Author: Norm Keith

Norm Keith

About Norm Keith

Mr. Keith is a senior partner and member of the White Collar Defence practice group in the Toronto office of Fasken Martineau and the author of 12 books, including Insider Trading in Canada (Lexis Nexis, 2012). Contact him at +1 416 868 7824 or nkeith@fasken.com.

Ontario’s OSC Following SEC in Whistleblower Bounties

The question of internal compliance is always a challenge when regulators offer rewards to whistleblowers with cash awards. Why report internally when the whistleblower can get paid if they report externally? Internal compliance officers are paid to establish, train and enforcement legislative compliance policies internally.  However, internal compliance will not usually result in a reward for good behaviour or for internal whistleblowing. Hence the inherent problem with rewarding the whistleblower.

Since Dodd Frank, the Securities and Exchange Commission (“SEC”) has been giving monetary rewards or bounties for credible tips from whistleblowers that lead to enforcement actions. For example, The SEC recently awarded more than $4.5 million to a whistleblower whose tip triggered the company to launch an internal investigation and report the whistleblower’s allegations to the SEC and another government agency.

The Ontario Securities Commission (“OSC”) adopted a whistleblower reward program in 2016, and has received hundreds of “tips” since then. Earlier this year, the OSC announced that it has paid $7.5 million in rewards or bounties for tips leading to findings of wrongdoing under securities law. The OSC tipsters apparently provided high quality, time, specific and credible information that helped advance enforcement actions resulting in monetary payments to the OSC.

What is troubling, from a compliance perspective, is that the reward is based on the finding of wrongdoing and enforcement. No rewards are given to individuals from reporting internally and preventing a regulatory or criminal contravention.  The bounty reward programs, both in the US and Ontario, only reward individuals when they help catch a corporate or individual after the contravention.

By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that could reveal their identity. The same applies with the OSC program.

One big difference between the SEC and the OSC programs, is that the penalties in the US are much larger than those in Canada. For example, in January 2017, Zimmer Biomet paid $30.5 million to resolve DOJ and SEC investigations into the company’s “repeat” violations of the Foreign Corrupt Practices Act. The DOJ said then thatBiomet “knowingly and willfully continued to use a third-party distributor in Brazil known to have paid bribes to government officials on Biomet’s behalf.” Those kinds of fines have not been seen by our courts or the OSC in their Canadian enforcement activities.

There is also a $5 million maximum on the OSC whistleblower counties program, suggesting that smaller rewards available in Ontario will be enough to achieve the same result and deterrent effect. The SEC has no such restrictions. Is this cap on the size of the bounty necessary, sufficient, and self-defeating?

Since Ontario is the only provincial securities regulator offering bounties, the other question of concern is whether  this is deterrent to business investment and listing on the Toronto Stock Exchange, for small capital firms, that may have the choice to register elsewhere in Canada?

Anti-Money Laundering: a Comparative Review of Legislative Development

The historical background of money laundering legislation began with the drug trade.  Initial AML efforts were introduced primarily to curb the ability of drug cartels to use the proceeds of their crimes to process money from illegal drug activity and build larger drug businesses. The key historical turning point of AML legislation was the Vienna Convention of 1988 (“Vienna Convention”), where 43 countries agreed on an approach to address money laundering rather than solely focusing on the drugs trafficking and related monetary issues. Shortly thereafter, the Financial Action Task Force (“FATF”) of the G-7 issued a report specifically addressing money laundering, citing 40 recommendations which needed to be implemented by the international community to effectively address this issue. These recommendations have driven the structure of the AML regimes of Canada the U.S. and the U.K. to date.

The current Canadian AML legislative system was originally designed to address drug offences but underwent two major changes. The initial change occurred with the adoption of Part XII.2 into the Criminal Code (“Code”), which specifically criminalized laundering and possessing the proceeds of crime. This Part also granted powers to law enforcement to detain, search, and seize property from anyone thought to be in possession of the proceeds of crime, expanding the scope of enforcement powers available in Canadian law against money laundering. The second major change occurred in the early 2000’s with the adoption of the current Proceeds of Crime (Money Laundering) and Terrorist Financing Act.[1]  This law is Canada’s current AML regime and implements various tools such as reporting obligations, recordkeeping obligations, additional offences, and administrative monetary penalties to strengthen enforcement against money laundering. Furthermore, this legislation also created Financial Transactions and Reports Analysis Centre (“FINTRAC”), Canada’s special intelligence unit, which has responsibility for reviewing reports and conducting preliminary investigations into money laundering investigations.

