White Collar Crime Risks Facing Canadian Businesses

White Collar Crime Risks Facing Canadian
Businesses

May 26, 2015
Panellists: Andrew I. Nathanson     Patrick F.D. McCann   Gavin Cameron
            +1 604 631 4908         +1 613 696 6906       +1 604 631 4756
            anathanson@fasken.com   pmccann@fasken.com    gcameron@fasken.com

White Collar Crime Can’t Happen to Me,
    Can It?

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White Collar Crime Can’t Happen to Me,
    Can It? (cont’d.)
    • From NYT article:

    G.M.’s eagerness to resolve the investigation — a strategy that sets it apart
    from Toyota, which fought prosecutors — is expected to earn it so-called
    cooperation credit, one of the people said. That credit could translate into a
    somewhat smaller penalty than if G.M. had declined to cooperate.

    Former G.M. employees, some of whom were dismissed last year, are under
    investigation as well and could face criminal charges. Prosecutors and G.M. are
    also still negotiating what misconduct the company would admit to.

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Introduction

    • White collar crime:
      • Poses significant and under-recognised risks to businesses
      • Carries reputational consequences often out of proportion to
        financial loss
      • Can give rise to individual and organisational criminal liability

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Introduction (cont’d.)

    • This presentation will:
      • Introduce the subject of white collar crime
      • Describe important features of white collar criminal
        investigations and prosecutions
      • Offer:
       • Suggestions for prevention
       • Strategies for responding to white collar criminal investigations
       • Techniques to minimize the negative impacts of white collar crime
         on your organization

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White Collar Crime

    • Wall Street 2: Money Never Sleeps

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Not White Collar Crime

    • Horrible Bosses

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What is White Collar Crime?

    • “Lying, cheating and stealing”
      • Term coined in the 1930’s by Edwin Sutherland, a
        sociologist, who defined it as “crime committed by a person
        of respectability and high social status in the course of his
        occupation”
    • Can include;
      • Financial crimes; fraud, embezzlement, money laundering
      • Offences committed in the course of commercial activity;
        insider trading, forgery, copyright infringement
      • Conduct characterised by deceit, dishonesty or breach of
        duty; ponzi schemes, bribery, identity theft

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What is White Collar Crime? (cont’d.)

    • Offences are not limited to the Criminal code
      • Can involve regulatory offences
    • Expanded definition includes
        • Environmental offences
        • Occupational Health and Safety (OHS) offences
    • Can be large fines and possible jail time for regulatory
      offences

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Specific White Collar Crimes…

     • All species of fraud
       • Managerial fraud and misappropriation
       • Accounting fraud, procurement fraud, credentials fraud,
         false claims
     • Securities-related offences
       • Criminal insider trading and tipping
       • Securities Act offences
     • Competition Act offences
     • Income Tax Act and other taxing statute offences
     • Corruption of Foreign Public Officials Act (CFPOA) offences

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The Effect of White Collar Crime on a
     Business
     • White collar offences carry significant penalties
       • Monetary fines
       • Risk of imprisonment for individuals
     • Consequences can reach senior officers and the Board
     • Investigations alone:
       • Can result in devastating reputational consequences
       • As a result, consume disproportionate senior management
         attention and resources
     • In extreme cases, white collar charges or convictions can
       pose an existential threat

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Consequences of white collar crime:
     unique sentencing terms
     • Restitution Orders and Probation
       • Criminal Code, s. 732.1(3.1) – Grants jurisdiction to:
         • Order policies to prevent future offences
         • Make a senior officer accountable for compliance
       • Order an organisation to widely publicize conviction,
         sentence, and remedial measures ordered
       • “Mareva”-like injunction to preserve corporate assets to pay
         possible fine
         • R. v. Fastfrate (1995), 125 D.L.R. (4th) 1 (Ont. C.A.)

