Canada enters new phase for white-collar crime

Companies may have made strides in compliance and reporting in recent years; now comes the next phase of combatting white-collar crime in Canada

Kenneth Jull, a partner in the Compliance and Investigations Practice Group at Baker & McKenzie LLP in Toronto, was in Ottawa giving a client a seminar on Canada’s new anti-corruption regime late last year when he asked how many people around the boardroom table had followed the Nazir Karigar trial.

Karigar
 is a landmark case, a must-read for anyone involved with a company that does business abroad. The Ottawa businessman was the first person tried under Canada’s Corruption of Foreign Public Officials Act.

Found guilty of planning to bribe an Indian politician and Air India officials in a failed bid to win a $100-million security contract, he had been sentenced to three years in jail a few months before Jull’s seminar.

Jull floated the question about
 Karigar because he had planned to use the case in the discussion with the 30 or so lawyers and senior executives attending the training session. Yet just one person in the audience was apparently aware of it.

“When Karigar was sentenced, Canada’s national newspapers gave it very little play as I remember. But I got interview requests from UK-based papers and the
 Wall Street Journal. I remember thinking: This is just bizarre.”

Jull is equally mystified by the lack of public interest when Québec’s Pétroles Global was found guilty of price-fixing in the gas industry, and subsequently fined $1 million.

It marked the first time a Canadian corporation has been convicted for the actions of mid-level territory managers with no evidence that head office had any idea what was going on — changes introduced to the Criminal Code under Bill C-45, the “Westray Bill.”

“Most people I know will drive around for an hour to find a gas station where the price is three cents less. Constantly griping about the cost of gas is kind of a Canadian obsession. But as far as the media was concerned it’s almost like it didn’t happen.

“If we were in the United States I guarantee you this kind of thing would get front-page business reporting. I don’t know why Canadians don’t get more upset about this kind of stuff. I just don’t get it.”

Jull, a member of Baker & McKenzie’s White Collar Crime Steering Committee, was having the conversation having just returned from the firm’s Western Hemisphere meeting in New York. How is Canada seen by his partners at Baker & McKenzie from other countries?

“I think there’s still some reticence in terms of in-house general counsel in Canada to spend money at the rate their counterparts in the United States would on compliance. Although Canada’s getting better, there’s still some reluctance to spend on doing the proactive things that you ought to do. It’s easier to sell in the United States because they are so much more aggressive. Individuals do go to jail.”

At its heart, white-collar crime is just corporate lying, cheating and stealing.

Of all the offences that fall under the catch-all, stock market fraud seems to get Canadians particularly riled up. Perhaps it’s the connotation of the privileged few circling the wagons while they help themselves and one another.

From Bre-X Minerals, YBM Magnex, Philip Services and Livent to Hollinger, Nortel and Sino-Forest, Canada has no shortage of securities scandals. What’s lacking have been convictions.

In the US, Kenneth Lay, Jeffrey Skilling, Bernard Ebbers, Bernie Madoff, Martha Stewart and Raj Rajaratnam are some of the big names who have spent time behind bars for market misdeeds. But in Canada, Garth Drabinsky and Myron Gottlieb are the only two high-profile individuals who spring to mind.

The question of why there apparently are not more perpetrators of white-collar crime serving jail time in Canada is an interesting one to ponder.

Insider trading, tipping and market manipulation are offences under the
 Criminal Code as well as under quasi-criminal offences in the provincial securities Acts. It’s just that the Criminal Codeprovisions aren’t used very often.

When criminal prosecution is possible, it’s the police who make the call on whether and where to bring charges, although they may ask the Crown which is the most appropriate legislation under which to proceed. When it involves the stock market, police tend to defer to securities regulators.

Edward Waitzer, a partner at Stikeman Elliott LLP in Toronto, says in his experience police have little enthusiasm for the criminal prosecution of securities-related crimes such as insider trading and tipping. He says without tools such as wiretapping powers (which the OSC is now seeking from the federal government), the evidence is often entirely circumstantial.

“I think the cops just don’t like doing securities cases because they’re complicated, they’re hard to prove and their failure rate is high, plus they’ve got to co-ordinate with securities regulators so it creates complexity. And I think they get discouraged because the OSC got one conviction, not criminal, in 2014. I’ve always found the cops’ commercial-crimes guys shy away from this. Maybe it will get better but, historically, this is not stuff they’re keen to do.”

Tyler Hodgson, a former Crown prosecutor and OSC enforcement counsel, says they also shy away from securities prosecutions because they don’t have the specialized knowledge.

