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What Fraud Victims Should Know About the Civil Remedies Act

At Investigation Counsel, we receive inquiries from fraud victims, often through the internet, requesting information on alternatives to traditional civil recovery due to the cost of private litigation. One such request was for information as to whether recoveries are viable by making a claim under Ontario’s Civil Remedies Act.

In July 2017, we published a blog post entitled what Fraud Victims Should Know About Recovery Through the Civil Remedies Act . This post provides an update regarding two stories since then – one based on the recently published decision in the Ontario Superior Court in Ontario (AG) v. $163,015.29, 2019 ONSC 3973 (June 26, 2019), and the other being one of our own cases, Gennett Lumber v. Hodgi et al., Court File No. CV-17-570182 (June 5, 2019), where we recovered cash for our client that was initially earmarked for an application by the Attorney General at the request of the Civil Remedies for Illicit Activities Office (“CRIA”).

In our June 2017 blog post, we discussed an inquiry from lawyers in California based on the press release from the Government of Ontario Attorney General Recovers $17M for Victims of Ponzi Scheme – Largest Ever Recovery Under Ontario’s Civil Forfeiture Law.  In that post, we advised that fraud victims should not count on recovery through civil forfeiture legislation because they have no control over the process, and because by the time they learn from the government that there will be no recovery for them, it is often too late to begin a civil fraud action. In Ontario, fraud victims have two years after learning of the fraud to begin an action for recovery. Missing limitation dates remains the most significant risk for most fraud victims.

Gennett Lumber v. Hodgi, Court File No. CV-17-570182 (June 5, 2019)

The plaintiff in this action, Gennett Lumber, heeded our limitation periods warnings and had a claim issued while the criminal proceedings were ongoing. The fraud involved some Ghana-based rogues living in Ontario who convinced bank employees to provide them with the credit card information of unsuspecting bank clients. The rogues used the fraudulently obtained credit card information to purchase various items including hardwood and construction materials from US-based suppliers. After the materials were imported into Ontario, they were quickly sold to local construction companies. The Toronto Police eventually traced the activity to one Mr. Eric Hodgi (“Hodgi”) and his confederates. The Police executed a search warrant at Hodgi’s apartment. At the apartment, the Police located and seized over $25,000 in cash. Hodgi was arrested along with his roommate Eric Bonsu (“Bonsu”). Bonsu denied that the cash was his.

Upon learning of the $25,000 seized by the police, we brought a motion in the civil courts to have the cash preserved pending the resolution of the civil action against Hodgi and his confederates. Eventually, Bonsu and the Crown struck a plea bargain in his criminal case which resulted in the charges being withdrawn. The criminal court judge, who likely did not know that the civil court had ordered the cash to be detained and without notice to us, issued an order permitting Bonsu to take the cash. The criminal judge was also not told that Bonsu had told the police the cash was not his. Upon learning of this, we brought a motion to have the cash turned over to Gennett Lumber to satisfy the judgment against Hodgi and his confederates. CRIA did not oppose our motion.

Under the Civil Remedies Act, the first step in the process requires the Crown to prove, on a balance of probabilities, that the funds were the proceeds of unlawful activities. The Crown does not need to prove that the person in possession of the funds was involved in unlawful activities. Likewise, at the motion in the civil courts, the Court accepted our submissions that the cash seized was derived from unlawful activities—whether from the credit card fraud scheme or some other nefarious conduct. Bonsu submitted that the cash was not derived from unlawful activities, but rather that he had earned it through legitimate employment. The Court ordered that Bonsu be examined under oath on his story.

At his examination, Bonsu admitted that when he was arrested he told the police that the cash was not his. Bonsu explained that, in Ghana, the police would beat you if you acknowledged ownership of suspicious amounts of cash, and therefore, he lied to the police. Bonsu’s employment and income records however did not corroborate this story. As a result, the Court concluded that there was a strong circumstantial link between the cash and Hodgi, insufficient evidence linking the cash to the legitimate income of Bonsu, and a lack of credulity to Bonsu’s story. The Court ordered the Police to turn over the cash to the plaintiff, Gennett Lumber, in partial satisfaction of the civil judgment it had issued against Hodgi.

The Court further ordered full indemnity costs for the motion of $11,000 payable by Hodgi, even though he was not in attendance. This order was based on our submission that Hodgi conspired with Bonsu to contest our motion for forfeiture of the cash seized by the police. You can review this unreported decision, here

Ontario (AG) v. $163,015.29, 2019 ONSC 3973 (June 26, 2019)

In this decision, the Court did not explain the facts of the police investigation, other than to say that the Attorney General was seeking forfeiture of approximately $163,000 held in a bank account in the name of one Mr. Kamal Sehgal related to a CRA phone fraud scheme. Mr. Sehgal was charged with fraud by police but those charges were withdrawn. The Crown called witnesses who gave evidence related to the CRA phone fraud with links to operations in India, and that the funds in Mr. Sehgal’s account were linked to the scam.

