White collar defence and investigations: 2017 year in review

15 February 2018

2017 saw some very interesting developments relating to the investigation and prosecution of white collar crime in Canada and abroad. While there was no significant activity in the area of foreign corruption, 2017 saw a number of notable competition and securities law decisions and enforcement proceedings, the introduction of proposed changes to the Competition Bureau’s Immunity Program, the first full round of implementation of Extractive Sector Transparency Measures Act, and increased discussions on the introduction of deferred prosecution agreements in Canada and whistleblower rewards.

Foreign Corruption

The significant development in 2017 was the removal of the facilitation payments exemption from the Corruption of Foreign Public Officials Act (CFPOA). On October 31, it became illegal to pay foreign officials to speed up or facilitate routine transactions, such as permits or the release of goods from customs.

This exception had been in place since Canada enacted the CFPOA and has meant that companies subject to the CFPOA could make facilitation payments without being found to be in contravention of Canada’s foreign anti-bribery law. However, with the removal of this exception, Canada’s anti-corruption legislation mirrors the UK’s 2010 Anti-Bribery Act and distinguishes itself from the U.S., which continues to allow facilitation payments under the Foreign Corrupt Practices Act.

Significant Canadian anti-corruption and anti-bribery prosecutions and updates include:

  • R v Karigar: in the first ever prosecution under the CFPOA to go to trial in Canada, Nazir Karigar was found guilty under the CFPOA of being part of an unsuccessful scheme to bribe Air India officials into awarding CryptoMetrics Inc. and its Canadian subsidiary a multi-million dollar biometrics contract.  He was sentenced to three years in prison, a sentence that was upheld on appeal in July 2017. The Ontario Court of Appeal also endorsed the trial judge’s analysis of section 3 of the CFPOA, clarifying that an offence is committed upon agreement to offer a bribe and does not require the bribe to be successful or for the foreign official to accept the bribe in order to render this conduct an offence under the Act.
  • R v Barra and Govinda: This decision relates to the conduct of two individuals who were alleged to have been a part of the same bribery scheme that resulted in the conviction of Nazir Karigar under the CFPOA.  Given complications in bringing this action to trial – and the inherent delays that followed – an application was made for a dismissal for long delay, citing the Supreme Court of Canada’s R v Jordan decision which set a presumptive ceiling of 30 months for a case to be brought to trial in the superior court.  Beyond the 30 month ceiling, the delay is considered presumptively unreasonable, potentially resulting in dismissal of the case, unless the Crown can demonstrate the presence of exceptional circumstances. In October, the Ontario Superior Court of Justice concluded that the Jordan framework applied to CFPOA offences, but that delay had not yet reached the 30 month ceiling.  And in any event, even if the ceiling had been surpassed, exceptional circumstances would have allowed for a reasonable delay of 35 months in the circumstances. The Court cited the extradition procedures, as well as the extensive volume of Crown disclosure and the complexity of cross-jurisdictional investigations as factors that must be included in the net delay analysis. This test will apply even when the Crown opts to proceed by direct indictment in the superior court proceeding and forego a preliminary inquiry.

Extractive Sector Transparency Measures Act

May 30, 2017, marked the deadline for most Canadian companies subject to the Extractive Sector Transparency Measures Act (ESTMA) to file their first report with Natural Resources Canada. ESTMA created stringent reporting standards for Canadian oil, gas and mining companies. If your company is required to report under ESTMA then it must file, within 150 days of its fiscal year-end, reports of any payments totaling C$100,000 or more made to any government in Canada or in a foreign state, or to a body that performs or is established to perform a government power, duty or function, where the payments are made in relation to the commercial development of oil, gas or minerals.

As of mid-November, Natural Resources Canada (the department responsible for the administration of ESTMA and the receipt/review of reports) showed that 729 companies had filed reports. In total, over $20 billion in payments were reported, with over $6.39 billion paid in Canada alone. While taxes and royalties/fees accounted for the bulk of the types of payments reported under ESTMA, bonuses, dividends and infrastructure improvement payments were also not insignificant.

Natural Resources Canada released new guidance information in August 2017 to assist reporting entities with their compliance for 2018. This guidance included a new validation checklist, a significantly expanded FAQ section and the government department’s methodology, including implementing a “risk-based approach”, to verification and enforcement.  

Beginning on June 1, 2017, ESTMA reporting requirements began applying to aboriginal payments in Canada and Natural Resources Canada has confirmed that payments forming part of private commercial agreements, such as impact benefit agreements, are reportable.

