By Frank Palmay1 And Assunta Di Lorenzo2
Fraud or its synonyms "dishonesty, infidelity, faithlessness, perfidy, unfairness etc..."3 is the direct antithesis of "trust, good faith, fidelity, fiduciary etc..." which are the hallmarks of the relationship between a financial institution and its clients.
The financial intermediary is most often the link between the institution and its client.
The financial intermediary, whether a bank or trust company employee/officer, an insurance or stock broker or an insurance agent, is in a unique position because often he/she is selling products to which the client cannot accurately attach a value and which the client may not fully understand. When this is the case, the client is particularly vulnerable to the actions of the intermediary.
With the growing number of participants and transactions in the financial services industry, it is more important than ever for financial institutions to protect themselves, their clients and their reputations from the effects of fraud or misconduct by the financial intermediaries they employ. Exacerbating the situation is the increasing complexity, speed and volume of financial transactions and the supervisory and monitoring difficulties which they imply.
In Canada, the 2007 CSA Investor Study on "Understanding the Social Impact of Investment Fraud"4 revealed that more than one million Canadians, that is one in five Canadians, have reported having been a victim of investment fraud.
White-collar crime costs corporations billions of dollars annually, damages the wealth and health of individual victims, and undermines the integrity of markets through eroding investor confidence. Securities regulators face high consumer expectations regarding the prevention of financial fraud. In response to these expectations, the Autorité des marchés financiers and other Canadian securities regulators have greatly bolstered their efforts in recent years to deter financial crimes.
The Canadian justice system has in the past earned the reputation of being "soft" on investment fraud. However, it now has the tools to "get tough" on investment fraud as a result of the coming into force of recent amendments to the Criminal Code which provide for stiffer penalties for white-collar crimes such as fraud. In the future, more significant consequences or sanctions are expected to be imposed by judges on those who are convicted of fraud.
Implementing an effective prevention and protection program is an important safeguard to protect institutions against the kind of financial, business and reputational cost arising from a conviction or damage to reputation.
What Constitutes Fraud?
2.1 Criminal Fraud
The essence of fraud is dishonest deprivation. Section 380 of the Criminal Code makes fraud a criminal offence punishable by up to fourteen years imprisonment. The following individuals are guilty of fraud:
(1) Every one who, by deceit, falsehood or other fraudulent means defrauds the public or any person whether ascertained or not, of any property, money or valuable security.
(2) Every one who, by deceit, falsehood or other fraudulent means with intent to defraud, affects the public market price of stocks, shares, merchandise or anything that is offered for sale to the public.
There are three leading Supreme Court of Canada (SCC) cases that establish the elements of criminal fraud: R. v. Olan (1978), 41 C.C.C. (2d) 145 (S.C.C.); R. v. Théroux (1993), 79 C.C.C. (3d) 449 (S.C.C.); and R. v. Zlatic (1993), 79 C.C.C. (3d) 466 (S.C.C.). The case of Olan expanded the interpretation of the offence of fraud, and indicated that dishonest deprivation must be established to support a conviction of fraud. Actual economic loss is not an essential element to the offence. Zlatic and Theroux clarified what is required for the mens rea element for the offence of fraud. The mens rea element requires proof evidence that the accused's conduct was deliberate and there was knowledge of the relevant facts of the crime.
The Quebec Court of Appeal in Regina v. Lacombe5 disallowed an appeal by a stockbroker charged with fraud under section 380 of the Criminal Code. In confirming the guilt of the stock broker, the Quebec Court of Appeal discussed the elements of the offence of fraud.
"Under our present law of fraud, the ultimate burden of proof being on the Crown, there can be no conviction where the trier of fact is left with a reasonable doubt (a) as to the element of deprivation, in the sense of detriment, prejudice or risk of prejudice to the economic interests of the victim; (b) that this deprivation was caused by conduct of the accused which, '...by the ordinary standards of reasonable and honest people...' would be regarded as dishonest, and (c) that the accused acted knowingly and intentionally, in the sense that he was aware his conduct would be ordinarily considered 'dishonest' and would result in 'deprivation'."
The court found that the stockbroker had defrauded his employers by knowingly putting their economic interests at risk for the purpose of recouping the loss he had dishonestly caused in the account of his brother-in-law.
A finding of criminal fraud specifically requires proof of an intent to defraud.
However, the fact that a person does not know "for certain" that an act is "dishonest" or that it creates a risk of deprivation does not necessarily provide a defense against a charge of fraud. Criminal intent for fraud can also be established through proof of "recklessness" or "wilful blindness".
On November 1, 2011, important changes to the Criminal Code came into force following the adoption of Bill C-21 (Standing up for Victims of White Collar Crime Act), which was introduced in response to a number of high-profile fraud cases. One of the most important amendments is the creation of a two-year mandatory minimum sentence for fraud over $1 million minimum under section 380(1) of the Criminal Code. The White Collar Crime Act also makes important changes to the aggravating circumstances that are to be considered at sentencing (such as the magnitude, complexity, duration or degree of planning of the fraud), it...