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Business Commentary To prevent market fraud, give enforcers more legal tools

Michael Watson is a former criminal prosecutor and a former director of enforcement at the Ontario Securities Commission.

The Globe and Mail's recent series on market fraud highlights the major problems facing enforcement agencies. There is no lack of will or ability on the part of those tasked with the job of protecting investors. Their lot is one of frustration about the limitations that prevent them from getting the job done.

Canada has long lived with a system that provides an easy way for fraudsters to hide their ill-gotten gains, making them inaccessible to enforcement agencies even when the perpetrators are caught. We allow the existence of corporate vehicles that give secrecy to their owners so that those owners can hide money from the authorities. Perhaps this has been allowed to exist because the same tool is used by the very rich, who also want to hide their money from the authorities in order to protect their wealth from scrutiny and government access.

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The result is that Canada has developed a reputation as an excellent place to launder money obtained through crime. We like to think of ourselves as distinct from disreputable offshore secrecy jurisdictions that make huge profits managing illegal funds while hiding them from law enforcement. Sadly, we are not distinct from offshore secrecy jurisdictions. We are one. Until this problem is taken seriously, the inability of regulators to recover funds will persist.

When Canada's anti-money-laundering agency, FINTRAC, was being created, which only occurred because Canada was in danger of being blacklisted by the IMF'S Financial Action Task Force (FATF), there was considerable lobbying of the government to minimize the ability of FINTRAC to actually get the job done.

Canadian financial institutions are allowed to deal with offshore financial institutions without having any information as to who the true owners of the funds they are dealing with really are. This creates a huge barrier to enforcement officials trying to recover stolen money for victims. Lawyers defending this system often respond that there are many legitimate reasons for people using these accounts. The discussion always seems to end there, without any consideration as to the enormous harm to investors, costs to the economy and the damage to our international integrity that the perpetuation of this system encourages. It is a simple fact: if we allow Canadians and financial institutions to deal with anonymous accounts, fraud artists will have a clear avenue to hide money from their victims and from enforcement agencies.

While U.S. criminal-law authorities are rightly credited with doing a better job than their Canadian counterparts at protecting the financial markets, they are able to do better because of severe legal limitations which exist in Canada that do not constrain enforcement in the United States.

In the United States, the Securities and Exchange Commission is able to conduct an investigation into financial misconduct using its regulatory powers – powers which are not available to criminal-law investigators, and where it determines there is enough evidence to warrant criminal-enforcement action, they can simply turn the fruits of their regulatory investigation over to criminal-law enforcement agencies. Having the benefit of the evidence gathered by the regulator, U.S. law enforcement has a much simpler path to investigate. In Canada, the prevailing view of the law is that evidence gained through regulatory powers may not generally be provided to or used by criminal-law-enforcement agencies.

Without that evidence, criminal-enforcement agencies do not have access to the information necessary to investigate the crime, and do not have the legal tools necessary to gather that evidence. The Supreme Court of Canada long ago said that those who participate in the capital markets have a very low expectation of privacy, yet criminal investigators remain shackled by a system that allows financial criminals to hide behind the very highest levels of privacy.

Canadian provinces are signatories to the multilateral memorandum of understanding (MMOU) of the International Organization of Securities Commissions. This MMOU allows foreign securities regulators to turn over evidence gathered by Canadian regulators to foreign criminal-law authorities to use in their investigations. That same evidence, however, may not be used by our own law-enforcement agencies to investigate crimes against Canadians. Until our laws are brought in line with those of the United States, this serious disparity in criminal enforcement will not change.

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