Category Archives: !Topics

Anti-Money Laundering & Terrorist Financing, Capital Markets Fraud & Insider Trading

Panama Papers: CRA getting tougher on tax evasion

We are beginning to see the legal enforcement fallout from the now infamous Panama Papers.  Canada Revenue Agency’s (CRA) concerted efforts to find undeclared offshore money and assets is moving into full gear. In addition to pursuing typical civil audits, the CRA is now executing search warrants and launching criminal investigations for tax evasion.

The CRA is actively gathering information from domestic and international sources to identify and charge offenders criminally. Since 2015, the Canadian government has required domestic financial institutions to report to the CRA all international electronic fund transfers of $10,000 or more.  In addition, as of March 2016 the CRA has analyzed over 41,000 transactions worth over $12 billion dollars, involving four jurisdictions and particular financial institutions of concern, and has initiated risk assessments on 1,300 individuals named in the Panama Papers. This has resulted in approximately 122 CRA audits to date and counting. However, it is not just taxpayers who are subject to the CRA’s scrutiny and who may be criminally charged. The CRA is also investigating the enablers and advisors, including the lawyers and accountants, who facilitated the hiding of taxpayer money and assets offshore.

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Analysis, Anti-Corruption & Bribery

ISO 37001: The New Anti-Corruption International Standard

The International Organization for Standardization (ISO) has recently entered the fray by establishing an ISO certification standard 37001 specifically addressing anti-bribery in corporations by providing a structure for organizations to assist them in the implementation or management of anti-bribery managements systems.  So what is ISO 37001?  Simply put, it is an international standard for anti-bribery management systems.  The beauty of ISO 37001 is the global acceptance of the standard for anti-corruption compliance.

Obviously an anti-bribery system is to prevent bribes from being given or offered by corporate individuals representing business interests of the organization.  As with all ISO certification standards there are specific elements that must be met by the organization in order to be certified.  The system is set up that there is a consistent review of the system in order to ensure compliance and continual improvement.

While national laws may differ regarding anti-corruption compliance, the idea, as with any standard, is to provide a common ground where all global branches of an organization, no matter the location, have the same basis for compliance.  Keep in mind that ISO 37001 only addresses bribery.  Other white collar compliance issues such as fraud, ant-trust offences and other types of corrupt practices activities are not within the scope of this standard.

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Analysis, Capital Markets Fraud & Insider Trading, United States

Inside Baseball: Former Baseball Star Convicted of Insider Trading

The phrase “inside baseball” took on new meaning for a former baseball star, Doug DeCines, who was recently convicted on insider trading and securities fraud charges.  Inside baseball is a term that usually refers to a detail-oriented approach to any subject, which requires a specific knowledge about what is being discussed, with nuances that are not easily understood by outsiders.  This term became reality for DeCinces when he was convicted on Friday, May 12, 2017 of illegal insider trading for a stock buy that earned him more than $1 million.

DeCines was no stranger to white collar crime allegations. On August 4, 2011, DeCinces, along with three others, was charged with securities fraud by the Securities and Exchange Commission (SEC).  The SEC alleged that DeCinces and his associates made more than $1.7 million in illegal profits when Abbott Park, Illinois-based Abbott Laboratories Inc. announced its plan to purchase Advanced Medical Optics Inc. through a tender offer. Without admitting or denying the allegations, DeCinces agreed to pay $2.5 million to settle the SEC’s charges.

Then in November 2012, DeCinces received a criminal indictment on insider trading in a related matter and was charged with securities fraud and money laundering.  Evidence at trial was that DeCinces was tipped off in 2009 that a Santa Ana-based medical device firm, Advanced Medical Optics, was going to be sold. The information came from the company CEO, James Mazzo, who was DeCinces’ neighbor in Laguna Beach, California, prosecutors argued. DeCinces bought more than 90,000 shares in the company days before Abbott Laboratories bought the firm, and he sold the shares for a profit of about $1.3 million, prosecutors said.[1]  On May 12, 2017, after a nearly two-month trial, a federal court jury in Santa Ana, California found him guilty on 13 charges.[2]

DeCinces, who is now 66 years old, will remain free on bail until sentenced. A hearing date was not immediately set for sentencing.  At the time of the merger, Advanced Medical Optics had seen its stock price plunge from more than $30 to under $10 in the wake of the 2008 Wall Street crash. It more than doubled after the merger was announced.

Canadian insider trading laws have not been as aggressively enforced as those in the U.S. The epic failure of the Ontario Securities Commission to secure a conviction in the prosecution of John Felderhof arising from the Bre-X Minerals scandals has now gained notoriety in the Hollywood movie Gold.[3]  There has only been one prosecution for insider trading under the Criminal Code, resulting in a guilty plea and a 39 month jail term for Stanko Grmovsek.[4]  Canada’s team, the Toronto Blue Jays major league baseball franchise, have been largely scandal free and is celebrating their 40th season in Toronto.