Currently, the focus of money laundering prevention efforts has centered on increasing international cooperation and addressing terrorist financing. The FATF and World Bank have constantly advocated the need for international unity in addressing organized crime and money laundering by terrorist organizations as a necessary precursor to making any significant change in this global issue. Although there is some harmonization amongst countries such as Canada, the U.S. and the U.K., there are various other countries, such as the Cayman Islands, whose legislative system are not harmonized.

It has been 28 years since the FATF’s initial 40 recommendation report, and as can be seen from this review of the Canadian legislation, the international harmonization in money laundering protocol sought by the report is starting to take form.  Although the AML regimes of all these countries do have various nuanced differences, the structural similarities have made cooperation between agencies such as FINTRAC, the Financial Crimes Enforcement Network (“FinCEN”)[2], and the Serious Organised Crime Agency (“SOCA”)[3] both more feasible and more seamless.  Although money laundering is still a serious problem that totals in the billions of dollars worldwide, the integration of regulators, enforcement regimes and standardization of detection protocols has made it much more challenging for criminals and terrorists to launder the proceeds of their criminal activity.

The new reporting-based approach adopted by Canada, the U.S., and the U.K. since the early 2000’s has marked a significant and effective shift in AML strategy from a reactionary approach to a more proactive one.  By creating regulators, thresholds, and reporting systems for transactions at a higher risk of being related to laundering the proceeds of crime, these countries are able to attack money launderers in the early placement stage when they are most likely to be caught, as tracing proceeds during the layering and integration stages consumes more resources and time.  In addition to this reporting-based shift, the criminalization of more activities related to money laundering, such as tipping, possessing the proceeds of crime, and money laundering itself, and the stiff penalties associated with these offences has helped to deter this behaviour.

The key next steps in the fight against money laundering will revolve around both improving the current AML regimes of these countries, and gaining more buy-in from other countries to improve and somewhat harmonize their money laundering policies.  Due to the nimbleness of criminal organizations as compared with slower moving government processes, the legislation required to address money laundering is often a step behind the techniques developed by money launderers.  Larger economies such as Canada, the U.S., and the U.K. will have to continue to review and update their AML policies at a faster pace to keep up with criminal organizations which are constantly evolving.  Furthermore, these countries will have to engage in diplomatic efforts to bring countries without sound AML legislation on board, which will be no easy task.  The inherent focus on confidentiality in offshore jurisdictions is not something many of these offshore jurisdictions will want to forego, largely due to the positive impact these regimes have on their national economies.  However, since money laundering removes funds that could otherwise be legitimately spent to grow the economy, leaders in the field of AML will have to advance this message, but will also have to be careful to not infringe the national sovereignty of these other jurisdictions.  Although the challenge to stop money laundering is still an uphill journey, the vast improvements made to the AML regimes of Canada, the U.S., and the U.K. since the mid-20th century may make the climb a little less steep.

[1] Proceeds of Crime (Money Laundering) and Terrorist Financing Act, SC 2000, c 17 (the “PCMLTFA”).

[2] The Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Department of Treasury and the American equivalent to FINTRAC.

[3] The Serious Organised Crime Agency (SOCA) is the United Kingdom equivalent to FINTRAC.

Safety violation results in contractor getting 18 months in jail

On Sept. 18, Sylvain Fournier, a Quebec based contractor, was sentenced to 18 months in prison followed by two years of probation.[1] Fournier had been found guilty of manslaughter under the Criminal Code relating to a workers death by means of a breach of Quebec safety code. The case is the first of its kind in Canada and raises serious concerns about the use of criminal law to enforce provincial regulatory safety standards.

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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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