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Responding to White Collar Crime
     Initial Stages: The Investigation
     •   Who is the investigator?
     •   What powers do they have?
     •   Why are they investigating?
     •   Who is the target?
         • The answers to these questions influence all of the decisions
           to follow

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Features of white collar criminal
     investigations
     • Multi-jurisdictional (including international)
     • Multi-agency
       • Overlapping and concurrent
       • Different interests, powers

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Overlapping investigations

     • Criminal Code investigations
       • “Normal” criminal rules
        • Right to silence, other Charter protections
     • Regulatory investigations under OHS legislation, Securities
       Act
       • Different rules
        • Compelled interviews, duty to co-operate, limited procedural
          protections
     • Important to identify the source of powers invoked
       • Failing to co-operate can be an offence
       • R. v. Jarvis [2002] 3 S.C.R. 757, 2002 SCC 73; R. v. Ling,
         [2002] 3 S.C.R. 814, 2002 SCC 74
        • Preserving and creating defences

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Reason to Believe an Investigation is
     Coming
     • In some cases, the notoriety or nature of events will make it
       obvious that an investigation is to follow
     • Essential to gather a full understanding of all the facts
     • Are you the target, witness or victim?
     • What if the person being investigated is an employee?
     • Be proactive
       • Brief and retain counsel early

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Who is “you” for the Purposes of Potential
     Liability?
     • Common scenario:
       • Manager or employee(s) being investigated for conduct in
          the course of employment
     • If the target meets Criminal Code definition of “senior
       manager” or “representative”, organisation may be criminally
       vicariously liable
       • If so, employee will likely require independent representation
       • Is there a duty to indemnify?
       • Can be prudent to ensure employee is well-represented, and
          a co-ordinated defence approach taken
        • Appropriateness of this depends on the circumstances

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Cooperate, or Assert your Rights?

     • This too depends on circumstances
     • Requires a full assessment of the facts and risk of potential
       liability
     • Cooperation can:
       • If organisational liability, be a mitigating factor in sentencing
       • Avoid the stigma and stress of search warrants or other
         orders
       • Allow the corporation to manage document requests
         practically
        • Section 18 of the Personal Information Protection Act (BC) and s.
          7(3) of PIPEDA, allow for voluntary disclosure of information to
          law enforcement agencies

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Cooperate, or Assert your Rights? (cont’d.)

     • If there is a potential for liability, best to:
       • Exercise right to silence
       • Require search warrants or production orders before
          disclosing any documents

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Cooperate, or Assert your Rights? (cont’d.)

     • Organisational decisions about cooperation or asserting rights
       should be made:
       • By Senior Management, the Board or other authorised
         decision-maker
       • Only by persons who are not conflicted
       • Only in the best interests of the corporation

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Search warrants: initial response

     • May not know you are under investigation until a warrant and
       a team of investigators appear.
     • Search warrant will identify:
       • The person or organisation under investigation
       • The offences alleged (though not always all offences)
       • The premises to be searched
       • The items sought
     • Investigators are obliged to show the warrant to the occupant
       of the premises

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Search warrants: initial response (cont’d.)

     • Activate your response plan
       • Hopefully you have one!
     • Call experienced outside counsel
     • Request, review and copy the warrant
       • Does it correctly identify the organisation and premises?
       • Is the execution within the permitted dates and times?

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Search warrants: initial response (cont’d.)

     • Raise any facial objections to the warrant’s execution
       • Do not interfere, even if you believe warrant or the manner of
         execution is invalid
     • Make or request copies of seized items
     • Do not:
       • Consent to search and seizure beyond warrant’s scope
       • Volunteer substantive information
       • Debate charges being investigated

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Search warrants: conduct of the search

     • Instruct employees not to interfere with the search
       • Best done in writing
       • Ensure documents are not destroyed, hidden or removed
       • Do not hinder or mislead investigators
     • Keep a record of what occurs in course of search
     • Inventory what is seized

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Post-investigation:
     will there be a prosecution?
     • Police and Crown are independent
     • Most Criminal Code offences and Provincial offences
       • Prosecuted by provincial Crown Counsel
     • Some Federal offences
       • Prosecuted by Public Prosecution Service of Canada
         (“PPSC”): “Federal Crown”
     • Independent discretion and charge approval standards
       • Substantial likelihood of conviction; and
       • Prosecution is in the public interest
     • Investigations do not always lead to charges
       • Consider representations in advance of charge approval

