CRA Can Examine Items Seized During Criminal Investigation Before Validity of Search Warrant Confirmed

By Anastasia Reklitis and Jenny P. Mboutsiadis

The Canada Revenue Agency (“CRA”) can examine and make copies of items seized by the Royal Canadian Mounted Police (“RCMP”) pursuant to search warrants issued during a criminal investigation without having to wait for a determination of whether the warrants were valid.  This was confirmed by the British Columbia Supreme Court in Canada Revenue Agency v. Royal Canadian Mounted Police, 2016 BCSC 2275.  The CRA has not appealed the decision.

In this case, the CRA applied to the court under subsection 490(15) of the Criminal Code, RSC, 1985, c. C-46, for access to items obtained by search warrants.  The search warrants had been issued based on the belief that those named in the warrants (“Named Persons”) had committed criminal offences, such as laundering proceeds of crime, possession of property obtained by crime, and importing and trafficking in a controlled substance.  The items seized included large amounts of cash, numerous documents and computers, and other electronic devices and media containing business, accounting, and tax records.

The CRA argued that it was permitted access because it is a person “who has an interest in what is detained”, thereby satisfying the applicable Criminal Code provision.  The Named Persons opposed the CRA’s application on numerous grounds.  The RCMP took no position.

The Named Persons’ first argument was that a determination that the seizure is lawful is a pre-condition to the CRA’s entitlement to access any materials.  The Named Persons had already commenced the process in the Provincial Court that could possibly lead to the quashing of some or all of the search warrants and argued that, therefore, the CRA’s application should be adjourned until the validity of the warrants is determined from that process.  The court rejected this argument and explained that the warrants were presumptively valid and the Named Persons have the burden to establish otherwise.  A mere challenge with vague possibilities was not enough to satisfy the court that the warrants were invalid.

The Named Persons’ second argument was that the CRA’s application should fail because it did not have an interest in the seized items.  The court found to the contrary:  the CRA did have an interest because the items could be relevant to various tax investigations in which it was involved, which were independent of the RCMP investigations.  In particular, the items were relevant to determining potential tax offences involving some or all of the Named Persons, including tax evasion and the filing of false tax returns.

The Named Persons’ third argument was that any order allowing the CRA access should contain specific restrictions relating to privacy, privileged material, and relevance.  The court refused to place any restrictions as it did not find it appropriate to limit the examination of the evidence.

The CRA’s application was allowed and access to the seized items was granted.  In doing so, the court stated that there is nothing inherently wrong with law enforcement officials cooperating and sharing legally-obtained information.  Preventing the CRA from accessing the RCMP gathered information would delay the CRA’s investigation, thereby prejudicing its effectiveness and the likelihood of charges arising from it.  The court’s view was that it is in the public interest that the RCMP and CRA investigations proceed concurrently as they concern offences arising from the same search warrants.

 

Features of Canada’s New DPA Scheme

The Canadian Government has announced that it will be moving forward, albeit slowly, with a Deferred Prosecution Agreement (DPA) system. The recent announcement from the Government of Canada came on March 27, 2018, in a “Backgrounder” under the heading “Remediation Agreements and orders to Address Corporate Crime.”

Canadian DPAs will be known as the Remediation Agreement Regime (“RAR”). The federal government’s long awaited move towards DPA’s have several specific but not unique features. First,  a RAR would be a voluntary agreement between a prosecutor and an organization accused of committing a criminal offence. A corporation cannot be force into. RARs would set out an end date and would need to be presented to a judge for review and approval.

Second, before approving the remediation agreement, the judge would need to be satisfied of the following:

  1. The agreement is in the public interest; and
  2. The terms of the agreement are fair, reasonable and proportionate.

Third, when these criteria are met, the judge would issue a judicial order approving the RAR. While an agreement is in force, any criminal prosecution for conduct that is covered by the agreement would be suspended. If the accused organization complied with terms and conditions set out in the RAR, the prosecutor would apply to a judge for an order of successful completion when the agreement expires.

