Canada country focus: Fighting fraud across borders

In a fast-moving multinational business environment, combating cross-border fraud has become a key challenge. Jim Patterson, Lincoln Caylor and Maureen Ward of Bennett Jones LLP investigate developments in Canada in fighting cross-border fraud

“Fraud is the ready minister of injustice.” (Edmund Burke, 1729-1797)

Technological advancements and the increased use of telecommunications and electronic means to transfer funds have brought about a marked increase in the amount of fraud that is perpetrated across borders, particularly between Canada and the US. Unscrupulous individuals rely on the difficulties (some perceived and some real) of pursuing cross-border claims to attempt to avoid the consequences of their fraudulent schemes. Given the extraordinary injunctive relief in civil courts and other remedies available in Canada, it is often advantageous to victims of fraud to commence proceedings in Canada.

Scandals associated with US companies such as Enron, WorldCom, Tyco and ImClone have brought on calls to strengthen corporate governance standards and better enforce laws governing capital markets activities. These scandals and the response in the US have prompted Canadian authorities to act. A popular perception that Canada is ‘soft’ on fraud is no longer true. For example, in recent years, Canada has made important legislative amendments and enactments[1] to help combat fraud and corruption both domestically and abroad. This legislation provides for greater protection and remedies for consumers, and improved enforcement procedures. It also requires companies to take an active role in reporting fraud and suspicious transactions. Also of note is the fact that Canadian courts have confirmed that class actions involving investment fraud are certifiable and that a non-resident can be part of a certified class.[2]

For Canadian courts to take jurisdiction there must be a real and substantial connection between the fraud and Canada. This will include connectors such as the fraud being committed from Canada, the rogue having assets situated in Canada, victims being located in Canada and witnesses and documents being located in Canada.

In a civil fraud action, it is often necessary to locate and preserve assets and evidence to ensure that they are not dissipated or destroyed before judgement. In Canada, there are extraordinary common law remedies discussed below that assist in this process.

A Mareva injunction is an injunction that freezes assets and is an exception to the general rule that there should be no execution before judgement. This remedy is not generally available in the US although certain statutes do provide for freezing assets. Among other parts of the test, the moving party must establish a ‘strong prima facie case’ and a real risk of dissipation of assets out of the ordinary course so as to defeat any judgment.[3] Such a risk can, in certain circumstances, be inferred from the defendants’ fraudulent conduct.[4]

Since a Mareva injunction is typically granted ex parte (without notice), the moving party and counsel must provide the court with complete, full and frank disclosure of all material information. This obligation applies to any injunction brought without notice. In some circumstances, a worldwide Mareva injunction can be obtained to restrain the defendants from disposing of their assets anywhere in the world.

An Anton Piller order is made without notice to the defendants. Generally this order requires the defendants to permit representatives of the plaintiff to enter the defendants’ premises for the purpose of removing evidence, including information on computers.[5]

The Discovery or ‘Norwich Pharmacal’ order is an order made against third parties, and can be made against a defendants’ financial institutions. Such an order can require financial institutions to disclose the defendants’ banking records to the plaintiff. The plaintiff can use this information to trace the proceeds of the fraud.

A Disclosure Order, although not always granted in Ontario, mandates that the defendants disclose the nature and location of their assets thus allowing the plaintiff to identify and freeze assets accordingly. Courts have held that disclosure of the nature and location of the assets is a necessary adjunct to the restriction on disposition.[6]

An undertaking as to damages may be required from the plaintiff seeking the injunctive relief described above. The undertaking protects the defendants in the event that the granting of an injunction is ultimately shown to have been unwarranted and harm arises from the interim granting of that injunction.

Cross-border litigants may also rely on the Canada Evidence Act,[7] which provides Canadian courts with the power to enforce requests from foreign courts to order the production of relevant documents that are in the possession or power of a party or witness who is within that Canadian court’s jurisdiction.

Cross-border frauds are becoming increasingly prevalent. Canada has adopted and expanded common law and statutory principles in order to reflect this growing concern. In fraud cases, however, the race often goes to the swiftest. Accordingly, in determining the choice of forum, pro-active plaintiffs may choose to commence proceedings in Canada to take advantage of the litigation fraud strategies unique to Canada, which may often result in swift and successful civil fraud recovery.

References

1. For example: the passage of Bill C-13, An Act to Amend the Criminal Code (Capital Market Fraud and Evidence-Gathering); amendments to the Ontario Securities Act R.S.O. 1990, c. S.5.; Proceeds of Crime (Money Laundering) and Terrorist Financing Act S.C. 2000, c. 17; exceptions to privacy laid out in the Personal Information Protection and Electronic Documents Act S.C. 2000 c. 5.

2. Carom v. Bre-Ex Minerals Ltd. [1999] O.J. No. 281 (Ont. Ct. Gen. Div.).

3. Aetna Financial Services Ltd. v. Feigelman (1985), 15 D.L.R. (4th).

4. 663309 Ontario Inc. v. Bauman (2000), 190 D.L.R. (4th) 491 at 507; Netolitzy v. Barclay [2002] B.C.J. No. 1796 at para. 30; Refco Futures (Canada) Ltd. v. Hadgi (unreported) October 12, 2000 (Ont. Sup. Ct.).; Shepherd v. Maureen Rojan-Ali et. al. (unreported) November 27, 2001 (Ont. Sup. Ct.); Bank of Nova Scotia v. Savoia et. al. (unreported) November 1, 2002 (Ont. Sup. Ct.).

5. Anton Piller K. G. v. Manufacturing Processes Ltd, [1976] Ch. 55 (C.A.).

6. Moony v. Orr, (1995) 1 W.W.R. 517 (B.C.S.C.) and Zarpac Inc. v. Susan Lynn Smiley (unreported) September 26, 2005 (Ont. S.C.).

7. R.S.C., 1985 c. C-5., S.46.