, Canada.

Find more information about fraud trends and statistics specific to Canada in the ACFE's 2016 Report to the Nations: Canadian Edition.