After the charges were withdrawn, the Attorney General requested the fund in Mr. Sehgal’s accounts subject to the investigation should be forfeited to the Crown. Mr. Sehgal opposed the forfeiture, submitting he should be permitted to keep the funds. In explaining Ontario’s Civil Remedies Act, the Court stated:

The CRA is a curious piece of legislation. It runs contrary to our views of the sanctity of ownership of property. It allows the Government of Ontario to seize property that is the proceeds of, or was an instrument of illegal activity. The CRA focuses on the characteristics of the property, not the actions of the property owner. It focuses on the acts by people perhaps not the owner. The property does not have to be linked to a specific person or group of persons. Indeed, the CRA is not concerned about the criminal culpability of anyone associated with the property. The seizure may occur regardless of the fact that the owner was not charged, or if charged, the charge was dropped, stayed, withdrawn, or the owner was acquitted. Because the CRA is not concerned with the actions of any particular person or group of people, proof is on the civil standard.

The Court held that the funds in Mr. Sehgal’s accounts were the product of unlawful conduct based on a series of flags of fraud. Catherine Davidson, a detective with the Calgary Police, advised the Court the flags of fraud included that:

  1. Mr. Sehgal is a foreign national;
  2. when Mr. Sehgal opened his account, he told the bank he was unemployed;
  3. in three months, there were approximately 44 deposits into the account;
  4. all of the deposits were in round numbers, divisible by 10;
  5. all were cash deposits were made at ATM machines or account-to-account transfers (except for one $20,000 cheque);
  6. these deposits were made at locations all over Canada. Each deposit came from a different individual;
  7. only two deposits were by the same individual—one of whom is one of the two people Mr. Sehgal admitted was defrauded in the phone scam;
  8. the account was reviewed frequently but only from locations in India and the United Arab Emirates; and
  9. Mr. Sehgal admitted that, except for the $20,000 cheque and his initial transactions upon opening the account, he did not know any of the individual depositors into the account, or the reason why anyone had deposited funds into the account.

Mr. Sehgal argued that the funds came to him in what is known in India as “Hawala” business practices. Hawala was defined as a non-traditional banking or financial arrangement or remittance system developed in India before the introduction of Western business practices. Hawalas often operate legitimately. The hallmark of a Hawala remittance system is that it based on trust and extensive use of connections such as family relationships or regional affiliations, without any sort of negotiable instruments. In a Hawala, transfers of money take place based on communications between a team of members of a network known as “Hawaladars” or Hawala dealers.

The Court rejected the Hawala defence. The Court held that Mr. Sehgal’s evidence in this regard is not credible and is based on hearsay. He does not identify this friend or the source of the information the friend gave him. He did not, for example, contact his bank in India. He cited no Indian government authority or record to support this assertion. The Court ordered that except for the $21,000 that Mr. Sehgal could legitimately explain, the balance of the bank account was to be turned over to Ontario’s Attorney General. To review this decision, see http://canlii.ca/t/j1dqs

Distribution to Victims under Ontario’s Civil Remedies Act

Whether any of the $162,000 was returned by CRIA to victims of the CRA phone scam is unknown. The office of the CRIA is not transparent generally with regards what they return to victims in specific cases. That said, CRIA staff often will provide information to determine whether it is worthwhile to bring a motion as described in the Gennett Lumber v. Hodgi case. For example, the recoveries for specific victims is not disclosed in the press release in Attorney General Recovers $17M for Victims of Ponzi Scheme – Largest Ever Recovery Under Ontario’s Civil Forfeiture Law.

Some background on the Civil Remedies Act is helpful to understand the mandate of the CRIA. In 2001, the Government of Ontario enacted the CRA, ostensibly to create a new tool to deter crime and compensate its victims. Ontario was the first province to enact such legislation. Most provinces and territories now have similar laws.

Unlike the federal Criminal Code of Canada, which deters crime by imposing incarceration or other punishment on the guilty, and attempts to rehabilitate convicted fraudsters through restitution orders and fines-in-lieu-of-forfeiture, the CRA permits an Ontario Superior Court to order the forfeiture of the proceeds of crime in an effort to make crime unprofitable and create an opportunity for a victim’s to recover.

The CRA attempts to make crime unprofitable by allowing the Attorney General of Ontario to bring applications in rem (against property instead of against a person) for the freezing, seizure, forfeiture and preservation of any property located in Ontario which is deemed to have been used to commit an illegal act or to have been acquired by committing an illegal act. Forfeited property is then used to cover the Crown legal expenses, or may be returned to its legitimate owners in certain circumstances.[1]

Victim Involvement in Bringing a CRA Application

Victims of fraud have no direct access to make a complaint to the Civil Remedies for Illicit Activities Office (“CRIA”). Rather, CRA applications are commenced when the police or a securities regulator refers a complaint that they deem suitable for a CRA application to the CRIA. Victims of crime or securities fraud have no direct input into which cases are referred to the CRIA.

Fraud victims who hope for recovery through a CRA application are required to make a criminal or regulatory complaint, and then hope that the Crown, police, or securities regulators will refer their case to the CRIA. If the CRIA deems a case to be in their interest, an application is brought by CRIA lawyers on behalf of the Attorney General. As we learned in the Gennett Lumber case, a victim of fraud can bring their own motion in the civil courts to sidestep the CRIA bureaucracy.

