FERTILE GROUND FOR FRAUD

Numerous watchdogs, police hurt enforcement

Investor group raises flag over lack of national strategy to combat financial frauds.

Canada’s fractured system of provincial securities regulators and disparate policing agencies makes it difficult to get a true picture of the scope of investment scams, much less stop them, an investor advocacy organization says.

The Foundation for the Advancement of Investor Rights on Monday became the latest organization to call for a new national agency to combat white-collar crime such as Ponzi schemes and pump-and-dump stock scams.

“Numerous regulators, police agencies and other organizations across the country share responsibility for preventing, deterring and detecting fraud, and taking enforcement action against it,” according to the investor advocacy group’s report, a 55-page study funded in part by Industry Canada.

As a result, there is “no formal strategy” across the country to track or tackle the problem.

“Fraud does not respect geographical boundaries,” said Anita Anand, a professor of business and ethics at the University of Toronto’s faculty of law, who herself has advocated to improve Canada’s record on financial wrongdoing through the creation of a national enforcement agency.

John Fabello, a veteran securities lawyer and partner at Torys LLP in Toronto, agreed that Canada would benefit from a national enforcement agency to focus on investment fraud.

“Our current patchwork of regulators … creates unintended gaps in enforcement,” he said.

“The most sophisticated of fraudsters count on and ex- ploit gaps in any regulatory system.”

Despite earlier calls for a national-enforcement agency to combat white-collar crime, the focus in Canada has been on efforts to bring all capital markets activity under a single national regulator.

Some market participants suggest that is the most logical course, rather than separating financial crimes enforcement from other regulatory functions.

But trying to reduce Canada’s 13 provincial and territorial watchdogs to a single national securities regulator has been a 40-year effort and remains a work in progress.

The latest iteration has four provinces participating in addition to the federal government: Ontario, British Columbia, New Brunswick and Saskatchewan. Quebec and Alberta remain fiercely opposed.

Meantime, provincial se-

Our current patchwork … creates unintended gaps

curities regulators are trying to tackle investment fraud on their own through their enforcement branches.

The Ontario Securities Commission, for example, established a Joint Serious Offences Team last year to work with police and crack down specifically on fraud and other “egregious types of misconduct.”

The financial crimes and anti-rackets branches of the Royal Canadian Mounted Police and the Ontario Provincial Police have both seconded officers to the Ontario Securities Commission’s team, which has started 14 separate investigations in partnership with the police agencies.

According to the OSC’s annual report, which was released Monday, criminal charges have been laid in three matters, and quasicriminal proceedings have been started in the Ontario Court of Justice.

Quebec’s securities regulator, the Autorité des marchés financiers, has a system in place that won praise in the FAIR report. The provincial regulator uses a “triage” system to allocate enforcement cases based on who is best suited to carry the case and who has the capacity.

Still, none of these measures is national and the FAIR Canada report said ad hoc cooperation through the Canadian Securities Administrators, an umbrella organization for provincial securities regulators, is not enough.

Lindsay Speed, legal coun- sel at FAIR Canada, suggested Monday that Quebec’s fraud-enforcement system could be used as a model for a national anti-fraud agency.

“In our view, this formalized process would better ensure that investment fraud cases do not slip through the cracks and are pursued through the appropriate venue,” she said.

Under the current system, “enforcement strategies are owned and managed by each jurisdiction individually,” while a centralized national fraud agency would give regulators and police “more bang” for each buck in their enforcement budget, she said.

The idea of a national agency to combat whitecollar crime was recently embraced by Alberta finance minister Doug Horner as an alternative to the renewed effort at broader co-ordinated securities regulation spearheaded by Ottawa.

The FAIR Canada report looked at the experience of other jurisdictions, including the United Kingdom, in making its 10 recommendations, which include a suggestion that provincial securities regulators explore crafting “whistleblower” programs to crack down on white-collar crime.

The Ontario Securities Commission has been considering such a program for a couple of years and is expected to release a “concept” paper in this coming autumn.

The FAIR Canada report also recommends that regulators work harder to help victims of investment fraud get their lost money back, including seeking co-operation from other agencies to track the funds.