Vigilance urged to avoid fraud

Fraud, corruption or money laundering may not have increased in volume yet, but it is looming on the horizon and the opportunities are increasing in the pandemic, say lawyers

In late September, a coalition of organizations urged the federal government to crack down on financial crime after Canadian banks, shell companies and individuals were identified in a global investigation into suspicious financial activity.

Between 2000 and 2017, the coalition, comprising Canadians for Tax Fairness, Transparency International Canada and Publish What You Pay Canada, said in a news release that suspicious activity reports referenced individuals from more than 170 jurisdictions and Canada ranked seventh among countries in which individuals were flagged for suspicious financial activity.

And in difficult financial times, such as during the current COVID-19 pandemic, “the incidence of fraud seems to increase because people will sometimes turn to desperate measures to address the financial stress, whether it’s individual or corporate,” says Munaf Mohamed, a partner and national co-chairman of Bennett Jones LLP’s fraud law practice, from his Calgary office.

Whether lawyers are seeing much fraud, corruption or mone -laundering now, it is looming on the horizon.

“If [corruption] does happen today, we’ll see it the next year or in two years,” says François Fontaine, senior partner at Norton Rose Fulbright LLP in Montreal. “At the moment, the risk is around public contracts that are given with much less oversight than they should have.

“The red flags are there,” he adds. “In that regard, I would say the occasions for fraud, money laundering and corruption are certainly increasing. When the government is spending money with limited tenders, the occasions are there.”

Particularly in Quebec, says Fontaine, MPs are complaining that — owing to the pandemic and increased public spending — the government is in a hurry to execute contacts and keep the economy afloat, but all the spending that’s being done is with less control. “It’s opening the door for people to get contracts through the back door. It’s certainly an occasion for potential corruption.”

There is also a risk that, with limited enforcement resources, what enforcement is done may be focused on more pressing areas, such as accounting fraud, including pandemic financial aid, says Graeme Hamilton, a partner at Borden Ladner Gervais LLP in Toronto.

“We’re going to see accounting fraud and related issues percolate that didn’t arise out of the pandemic but were dilution ratios. They were precipitated by the pandemic, but the associated [economic] contraction brought them to the fore.”

Economic contractions can expose that a company’s financial position isn’t as robust as it may have been portrayed, says Hamilton, and out of that process an underlying fraud may be discovered. As well, the number of government financial relief programs available, all set up quickly, have seen some organizations taking advantage of the available aid when they weren’t necessarily entitled to it.

“I think you’re going to start to see that investigated as we move forward,” he adds.

Mohamed sees Canada as having a poor record of successfully prosecuting financial crime, such as money laundering and kiting and the U.S. as being more active in enforcements. As well, Canada’s civil system is better equipped, with its extraordinary remedies, to regain money than is the criminal system, he says. Getting worldwide freezing orders and third-party disclosure orders, “assuming you can establish the proper foundation of evidence, allows you to establish an investigation of a private party rather than leaving it in the hands of the criminal system or authorities.

“If you are a large company with resources, you can use the civil system to pursue fraudulent claims and repatriate money and seek the extraordinary orders you can get here and in other jurisdictions. The case is different if you are an individual with limited means; you’re not going to have that ability, and you probably are going to have to go through the criminal justice system. And I guess the question is whether the criminal justice system has the resources to pursue what I’ll call extra-jurisdictional fraud claims.”

Managing corporate risk
Over the past six months, Mohamed has seen a heightened interest in corporations looking more closely at their affairs and conducting investigations, in part because regulators are being more vigilant about fraud and the like, he says.

And more companies are being increasingly vigilant in compliance and risk, he says, including monitoring their controls and whistleblower complaints. “A lot of money is flying around now from the government,” he says, and more vigilance is required for the executive who pays a bribe to save the company from dire straits, as well as employees filing false invoices and suppliers cutting margins; “all the things you’d expect when companies are in trouble.”

Because there has been a lot of government relief coming out in very short order and policy changes regarding alcohol and cannabis sales, for example, companies may find themselves in violation of lobbying laws, says Hamilton.

“If they haven’t taken steps to comply with provincial lobbying laws before interacting with the government, corporations are going to want to influence that involvement to their advantage and risk that they could find themselves in violation of the laws that pertain to lobbying,” he says, including anti-corruption laws concerning gifts and influence peddling.

Another heightened risk is that of material misrepresentation. If a company finds that there’s been a material misstatement that was used to obtain financing through the pandemic, for example, and has obtained that credit facility or other financing, a continuing offence could be found to have been committed by the company to the extent that that misrepresentation hasn’t been corrected, Hamilton says. If the board of directors or senior officers are made aware of that misrepresentation, “there really is a duty on them both to avoid corporate liability as well as personal liability, to take positive steps to correct that, to investigate the issue.”

Corporate controls to detect wrongdoing include compliance programs among agents, third-party suppliers and contractors, and sophisticated companies will have programs to detect money laundering and fraud, says Fontaine.

“If you get caught, maybe the only way you will defend yourself . . . is to show you had the mechanism, the controls in place [that are] compliant with the legislation.” This is especially important in starting business in a new overseas market where the risk of corruption may be higher. Ensuring that controls are in place will minimize the risk of employees being successfully solicited for bribes or paying them, he says.

And with work now being conducted largely remotely, the risk of impersonation and fraud is greater, says Hamilton. “How does a work-at-home environment impact the security of your information?” Companies may also fall prey to being caught up in spoofing schemes in paying vendors.

Now more than ever, corporations must remain vigilant, says Fontaine. “With the pandemic, what is necessary is to adapt existing controls as a corporation to the new reality. . . . You work differently when you work remotely. As a company, what are the opportunities for your people to bypass controls? Are the controls adapted to that reality?”

The remote work environment brought into play by the pandemic will also change white collar crime and regulatory investigations, says Fontaine, who last year travelled to Europe 18 times to conduct investigations but this year has not ventured anywhere since February. Now, he uses online meeting platforms, “but you don’t interview the same way through a screen than when you meet face to face,’ he says.

“It will be interesting to see how companies will deal with ‘sensitive meetings’ and internal investigations related to allegations of wrongdoing being corruption, fraud or money laundering after the pandemic and when travelling will again be possible,” adds Fontaine. “Will companies continue to discuss sensitive issues through a screen and on the various platforms [such as Zoom and Microsoft Teams] because it’s efficient and allows significant costs savings or will they return to in-person meetings?”

Fontaine predicts that many meetings will now be held virtually instead of in person, which raises the issue of confidentiality.

“We can assume that if the investigative authorities such as the RCMP and Department of Justice can intercept a telephone conversation, they will also be able to intercept internet meetings conducted virtually and invite themselves in the meeting room much easier than in the past. That will be interesting to follow in the after-pandemic.”

In the end, though, “those challenges companies are facing have been existing since long ago and will continue to exist,” he says. “You consistently have to adapt your program, your control. The pandemic is an example, but the world is changing very quickly . . . year after year, and you cannot say, ‘I have a program in place for five years and it’s still up to date.’ You have to make sure that you maintain those controls, those programs, constantly.

“You will have to face your new realities,” adds Fontaine. “When there’s a change in technology, you will have a new reality for all sorts of reasons. The pandemic is just one thing.”