White-Collar Crime in Canada

Canada is slowly shedding its image of being soft on fraud and white-collar crime

There has been a longstanding perception that Canada is soft on fraud and white-collar crime, both domestically and internationally.

A number of recent government initiatives, however, suggest that may no longer be true. Company executives and legal counsel need to make sure they are aware of the changing landscape and what they have to do to operate successfully within it.

The most contentious change is the introduction of an integrity regime by Public Works and Government Services Canada. Under the new guidelines (first tabled in 2012, modified two years later and amended again in 2015), Canadian companies and/or those working for them that are found to have contravened the Corruption of Foreign Public Officials Act could face, among other penalties, exclusion from conducting business with the federal government for a period of between five and ten years.

“It is a very challenging regime,” says Linda Fuerst, a partner in the Toronto office of Norton Rose Fulbright Canada LLP. “If a company is found guilty of misconduct in another country or jurisdiction, even if it has no connection to Canada, it could potentially debar them, a result that could be devastating.”

It’s possible the ongoing opposition to the regime, which includes impassioned lobbying from entities ranging from the Canadian Bar Association to the Canadian Council of Chief Executives, could result in a further softening of the framework. No matter the final version, however, it seems that from now on, the consequences of being caught up in corruption abroad will be extremely serious to those who are convicted.

Canada is not alone in stepping up its fight against corruption. “Internationally, particularly governments that are members of the OECD (Organisation for Economic Co-operation and Development), continue to increase the bar on business conduct, and are following through with enforcement and high penalties against not only corporations but also executives of businesses,” says Riyaz Dattu, a partner in the Toronto office of Osler, Hoskin & Harcourt LLP. “Even countries such as China, India and Brazil are joining in on these international initiatives. There has been an almost universal sea change in a matter of just five years.”

Another significant change in Canada is the Extractive Sector Transparency Measures Act (ESTMA), which received royal assent in December 2014 (although it may still be amended). Under ESTMA, companies in the extractive sector will have to report payments of any nature, both foreign and domestic, exceeding $100,000 in a given year.

The act requires “certain entities with connection to Canada, that are engaged in commercial development of oil, gas or minerals in Canada or elsewhere, or that control such entities, to report payments made to any government, whether foreign or domestic, in excess of $100,000 in a given year,” Dattu wrote, in conjunction with several colleagues, in a legal alert. “The legislation will require Canadian businesses involved in resource extraction to file detailed reports, which will be publicly available. This disclosure requirement may raise serious issues for entities that have agreements with foreign governments covered by confidentiality obligations.”

Domestically, Canada has also seen some important regulatory developments in recent years.

“Regulators have been proactively going out to the marketplace saying, look, we are stamping out fraud and we’re making fraud a high priority for our prosecutions,” says John Fabello, a partner and litigator in the Toronto office of Torys LLP. “This is borne out in the numbers and in the penalties they’re obtaining.”

Fabello cites statistics released by the Canadian Securities Administrators (CSA) and by individual securities commissions. “For 2014, out of the total proportion of cases the CSA brought against respondents, about 30 per cent of the respondents were alleged to have engaged in fraud. That’s pretty significant when you consider they’ve got many other categories of claims they bring forth. Look at the number of proceedings commenced by the OSC (Ontario Securities Commission) in 2014. About 40 per cent involved allegations of fraud.”

The OSC showed its determination to up the ante when combatting fraud when it launched, in 2013, a joint serious offences team (JSOT) in partnership with the RCMP’s financial crime program and the OPP’s anti-rackets branch. The unit, which has the power to use wiretaps and surveillance, has won jail terms against at least eight people since its inception and has more than 10 ongoing cases.

The Ontario Securities Commission also recently changed a longstanding policy against entering into negotiated settlements when it allowed companies, in very restrictive instances, to enter a “no contest” plea, somewhat similar to the deferred prosecution agreements that exist in the US and the UK. Under DPAs, some companies in those jurisdictions can pay hefty fines (often considered close to extortionate) for alleged white-collar malfeasance but do not have to admit guilt or face legal penalties.