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Post-investigation: if charges are
     approved, now what?
     • Options include:
       • Lay the groundwork for a reduced sentence
        • Co-operate and enter a guilty plea
      • Gear up for the fight
        • Stinchcombe disclosure
        • Mode of trial
        • Charter and evidentiary challenges
         • Whose rights are engaged?
         • Charter rights of individuals and corporations differ

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Strategies for responding to white collar
     crime: proactive steps
     • An ounce of prevention is worth many pounds of cure
       • Where appropriate for size of organisation, implement robust
         compliance programs
        •   Identify material risks
        •   Adopt written policies
        •   Install internal controls and procedures appropriate to risks
        •   Train, audit and evaluate

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Strategies for responding to white collar
     crime: proactive steps (cont’d.)
     • Monitor compliance programs at a sufficiently senior level
       • For reporting issuers, make recurring audit committee
         agenda item
       • Possible emerging best practice of separating counsel and
         compliance functions, with compliance having direct report to
         audit committee or Board
     • Effective compliance programs:
       • Help deter and detect white collar crime
       • Can be a factor in discretionary sentencing decisions

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Strategies for responding to white collar
     crime: reactive steps
     • Get a handle on process
       • Establish a project team
       • If the matter involves reputational issues, significant potential
         liability, senior executives or conflicts of interest, establish a
         special committee of the Board
       • Involve experienced outside counsel as early as possible
       • Consider PR strategy, balancing defence strategy against
         other imperatives

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Strategies for responding to white collar
     crime: reactive steps (cont’d.)
     • Investigate the problem
       • Consider whether internal or independent investigation is
         appropriate
        • If disclosed and used as basis for cooperation with authorities,
          investigation can be mitigating factor on sentencing of the
          organisation
         • Criminal Code, s. 718.21(e) and (j)
        • Be sensitive to rights of employees, privilege issues

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Strategies for responding to white collar
     crime: reactive steps (cont’d.)
     • Take a 360 degree view
     • Understand the potential liabilities
       • Corporate liability, executive liability or director liability
       • Possible and likely criminal and civil penalties

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White Collar Prosecution Case Study:
     R. v. Durward (ONSC)
     • Bid rigging prosecution of suppliers of IT professionals to
       Federal Government
     • Charges included bid rigging (Competition Act offence) and
       conspiracy to bid rig (Criminal Code)
     • Concluded on November 27, 2014 with 60 not guilty verdicts

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R. v. Durward (cont’d.)

     • Significant features
       • Massive document seizures pursuant to search warrants
       • Disclosure of over 1 million pages of documents
       • Successful pre-trial constitutional challenge to s. 69 of the
         Competition Act as violating s. 11(d) of the Charter
         (presumption of innocence)
       • Jury trial
        • First on bid rigging case since R. v. McNamara in 1981

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Recovery Case Study: Silvercorp Metals
     Inc.
     • TSX-listed mining company with operations in China
     • Claimed to be largest silver producer in China
     • Short-selling campaign launched by hedge funds
       • Web-based publications alleging disclosure issues
       • Accusations of accounting fraud in anonymous letters to
         OSC, Silvercorp’s auditors and media
     • This led to a B.C. Securities Commission (BCSC)
       Investigation (September 9, 2011 BCSC press release)

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Recovery Case Study: Silvercorp (cont’d.)

     • Silvercorp’s response:
       • Created a special committee
       • Cooperated with BCSC investigation
       • Hired forensic auditor
       • Launched PR campaign
       • Started defamation action in New York State
     • BCSC Executive Director then issued notice of hearing
       against the principal of one of the hedge funds, alleging fraud
       (December 19, 2013)

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Recovery Case Study: Silvercorp (cont’d.)

     • The saga continues, however:
       • Consultant brings tort claim for false imprisonment in China
        • Silvercorp’s jurisdictional challenge recently dismissed
         • Huang v. Silvercorp 2015 BCSC 549
      • BCSC hearing panel dismisses fraud allegations against
        short seller’s principal
         • Re Carnes 2015 BCSECOMM 187

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Strategies for responding to white collar
     crime: Conclusion
     • Consider the right strategy
       • Voluntary disclosure of illegal conduct
       • Constructive engagement with prosecutor and regulators
       • Assertive defence
     • No single right answer
       • Strategy will depend on organisation’s best interests and
         context
       • Organisation’s and individual’s interests and strategies may
         be different

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