Fraud is flourishing: Canada’s regulatory patchwork paves way for financial crimes

May 2017 | LEGAL & REGULATORY | FRAUD & CORRUPTION

Financier Worldwide Magazine

Fraud is alive and well in Canada. It is thriving and fraudsters are innovating. The ongoing boom in white-collar crime is partly the result of Canada’s lack of a uniform regulatory system and ineffective law enforcement.

Canada’s regulatory patchwork as a catalyst to fraud

On 22 September 2016, the US Treasury’s Office of Foreign Affairs Assets Control (OFAC) designated Vancouver-based PacNet Group a significant transnational criminal organisation. PacNet is an international payments processor and money services business, with a history of money laundering. OFAC issued a press release, stating that PacNet knowingly processes payments on behalf of a wide range of mail fraud schemes that target victims in various countries across the globe, and it is the third-party payment processor of choice for a breadth of mail fraud ploys. These allegations shine lights on how these types of fraudulent activities can flourish under Canada’s current legal landscape.

Canada’s lack of cohesive regulation is particularly problematic surrounding the collection of beneficial ownership information on registered companies.

According to information provided by the British Columbia (BC) government, between 2006 and 2015, 304,859 companies were incorporated through BC’s Ministry of Technology, Innovation and Citizen’s Services. Federal incorporations are also on the rise.

Canada has 2.6 million corporations, with an overwhelming majority incorporated provincially. The formation of companies is an industry unto itself, with Canada allowing a high degree of anonymity about registrants. A report issued by the Financial Action Task Force warned that “Canadian legal entities and arrangements are at a high risk of misuse for [money laundering and terrorism financing] and mitigating measures are insufficient both in terms of scope and effectiveness. The reliability of the information recorded raises concerns because there is no obligation on registrars to confirm the accuracy of the basic company information provided at the time of incorporation”.

The Association of Certified Fraud Examiners’ (ACFE) 2016 global fraud study highlights the increasing ingenuity of white-collar criminals, and the role of technological advances in the boom. Two-thirds of all cases reported to the ACFE targeted closely held or public companies. Banking and financial services are among the hardest hit sectors.

Technological & criminal ingenuity

The intersection of financial services, technological advances and criminal inventiveness has crystallised in the growth of financial technology (FinTech). This sphere has evolved at a rapid speed, and legal regulation has been left to play catch up. Financial technology is a prime example of an area of business that is largely unregulated. The rules that do exist have been imported from regulatory models fit for traditional banking and financial services, and do not properly align with the demands of the novel FinTech framework. FinTech companies look at the legal regulatory scheme as it stands and know that they are novel and unique; some of these businesses are operating outside of a legal framework because there is no properly applicable regulation. This allows for innovation and growth, but also renders these types of financial startups vulnerable to fraud.

The Ontario Securities Commission has launched a hub called LaunchPad, which will assist FinTech companies with navigating and tailoring the existing regulatory framework to the needs of the individual business. This hub has been created with the recognition that some of the existing regulatory requirements do not make sense for this new business model.

Similarly, the British Columbia Securities Commission (BCSC) is now working to create its own framework in response to the innovation and adoption of new technologies in the financial services sector. In March, the BCSC released an online survey, published a new tech industry webpage, and announced a dedicated Tech Team as part of its ongoing effort to assist the BC FinTech industry.

Brenda Leong, BCSC chair and chief executive, commented, “we understand that early-stage companies need access to capital and a clear regulatory framework to operate in”. The BCSC’s aim is to work with industry insiders to create a flexible and balanced regulation that allows for innovative business models. The BCSC also works with other Canadian securities regulators to support FinTech industry growth by facilitating timely and harmonised reviews of registration and exemptive relief applications.

FinTech is gaining momentum in BC, with close to 100 companies in the province, nearly one-third of which are less than five years old. The BCSC is taking note, and there are 10 robo-advisory firms currently registered with the BCSC, seven firms exempt from registration as crowdfunding portals, and nine portals that are exempt market dealers.

The Alberta Securities Commission’s perfect scam

On 22 February 2017, an event was held in Calgary, Alberta, which was billed as a real estate investment seminar hosted by ‘Maplestock Investments’. Jonathan Fisher, a finance ‘mastermind’, promised a packed room of attendees a fortune if they invested with his company. The seminar drew a large crowed of individuals eager to cash in on guaranteed, low-risk, high-yield securities.

The event was a scam put together by the Alberta Securities Commission (ASC) to highlight how easy it is for individuals to fall prey to illicit investment scams. “We created a fake investment company, we created a persona which was Jonathan Fisher, a British born financier who spends time on his yacht in his spare time, and invited people to learn about an investment opportunity,” said Allison Trollope, the director of communications and investor education with the ASC.

Even though the scam was purposefully rife with red flags that should have given potential-investors pause, nearly 50 people registered for the event. Halfway through the seminar, the crowd was told it was all a set-up and were given a short presentation on the importance of protecting their hard-earned money. The entire event was filmed and was turned into an educational video to mark Fraud Prevention Month.

This scam only serves to emphasise the need for individuals to be increasingly wary of potential investments, and promises that sound too good to be true. The ASC took drastic measures with this campaign to drive home the message that people need to be watchful for fraud and make efforts to educate themselves when opportunities arise.

Canada’s vulnerability to financial crimes

A report issued by the International Monetary Fund expressed concerns about Canada’s ability to combat money laundering and financial crimes, noting that Canada is exposed and vulnerable to high risk money laundering threats. In successful cases before the courts, asset recovery is low. Penalties are also low, and are not significant enough to offer a real deterrence to white-collar criminals.

The proliferation of fraud in Canada highlights the need for a robust and cohesive national regulatory scheme. It further demands a legal framework that can provide significant remedies for victims of fraud, both to serve as a true deterrent, as well as to offer actual financial relief to deserving parties.

Jessica Lewis is an associate at Bennett Jones LLP. She can be contacted on +1 (604) 891 5160 or by email: lewisj@bennettjones.com.

Jessica Lewis

Bennett Jones LLP