In September 2014, Ernst & Young LLP, which was represented by Linda Fuerst, agreed to an $8-milion settlement with the OSC regarding work it conducted for Sino-Forest and Zungui Haixi in China. Both public companies were allegedly overstating their assets and revenues.

The settlement, which did not require E&Y to admit or deny any wrongdoing, avoided the “time, expense and uncertainty,” around the two separate cases against Ernst & Young that were scheduled to take place over nearly 100 days, Fuerst said at the time.

Fabello thinks the new option, which has been allowed in only a few instances, shows leadership by the OSC by it saying that “under the right circumstances, where respondents cooperate and provide information and have fully remediated the problem, we’ll consider no admission and no contest settlements.”

On the federal front, there also seems to be an upswing in prosecutions under the Competition Act. In 2013, during a two-week span, the Competition Bureau obtained record-setting fines against two Japanese auto parts suppliers that pleaded guilty to bid-rigging charges. Yazaki Corporation was fined $30 million by the Ontario Superior Court of Justice, the largest ever ordered by a court in Canada for a bid-rigging offence, and Furukawa Electric Co. was fined $5 million as well.

In May 2015, however, the bureau suffered a major setback in another bid-rigging case, one that the defendant’s lawyer, Peter Mantas of Fasken Martineau DuMoulin LLP, said offered a key message for lawyers and clients accused of fraud.

An 11-person jury, following an eight-month trial, found six individuals and three corporations, including TPG Technology Consulting, not guilty of 60 charges under s. 47 of the Competition Act. The allegations concerned responses to request for proposals in 2005 by several government bodies by several companies in the Ottawa information technology consulting industry.

Mantas, who represented TPG, said the decision to request a jury trial (it took a month to select a jury, longer than for the murder trial of Luka Magnotta), contrary to the typical strategy for a long and complex fraud trial, is an option that should be considered more often. “Juries can be pretty good at looking at a case, even if it’s a complex commercial litigation, from a big-picture perspective. They can really bring an element of common sense to it, which they did in this case.”

Mantas is also the lawyer for Nigel Wright, former Prime Minister Harper’s chief of staff who wrote a personal cheque for $90,172 to pay questionable expenditures by Senator Mike Duffy. Wright agreed to talk with investigators from the outset, a decision Mantas says that lawyers often counsel their clients against if they face possible criminal charges.

But in this day and age, he says, there could be circumstances in which that is the best strategy, because “if you have that discussion there’s a chance you might be able to persuade them not to charge you at all.” He notes that Duffy, who did not talk to investigators, was charged.
Although it seems authorities are getting tougher on white-collar crime and corruption, Munaf Mohamed, a partner in the Calgary office of Bennett Jones LLP, notes that Canada’s reputation for inaction may still apply.

“In terms of the intersection between civil claims and the authorities, my experience is that our law enforcement are taxed too thin and don’t have the resources to pursue complex commercial fraud,” he says. He cites a matter he recently completed where a Canadian individual defrauded a financial institution by cycling more than a billion dollars through a number of US entities, some publicly traded, and defrauded the financial institution of a large amount through a kiting scheme. “The financial institution took action, obtained Mareva injunctions and other extraordinary measures and enjoyed a substantial recovery,” he says. “The fellow in the US was indicted and convicted and will likely receive 25 years for his part. The Canadian charged in the US confessed. The Canadian authorities have yet to pursue this individual for this matter.”

Mohamed’s example rings far too true to many who keep tabs on the white-collar crime landscape in Canada. There does seem to be at least somewhat of a sea change, however, and Canadian companies that fail to believe that and respond, especially with the implementation of meaningful compliance programs, could find themselves in water much hotter than they’d ever imagined before.