The legislation is proposed to have the following terms and conditions: the corporation has accepted responsibility for, and stop, their alleged wrongdoing; it has agreed to pay a financial penalty; it has been disgorged of any benefit gained from the wrongdoing; it has enhanced its  compliance measures; and has made restitution to any victims, including overseas victims, as deemed appropriate in the circumstances.

Fourth, the criminal charges would then be stayed in Court at the request of the prosecutor, and no criminal trial or conviction would follow. The stated purposes of the RAR include the following:

“a. To denounce an organization’s wrongdoing and the harms that such wrongdoing has caused to victims or to the community;

b. To hold the organization accountable for the wrongdoing;

c. To require the organization to put measures in place to correct the problem and prevent similar problems in the future;

d. To reduce harm that a criminal conviction of an organization could have for employees, shareholders and other third parties who did not take part in the offence; and

e. To help repair harm done to victims or to the community, including through reparations and restitution.”

Fifth, however, if the accused did not comply with all of the RAR, the criminal charges would be revived and the accused could be prosecuted and potentially convicted. In other words, all bets are off and the corporation will be prosecuted to the fullest extent of the law.

Sixth and finally, the RAR program will come into effect 90 days after the Budge Implementation Act, is passed into law and given Royal Assent (yes, the Queen’s representative still have to approval all Government of Canada’s new laws. Strangely, the RAR legislation is already being considered by Parliament as part of the Budget approval process, internally and without public hearings.

Jail Term for Construction Superintendent Upheld by Court of Appeal

On January 20, 2018, the Court of Appeal for Ontario released its decision in the Appeal of Vadim Kazenelson (“Kazenelson”) both his conviction and sentence appeal.  Kazenelson was the Project Superintendent/Manager for the Metron Construction Incorporated (“Metron”) project in Toronto that went terribly wrong on December 24, 2009.  Tragically four workers died, and one was seriously injured, when two swing stage scaffolds broke apart, and five out of the six workers who were not attached to a lifeline that was anchored to the building, fell to the ground, over 100 feet below.  Kazenelson had been at the project at the time of the accident and allegedly aware of workers not using fall arrest lanyards at the time of the accident.

Kazenelson was prosecuted for five counts of criminal negligence under the Criminal Code Amendments, often referred to as the Bill C-45 or Westray Mine Disaster Amendments to the Criminal Code.  Kazenelson argued at trial that he was not guilty because he was not the direct supervisor of the crew, he had ensured that the workers had been properly trained and provided with fall arrest protective equipment, that he did raise the concern of workers not being provided with lanyards, when he was on site prior to the accident.

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The French system of law is changing through DPAs.

This week, White Collar Post features a guest post from Frédéric Ruppert(1) and Maria Lancri(2)

One year after the enactment of the Sapin II Law, that set up the French Anticorruption Agency “AFA” and authorized Deferred Prosecution Agreements “DPA” à la française, the first DPA was approved by the Paris Tribunal.

Although the investigation started years before the Sapin II Law enactment and the matter involved money–laundering of tax evasion proceeds rather than corruption, this French DPA is being watched with attention as a guidance for future settlements.

It was brought together by i) the French National Financial Prosecutor “NFP,” who contributed to the Sapin II law and the DPA, with a clear understanding that business requires a dedicated and efficient tool against white–collar crimes, and ii) the negotiations with the defendant’s lawyers, after the Sapin II Law enactment.

The DPA statement of facts state that HSBC group and particularly its Swiss affiliate HSBC Private Bank (Suisse) SA “PBRS,” sent its salespeople to France to prospect new French clients or offer new products to existing clients. Most, also French tax residents, did not declare their Swiss accounts, contrary to French legal requirements. PBRS thus assisted them in illegally concealing these assets from the French tax administration. A judicial investigation was then opened; PBRS was indicted for unlawful financial and banking solicitation and aggravated money–laundering of tax evasion proceeds.