[1] http://www.nydailynews.com/newswires/sports/ex-baseball-star-doug-decinces-guilty-insider-trading-article-1.3160385

[2] Hannah Fry, Former Angels player Doug DeCinces found guilty of insider trading, Los Angeles Times (May 12, 2017). Retrieved on May 13, 2017.

[3] https://en.wikipedia.org/wiki/Gold_(2016_film)

[4] See, Insider Trading in Canada, 2nd Edition, 2017, Lexis Nexis, N. Keith, pp. 88-94

Analysis, Anti-Corruption & Bribery

Corruption Prosecution Collapses After Wiretap Evidence Excluded

The high-profile corruption prosecution of two executives and the alleged intermediary to a foreign government has ended dramatically after a judge excluded the wiretap evidence collected by the RCMP. The defendants – Kevin Wallace & Ramesh Shah, both former Vice-Presidents at SNC-Lavalin, and Zulfiquar Bhuiyan, a dual Bangladeshi-Canadian citizen – were charged under the Corruption of Foreign Public Officials Act for bribes allegedly paid by SNC-Lavalin to secure a contract to supervise construction in Bangladesh.

The construction project was to build a multipurpose bridge connecting the southwestern region to the rest of Bangladesh. [1]  It was intended to stimulate economic growth by allowing transport of passengers, freight, natural gas, telecommunications and electricity.[2]  The project was forecast to cost approximately $2.9 billion and was funded, in part, by a $1.2 billion credit from the World Bank.

The Canadian investigation started after a World Bank investigator provided information obtained from four tipsters to the RCMP.  The tipsters alleged SNC-Lavalin was in the process of bribing Bangladeshi officials to secure the contract to supervise construction.  The RCMP never met any of the tipsters, but spoke with one by telephone.  The information provided by three of the four tipsters was obtained from other sources, but the RCMP never spoke with the tipsters’ other sources where identified.  The RCMP used information from the tipsters to obtain authorization to wiretap the private communications of the three defendants.  The information gathered on the wiretap led to the charges being laid.

Intending to challenge the wiretaps, the defence applied for a third party production order to compel senior investigators of the World Bank to appear before a Canadian court and produce documents.  The trial judge granted the applications.  The decision was appealed all the way to the Supreme Court of Canada.[3]   The Court overturned the trial judge’s decision.  The Court held that the World Bank did not waive its immunity by voluntarily providing information to Canadian law enforcement officials accordingly, its documents were immune from production.  Further, the Court found the documents requested were not relevant to the challenge of the wiretaps.

The defence subsequently brought a successful application to exclude the wiretap evidence.  Justice Nordheimer found that the two preconditions for a wiretap – (i) reasonable and probable grounds to believe an offence is or has been committed and (ii) investigative necessity – were not met and the wiretap should never have been granted.  On the first criterion, Justice Nordheimer noted that the RCMP relied almost entirely on information provided by the tipsters.  In his view, that information was not sufficient to provide reasonable and probable grounds because it was not compelling, credible or corroborated.  He was particularly critical of the reliability of the information.  He wrote:

The fact that a particular investigation may be difficult, does not lower the standard that must be met in order to obtain a [wiretap] authorization. Reduced to its essentials, the information provided in the ITO was nothing more than speculation, gossip, and rumour. Nothing that could fairly be referred to as direct factual evidence, to support the rumour and speculation, was provided or investigated. The information provided by the tipsters was hearsay (or worse) added to other hearsay.[4]

On the second criterion for a wiretap, Justice Nordheimer found that the RCMP failed to establish there were no other reasonable ways to investigate the allegations.

Justice Nordheimer concluded that the wiretap should not have been issued, and the evidence gathered by wiretap violated the defendants’ Charter rights to be free of unreasonable search.  Accordingly, he excluded all of the private communications intercepted from the evidence at trial. The Crown admitted that it had no reasonable prospect of conviction without the wiretap evidence.  The prosecutor decided not to call any evidence, and all three defendants were acquitted.

This was certainly not the end that Canadian prosecutors envisioned to a case the World Bank described as “a high-level corruption conspiracy among Bangladeshi government officials, SNC-Lavalin executives, and private individuals” that was proven by “credible evidence corroborated by a variety of sources.”[5]  The collapse of the Canadian case was caused, in large part, by deficiencies in the RCMP’s preliminary investigation.  Investigators appear to have taken insufficient steps to vet tipster information before seeking authorization for wiretaps.  This failure rendered the wiretap evidence inadmissible.  This case underscores the importance of the preliminary stages of the investigation and highlights opportunities for defence counsel seeking to exclude evidence obtained by wiretaps authorized primarily on the basis of tipster information.

[1] World Bank “Bangladesh Padma Multipurpose Bridge Project”, online: http://projects.worldbank.org/P111017/bangladesh-padma-multipurpose-bridge-project?lang=en

[2] Ibid.