Competition Law

There was heightened activity in the competition law space over the previous year.  In October, the Competition Bureau released its much anticipated (and much needed) proposed amendments to the Immunity Program. The Bureau was motivated to make the changes, in part, because of failed prosecutions in the certain high-profile criminal cases.  For example, in 2015 all charges in the chocolate price-fixing prosecution were stayed by the Crown soon after important disclosure issues arose between the Crown and the immunity and leniency applicants in that case.  The previous version of the Immunity Program would be left largely intact by the proposed amendments, but there are some notable changes included that would address some of its shortcomings:

  • Interim Grant of Immunity (“IGI”): Before final immunity is provided, and after the proffering stage is completed, the DPP may grant an IGI to the immunity applicant.  This is intended to “facilitate the Bureau’s investigation by formalizing the framework within which the applicant will disclose records and make witnesses available.”  It is anticipated by the Bureau that full disclosure would then be provided by the IGI recipient, and that such disclosure would not be used against that individual or entity unless found to be ineligible for immunity or found to violate the terms of the IGI.  The IGI can cover officers, directors, employees, and agents of an applicant, but they will no longer automatically qualify for the same immunity recommendation as the corporation if they fail to admit to knowledge or participation in the conduct, or fail to cooperate in the investigation. 
  • Disclosure: The applicant must provide the Bureau with “full, complete, frank and truthful disclosure of all non-privileged relevant information, evidence or records” that relate to the anti-competitive conduct.  Within 30 days after the grant of an IGI, the applicant must disclose its claims of privilege to the Bureau.  Following such disclosure, the Bureau will seek advice on whether the claims of privilege are valid.  In the event that the claims of privilege are not persuasive, independent counsel acting as a referee will be appointed to review the documents and determine the validity of the privilege claims.
  • Interviews: Interviews may be under oath, audio recorded, or videotaped.  Audio recording may also be used for proffers.

A number of criminal competition law matters were resolved in 2017 with results that suggest the Bureau was more successful with its investigations and the eventual Crown prosecutions than in previous years:

  • In Quebec, companies were fined in two separate bid rigging schemes.  One of the bid rigging schemes related to municipal contracts for sewer services that resulted in charges in 2011 and 2012 against a number of companies and individuals in respect of 37 calls for tender. Fines were also handed down in a bid rigging case relating to ventilation contracts for high rise residential construction projects in the Montreal area that led to charges in 2010 against companies and individuals.
  • Two Japanese car parts manufacturers pled guilty for their role in an international bid rigging conspiracy.  As part of their negotiated plea agreements, both manufacturers agreed to pay substantial fines.
  • A fine was paid by Irving Oil Limited following a guilty plea for retail price maintenance from conduct that predated amendments to the Competition Act that decriminalized price maintenance.  The charge related to price-fixing of gasoline pump prices in the Eastern Townships of Quebec.  The “Octane Investigation” into the scheme started in 2004 and ultimately resulted in charges against 54 individuals and entities.  It also spawned two Supreme Court of Canada decisions arising from a parallel class action proceeding.  In 2014, the SCC released a decision on the issue of disclosing wiretap surveillance in a civil proceeding that was obtained in a criminal investigation.  More recently in September 2017, the SCC released a decision giving the Bureau’s chief investigator the right to refuse examination in the civil proceeding, and the Attorney General of Canada the right to refuse to disclose all intercepted communications and documents in the investigation file. Neither the Attorney General nor the Bureau’s chief investigator was a party to the civil proceeding, and the SCC concluded that they could not be compelled to submit to discovery on the basis of Crown immunity from discovery.

Securities Law

This past year was the first full year of operation of the new whistleblower programs launched by the Ontario Securities Commission and the Quebec Autorité des Marchés Financiers.   It is not clear as of yet whether the programs have led to any significant enforcement action, or whether the AMF’s decision not to compensate whistleblowers will affect the success of its program in Quebec.  However, if the track record from the equivalent whistleblower program launched by the United Stated Securities and Exchanges Commission is any indicator, there is likely to be increased enforcement action in both provinces, and in particular Ontario where whistleblowers are compensated.  The SEC awarded close to $50 million in 2017 to 12 individuals who provided that organization with information that either led to an investigation or made a significant contribution to a successful enforcement action.  Similar to the program launched by the AMF, the Alberta Securities Commission announced in February 2017, as part of its three year strategic plan, that it is considering the implementation of a whistleblower program that will not financially compensate whistleblowers.

There were a number of notable regulatory enforcement actions and securities decisions in 2017:  