“When the Crowns look at it they say: ‘We don’t really have any experience prosecuting insider trading cases, but you know who does? The Ontario Securities Commission, or the Alberta Securities Commission, so we’ll just let them take the lead,’” says Hodgson, now national leader of the white-collar crime and regulatory compliance and investigations group at
 Borden Ladner Gervais LLP in Toronto.

“If it’s a general fraud, an Enron-type fraud, the Crown would say: ‘We have experience prosecuting frauds, we’ll prosecute this.’ But if it’s a securities law or securities-related fraud, they tend to take a second chair to the securities regulators.”

As for regulators, they in turn usually opt for the administrative route over a quasi-criminal prosecution – choosing sanctions over sentences – because the burden of proof is lower.

“It’s far more difficult to prove a charge when it’s criminal or quasi-criminal because the standard is beyond a reasonable standard of doubt, as opposed to a reasonable probability when there is no jail sentence involved. So they don’t use the
 Criminal Code provisions very often because they have this lower standard available to them. There’s more of a prospect of success if they take it on the civil side.”

Canada’s patchwork system of securities regulators makes enforcement more difficult, he says, predicting that the formation of a co-operative national regulator, which has the support of at least five provinces, should pave the way for the creation of a specialized team of securities prosecutors akin to the US.

“If that happens, for the first time you’ll have Crowns that will start to develop that area of expertise. So I’d expect in the long term, five years or so, you’ll start to see increased enforcement on the pure criminal side by the Crown.”

While Canadian regulators will never have the resources their peers in the United Stats have, he says, “things I’ve seen in the last five years suggest to me we’re at least moving in the right direction. There’s a real interest in the government to shore up any perceived deficiencies.”

Hodgson believes Canada is starting to shake off its reputation for having less-than-robust enforcement of white-collar crime. The evidence, he says, can be found in the law firms themselves.

“The full-service corporate firms, the Bay Street firms, have woken up to the fact there’s a potential revenue stream in the white-collar area. I think it’s safe to say every Bay Street firm has a specialized white-collar or government investigation practice.”

There’s no question the US has been much more aggressive in moving against securities offences, and the criminal prosecution of insider trading is a perfect example, says
 Linda Fuerst, a partner at Norton Rose Fulbright in Toronto.

Fuerst cites figures from the US Attorney for the Southern District of New York showing 89 people were charged criminally with insider trading between October 2009 and October 2014. Eighty-one either pled guilty or were convicted.

“In Canada, you’re hard-pressed to think of more than one or two
 Criminal Code prosecutions for insider trading — not just in the last five years but ever,” she says. “That’s in stark contrast to the American experience. I think there is a recognition Canada has fallen far behind.”

Like most other regulators, the Ontario Securities Commission has been trying to up its game. The OSC set up a joint serious offences team with the RCMP and the Ontario Provincial Police anti-rackets branch two years ago. It is pushing ahead with a whistleblower program that would see public-company informants eligible for a reward of up to $1.5 million, and seeking federal rule changes in Ottawa that would allow its investigators to use wiretaps during investigations of illegal insider trading or tipping.

And this spring, it acquired some new roommates: the Mounties.

When the RCMP announced it was moving its 28-member Toronto-based Integrated Market Enforcement Team (IMET) into the OSC’s offices, it made news headlines. It’s not hard to see why. The symbolism in having the country’s iconic scarlet-clad police force working shoulder-to-shoulder with the senior-market cops is hard to miss.

The question remains, however, whether this move will go beyond optics and lead to more charges and convictions? Fuerst says that’s not necessarily a given.

“The difficulty is we just don’t have the experience. The RCMP through IMET has not been spectacularly successful in the white-collar criminal prosecutions it
 has brought and I think that’s a function of the fact that until recently they haven’t had people on staff who understand the capital markets.” She saw that first-hand, she says, when she had clients being questioned by the RCMP for a possible criminal investigation. “They didn’t know what questions to ask or even what documents to ask for.

“Hopefully, that’s being remedied now.”

As for the move into the OSC mother ship (the RCMP’s Montréal-based IMET team has already moved into the AMF headquarters, incidentally), Fuerst says while working together will allow for more consultation in deciding which cases to pursue and how to investigate them, both sides need to be mindful of the Charter.

A regulator can compel someone to hand over documents and come in to testify under oath when the investigation is related to possible administrative sanctions. But in investigations where jail time is possible, it cannot do so.

The regulator is also explicitly forbidden from turning transcripts of compelled evidence over to any police agency without the consent of the person who provided the testimony because it violates their right to remain silent.