[3] World Bank Group v. Wallace, 2016 SCC 15

[4] R. v. Wallace. 2017 ONSC 132 at para 71

[5] World Bank, “World Bank Statement on Padman Bridge” (29 June 2012) online: http://www.worldbank.org/en/news/press-release/2012/06/29/world-bank-statement-padma-bridge

Analysis, Anti-Corruption & Bribery, International Trends in White Collar Enforcement, United States

President Trump and Congress Water Down Anti-Corruption Rules for U.S. Mining Companies

On February 14, 2017, President Trump signed into law a joint resolution of Congress to repeal a critical anti-corruption rule for oil, gas and mining companies. The law was introduced by the House on January 30, 2017. It quickly moved to the Senate, where it was passed with the support of the Republicans and opposition of the Democrats.

The rule is referred to as the “Cardin-Lugar regulations” and was enacted by the U.S. Securities and Exchange Commission, in accordance with the Cardin-Lugar amendment of 2010.  The amendment, prompted by the 2008 financial crisis and high prevalence of corruption in developing countries, directed the Securities and Exchange Commission to issue a rule requiring oil, gas and mining companies listed on the U.S. stock exchange to disclose how much they paid to hosting foreign governments (above a certain threshold).  The purpose of this amendment was to curb bribery and otherwise illicit payments made to governments in return for specific natural resource extraction projects.

The rule itself took a decade to finalize, and, up until the U.S. government’s recent decision to overturn it, was set to take effect next year. As the rule stood, it would require U.S. listed mining companies to file an annual report with the Securities and Exchange Commission, outlining the type and total amount of payments made to foreign governments (and the U.S. federal government) with respect to extractive projects. With the decision to repeal the Commission’s rule, there is therefore no indication that U.S.-listed companies will be subject to a reporting regime in the near future. That is, until the Securities and Exchange Commission creates a new rule. While the Cardin-Lugar regulations have been overturned, the Cardin-Lugar amendment has not been. This means that U.S.-listed companies will likely still be subject to reporting requirements at some point in time, as the Cardin-Lugar amendment requires the Securities and Exchange Commission to issue disclosure rules on extractive companies. However when this rule will be enacted, is yet to be determined. Given the length of time associated with enacting the original rule, it is unlikely that a new reporting regime will be established any time soon. In the meantime, U.S.-listed companies will be required to continue to track their payments, pursuant to the U.S. Foreign Corrupt Practices Act , however, they will not be required to make this information public.

It is unlikely that other countries who have adopted legislation consistent with the Cardin-Lugar regulations will follow the U.S. government’s new direction in this field. The regulations have received widespread support from the world’s major extractive companies, and many companies have a reporting regime. It has led to the creation of a global standard of transparency in the extractive industry, with numerous countries including Canada, the UK and the EU, enacting similar legislation to help combat corruption and to increase accountability in corporate governance.

Canada continues to be one of the countries supporting transparency requirements in the extractive industry. The Extractive Sector Transparency Measures Act  for example came into force in June 2015 and contains broad reporting obligations for oil, gas and mining companies. The reporting obligations go even further than the Cardin-Lugar provision, to include not only entities included on Canadian stock exchanges, but also certain private companies.

A concern for Canadian and foreign companies who will maintain their reporting regimes is whether the repeal of the Cardin-Lugar regulations will place U.S.-listed companies operating in mining extraction areas at an advantage compared to companies subject to rigorous transparency requirements. Particularly for projects in developing countries such as Africa, where there is a problem with corruption and where succumbing to bribery could lead to the award of mining rights and subsequent contracts. While the Cardin-Lugar rule would not have ended corruption, it was expected to put pressure on those giving bribes and those receiving them, as they would be aware that they would have to report any payments made to government. With the repeal, there is the possibility that U.S.-listed companies could feel more inclined to engage with corrupt governments and be under less pressure to decline a bribe, which could put them ahead of competitors from Canada, the UK, the EU and elsewhere. Whether or not this will in fact cause such a shift in the thinking and conduct of U.S.-listed companies during their dealings with foreign governments is of course undetermined. However, there remains a concern for mining companies subject to these types of reporting regulations, when operating and competing against American companies in these areas.

Mining companies listed on both U.S. and foreign exchanges will still be subject to transparency requirements. While the U.S. may not have reporting requirements, U.S.-listed companies operating in Canada, UK and EU will still be required to comply with applicable transparency legislation. Therefore, if a company has reason to believe and is concerned that an American competitor is committing bribery or corruption, it should consider further investigation. The suspect company may be subject to other transparency requirements and anti-corruption legislation.

In conclusion, although the repeal of the Cardin-Lugar regulations signals that Canadian, UK and EU companies will have tougher reporting guidelines compared to their US neighbours, the playing field may have just become more complex, rather than uneven.