As PBRS admitted to the facts and accepted their legal characterization, which was necessary because an investigation was opened, the NFP proposed a DPA that the Tribunal approved.

Because the Justice Ministry has not yet issued any guidelines, the HSBC/PBRS DPA is valuable in understanding how authorities determined the fine paid by PBRS. It describes i) PBRS’ activity in France, ii) the number of its employees, iii) the value of the undeclared assets managed for its French clients, iv) its profits, and v) its profits derived from assets managed for French clients. From this, the authorities calculated a €86,400,000 fine for disgorgement of profits.

The compliance program of HSBC group at the time, is described by the DPA as less developed than today. It also notes that its subsidiaries, including PBRS, were allowed to conduct their business quite independently. HSBC group has since overhauled its compliance program, increased its control over its subsidiaries, withdrawn from certain markets and implemented strict financial crime, regulatory and compliance standards. At PBRS’ level, most managers were replaced, a transparency policy was implemented, some services were no longer offered and numerous clients were dropped.

Until the Sapin II Law enactment, PBRS was uncooperative, as the law did not permit settlements in such criminal matters. However, afterwards, the NFP recognized PBRS’ cooperation with authorities.

Given the seriousness of the matter, the DPA imposed an additional €71,575,422 fine, bringing PBRS’s total to the maximum available at law.

PBRS also had to indemnify the victims per the Sapin II Law, including the French Government, which was awarded damages for its €142,024,578 tax loss.

Altogether, PBRS paid €300,000,000, which HSBC Holdings guaranteed.

The advantage of DPA procedures over regular procedures is that defendants are not prohibited from participating in public procurement processes.

Incidentally, this is the major difference with World Bank procedures. It debars companies engaged in corruption or collusion from participating in any World Bank financed public procurement market. This was the case for the French company Oberthur Technologies SA., debarred for 2.5 years. It was also debarred from procurements issued by other development banks as part of the cross–debarment procedure.

 

(1) Frédéric Ruppert, Avocat à la Cour, Attorney at Law, California State Bar, Frederic’s practice is mostly focused on M&A and Private Equity and also extends to other corporate and business matters and Corporate Governance. https://www.linkedin.com/in/frederic-ruppert-2218767/ Email:  ruppert@frlaw-avocats.com

(2) Maria Lancri, Avocat à la Cour, has had a career in both private practice and in-house. She is currently of Counsel at GGV, a Franco-German law firm and specializes in Compliance matters and Data Protection and also advises companies in France on how to set up their Compliance programs: http://gg-v.fr/equipes/maria-lancri/ Email: lancri@gg-v.net

Canada takes a further step to combat international human rights violations and corruption

The Justice for Victims of Corrupt Foreign Officials Act

Overview

On October 4, 2017, the House of Commons has unanimously voted to pass Bill S-226, the Justice for Victims of Corrupt Foreign Officials Act (the “Act”),[1] that is commonly known as the Magnitsky law.[2]  The law is named after Sergey Magnitsky, a Moscow lawyer who uncovered a large tax fraud and was detained and died in a Moscow prison on November 16, 2009.  Bill S-226 received Royal Assent on October 18, 2017.

The Act imposes various sanctions, including freezing of assets and travel bans, on foreign nationals responsible for gross violation of internationally recognized human rights and significant corruption.  Among other things, the Act permits issuing orders against anyone in or outside Canada who are dealing, directly or indirectly, with the property or financial affairs of the foreign national that is the subject of an order or regulation under the Act.

On November 3, 2017, regulations under the Act were enforced combating the activities of 52 foreign nationals who are believed to have been engaged in gross human rights violations or significant corruption activities.  The majority of the named individuals are the nationals of the Russian Federation, in addition to the nationals of Venezuela and South Sudan.  The Russian government has not welcomed the law.  It retaliated with its own list banning the entry of various Canadians into Russia.  As part of the retaliatory measures, Russia’s officials stated that the government viewed the law as yet another attempt to exert pressure on Russia.

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