Blurring the lines can create a big problem, says Fuerst, pointing to the case of
 R. v. Landen, in which the defendants successfully argued the OSC had compelled the production of trading records from a third party while still weighing whether it would be a quasi-criminal prosecution or an administrative proceeding.

Ontario Court of Justice Judge Rebecca Shamai found that constituted a “serious” breach of the Charter, and warned that all OSC investigations “are vulnerable to failure for want of Charter compliance.”

What that suggests, says Fuerst, is that when charges are laid, the issue of how the RCMP and OSC investigators collaborated during an investigation will become “a line of attack defence counsel will be focusing on.”

Securities commissions are increasingly requiring market participants and gatekeepers to provide another level of policing to their own terrain, says
 John Fabello, a partner at the Toronto office ofTorys LLP.

“The commissions have come out with various initiatives,” says Fabello. “One recent example on the heels of Sino-Forest is that they said [the OSC] staff’s expectations of underwriters is that the due diligence they do with respect to issuers bringing securities to market has to be enhanced, doing more than what staff understood underwriters were doing previously.”

Regulators are also getting bolder about the kinds of cases they prosecute, he says. “They’re increasingly using this public-interest jurisdiction to say: ‘Even if it’s not written and prohibited, or required as in the case of underwriting new standards, we say it’s offside and we’re going to prosecute.’”

He’s convinced Canada is “absolutely” making progress in its efforts to tackle white-collar crime.

Most practitioners would agree with him in one area at minimum — prosecutions related to anti-bribery.

In 2011, months after Nazir Karigar became the first person charged with violating Canada’s anti-bribery law, the Organisation for Economic Co-operation and Development blasted Canada, saying the law was too limited, there were too few investigators and the penalties were too weak. Transparency International also named Canada as one of 21 countries with “little or no enforcement” of its own anti-bribery legislation.

Around that time same time enforcement officials actually started showing a hint of teeth.

Calgary-based Niko Resources Ltd. pleaded guilty to bribing the Bangladeshi energy minister with trips and a $190,000 car as he was assessing how much the company would have to compensate some villagers for water contamination following an accident.

Niko agreed to pay a $9.5-million fine and submit to a three-year probation order requiring it to implement a detailed compliance program subject to independent audit at the company’s own expense.

Griffiths Energy International Inc. was next to be charged with anti-bribery offences after a new management team installed in the summer of 2011 discovered previous management paid a diplomat’s wife $2 million as the company pursued lucrative opportunities in Chad.

The executives retained Gowling Lafleur Henderson LLP to investigate the transactions and then went to the police afterwards with the results.

Griffiths was handed a $10.35-million penalty. Unlike Niko, there was no probation order monitoring its behaviour for the next several years, which was seen as consideration for self-reporting.

But the fact Griffiths was hit with a $10.35-million penalty caused concern in some circles.

“It definitely got my eyebrows up,” says
 Andrew Nathanson, a litigator in the Vancouver office of Fasken Martineau DuMoulin LLP. “I thought the fine in that case was very large relative to the fact the company came forward proactively and the underlying circumstances.

“I thought they didn’t get a lot of credit for a lot of the things they did right. That was a big fine.”

In the US, anyone like Griffith considering self-reporting anti-corruption violations can negotiate a non-prosecution or deferred-prosecution agreements with the regulator. Not here, though.

“That’s a big flaw in Canada,” says Mark Morrison, Co-practice Group Leader of the National Business Crimes, Investigations and Compliance Group at
 Blake, Cassels & Graydon LLP in Calgary. “If you want to do the right thing you’re placed in a difficult position. The only available action is a guilty plea, which creates a big problem.”

Outside of the material-disclosure obligation under securities laws, there is no requirement to self-report, Morrison says — and the absence of non-prosecution or deferred-prosecution agreements reduces the incentive.

“It’s a very reasonable decision, and I think a very defensible decision, for a company to elect to identify the problem, fix the problem and not self-report.

“The downside of that approach is it creates a skeleton in the closet. And increasingly what’s happening in the transactional context – whether it’s banks in the context of financings or counterparties in the context of M&A discussions – is people are really focusing on anti-corruption due diligence.”

Self-reporting contains risks as well, Morrison says.

“When you go to the RCMP, their expectation is that you are effectively opening the kimono. So that’s one of the absolute risks when you are speaking with them.

“Your client needs to understand they can take that information and go in any direction with it, including an unfavourable direction.”

Morrison says Canada has been improving on enforcement and bringing significant cases. “Certainly we’re nowhere near the enforcement regime of the United States but Canadian companies, or companies operating in Canada, are well-aware there is a material risk of being pursued for white-collar crime in Canada — and much more so than there would have been 10 years ago.”