  • In December, the BCCA released its decision in R v Rashida Samji, in which it found that an individual can be criminally prosecuted and also be subject to regulatory proceedings that result in a substantial administrative monetary penalty (“AMP”) without triggering the rule against double jeopardy under s. 11(h) of the Charter of Rights and Freedoms.  The appellant had been charged criminally in that case with theft and fraud in respect of a Ponzi scheme that put $100 million in investor funds at risk.  She had also been the subject of regulatory proceedings before the B.C. Securities Commission in respect of the same Ponzi scheme. That proceeding ultimately found that she had committed fraud. In addition to a disgorgement order, the BCSC ordered that she pay a $33 million AMP. The appellant sought a stay of the parallel criminal proceeding on the basis that the AMP constituted a “true penal consequence” and that, as a result, it triggered the rule against double jeopardy.  The BCCA disagreed with the appellant and dismissed the appeal because (1) the regulatory considerations were different from the criminal sentencing principles; (2) the proceeds of the AMP were allocated by the BCSC for the benefit of third parties; (3) the stigma from the BCSC’s finding of fraud differed from the stigma associated with a criminal conviction; and (4) the personal effect of the substantial fine on the appellant was significant, but did not take it into the realm of being truly punitive.
  • Blockchain based cryptocurrencies continued to cause issues for securities regulators in 2017, and will likely raise enforcement problems for both regulators and law enforcement going forward.  PlexCoin is an example of a cryptocurrency that was the subject of aggressive enforcement activity, in both Quebec and the U.S.  It is alleged that PlexCoin was marketed as a cryptocurrency that would provide returns of more than 1,300% to investors in less than a month.  The initial coin offering (“ICO”) for PlexCoin raised about $15 million.  The SEC separately obtained an emergency asset freeze and the AMF obtained a number of orders against PlexCorps, PlexCoin, DL Innov Inc., Gestio inc. and Dominic Lacroix to halt the ICO.  The Superior Court of Quebec ultimately found Dominic Lacroix and DL Innov Inc. in contempt of the AMF orders and sentenced Lacroix to two months’ imprisonment and a fine of $10,000.  
  • In October 2017, the Ontario Court of Appeal heard an appeal of the Divisional Court decision in Finkelstein v Ontario Securities Commission, which is the latest hearing in the ongoing Bay Street insider trading and tipping saga.  It was the first time that the ONCA had the opportunity to interpret the application of the definition of a “person in a special relationship with the issuer” to successive tippees possessing material, non-public information about an issuer.  In particular, the ONCA was tasked with determining, among other things, when a tippee “ought reasonably to have known” that their tipper stands in a special relationship with an issuer.  The OSC hearing panel had applied a number of factors in drawing inferences about the state of the tippee’s knowledge with respect to the relationship between the tipper and the issuer or another person in a special relationship higher up in the tipping chain. The ONCA released its decision in January 2018, and Brown J.A. for the court found that the factors identified by the hearing panel were reasonable.
  • In July 2017, an OSC hearing panel released its decision in the high-profile Sino-Forest proceeding.  It found that the company and some of its senior management defrauded investors.  At one point, Sino-Forest was the most valuable forestry company listed on the TSX.  In 2011, a report was released by Muddy Waters, LLC that became known as the “Muddy Waters Report”, which alleged the company was a fraud and a Ponzi scheme.  After the release of the report, Sino-Forest’s share price plummeted and the company ultimately collapsed.  Following one of the longest and most complex proceedings in OSC history, the panel concluded that: (1) Sino-Forest and certain senior officers of the company engaged in deceitful or dishonest conduct in respect of the company’s asset ownership, revenue recognition, and a series of corporate transactions, in a manner that was fraudulent and contrary to the public interest; (2) Sino-Forest made statements that were misleading or untrue in a material respect; (3) certain senior officers permitted, authorized, and/or acquiesced in Sino-Forest’s making of the materially misleading or untrue statements; and (4) certain senior officers misled the OSC Staff during their investigation.  Oral submissions on costs and sanctions are scheduled to be heard in late March 2018.

Deferred Prosecution Agreements – coming to Canada?

The federal government closed its consultation in November 2017 into whether prosecutors should be permitted to enter into deferred prosecution agreements (“DPA”) with a corporate accused.  A DPA suspends the criminal prosecution for a period of time to allow the accused to comply with its terms.  If the accused complies with its obligations under the DPA, the charges will be withdrawn.  The DPA would include, among other things, the obligation to pay a financial penalty, cooperate with authorities, and admission of certain facts.  If DPAs are approved for use in Canada, it is expected that they would enhance the detection of corporate wrongdoing, and reduce the costs associated with investigating and prosecuting corporate crimes.  Furthermore, DPAs will provide certainty for an accused in resolving corporate wrongdoing since the DPA will clearly define what the accused will receive in return for cooperating, whereas currently cooperation is only a mitigating factor taken into consideration in sentencing.  On the flip side, it is possible that the use of DPAs could cause companies to view these agreements as a “cost of doing business” and not actually result in any deterrence.

Justice for Victims of Corrupt Foreign Officials Act

On October 18, 2017, the Justice for Victims of Corrupt Foreign Officials Act (the Sergei Magnitsky Law) received Royal Assent. This law will allow the federal Cabinet (through the Governor in Council) to make orders or regulations to restrict or prohibit activities of foreign nationals who are responsible for, or complicit in, extrajudicial killings, torture or other gross violations of internationally recognized human rights. The law, similar to the implementation of Canada’s economic sanctions, allows for the creation of lists of individuals or persons against whom the restrictions are imposed and provides for a broad range of prohibitions, such as travel bans, asset freezes, restrictions on dealings with property, and the provision of financial services, imposed on anyone subject to the law. Further, various financial institutions in Canada have an ongoing obligation to determine if they are in possession or control of property of listed persons and to make reports about such property on a monthly basis.

To date, Canada has imposed sanctions against 30 individuals from Russia, 19 individuals from Venezuela, and 3 individuals from South Sudan. The restrictions against the listed individuals include asset freezes and inadmissibility to Canada. The U.S. has an analogous law, the Global Magnitsky Act, but the lists under that legislation differ from those published in Canada.


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