If a Court makes an order pursuant to a CRA application, the forfeited money or property is held by the Crown in a designated fund.[2] Persons who have a potential property interest are then notified to submit a claim for compensation.

All claims must comply with section 6 of Ontario Regulation 498/06[3] or they will be denied. To obtain a claim form or to make inquiries regarding entitlement to compensation, affected parties may contact the CRA at the following address:

Civil Remedies for Illicit Activities Office (CRIA)
Ministry of the Attorney General
77 Wellesley Street West, P.O. Box 555
Toronto, ON, M7A 1N3

1-888-246-5359

cria@ontario.ca

Fax: 416-314-3714

For an example of Statutory Notice by the Ministry of the Attorney General, see http://www.osc.gov.on.ca/en/NewsEvents_nr_20130731_osc-omagn-al-tar.htm

Burden of Proof

Applications brought by the Attorney General are brought against property, not persons. The application for forfeiture is initially brought ex parte by the Crown to preserve the property at issue. After the Court orders the property held for a hearing, those who had possession are notified that they may contest the application for forfeiture.[4]

The burden of proof is on the Attorney General who, pursuant to Section 16 of the Act, must show that the property in question is the proceeds or an instrument of unlawful activity. The standard of proof on the Attorney General is “the balance of probabilities”. This is the standard of proof used to determine liability in civil rather than the more onerous standard used in criminal proceedings, where an accused must be found guilty “beyond a reasonable doubt”.

Circumstantial evidence is admissible in CRA applications. A respondent’s failure to provide a credible explanation for a legitimate source of the property or an explanation for a lavish lifestyle without an apparent source of income may be considered by a Court as part of the forfeiture analysis. To state otherwise, suspicious circumstances call for a “credible and reasonable answer.”[5]

If there is a finding of guilt in a criminal proceeding related to a criminal charge, the finding will also satisfy the balance of probabilities standard of proof required for forfeiture under the CRA.   Section 17 explicitly provides that when a person is found guilty on criminal charges such as fraud, they are deemed to have committed the unlawful act for the purposes of the Act.

In other words, a criminal conviction of fraud will result in an order under the Act provided the Crown can also demonstrate that the property in question is proceeds of the fraud. However, even if an accused has been acquitted or the charges were withdrawn or stayed, that person can still be the subject of an order for forfeiture under the CRA.

Priority of Creditors

The CRA and its implementation by the CRIA have been severely criticized for distributing the money to provincial and law enforcement agencies rather than compensating victims of crime as its first priority.[6] For example, the regulations to the CRA prioritize recovery of the Attorney General’s legal expenses before compensating victims of crime. Generally, it is only after such recovery that the victim can hope for compensation, and then only if the Crown is satisfied that the monies or property seized can be traced to the victim’s funds.

Because applications under the Act are litigated by the Attorney General and not by the victims’ own counsel, this means that the fraud victim gives up substantial control over a claim to seized monies and property. This, again, is why we recommend the victims of fraud, like Gennett Lumber, bring their own civil action and then bring a motion for a preservation order if they learn of what property was seized by police during a search warrant.

According to an April 2016 CBC News report,[7] since November 2003, approximately $48.6 million worth of property has been seized by the province under the Act. Of that amount, $24.5 million of that has been distributed to “victims’ funds” (which includes charities to support victims of crime as well as the victims themselves), $10.9 million was distributed to law enforcement agencies through grants, and the remainder $13.2M was retained by the Ontario government to help recover the cost of handling cases of civil forfeiture.

Although $24.5M of a seized $48.6M sounds like a respectable percentage of recovery for victims, it must be borne in mind that $17M of that $24.5M was from the Stanford case referred to above. In the Standford case, the United States Securities Exchange Commission gave the CRIA the recovery on a platter. This recovery had little to do with CRIA investigating, tracing and freezing funds on behalf of fraud victims.

According to a June 27, 2016 Law Times article, it was reported that the Ontario government had generated $2.9M in 2014-15 from its Civil Remedies Act powers, but of that amount only $202,000 was paid in direct compensation to victims of crime.[8] In other words, only approximately 7% of recovered money and property was returned to victims.[9]

The Bottom Line

While recovery efforts through the CRA and CRIA is laudable, investment/securities fraud victims hoping to obtain recovery in the justice system should retain their own civil fraud recovery counsel to at least issue a claim and then monitor the criminal and regulatory case.

In our experience, fraud victims often require guidance on coordinating their private recovery actions with their role as complainants in regulatory or criminal actions – a topic we have discussed in other blogs. Civil fraud recovery counsel should also provide an opinion on whether civil pre-action remedies such as tracing and freezing of the victim’s lost money is viable in the circumstances.

Another important consideration for fraud victims is that often criminal and regulatory actions only focus on the primary fraudsters. In civil fraud recovery actions, victims often can bring suit against and seek recovery from professionals and others who facilitated or were enriched by the fraud – sometimes referred to as secondary defendants – or defendants who are ‘knowing assistants’ or ‘knowing recipients.’ Actions against secondary defendants should often be brought when the loss is discovered.

Finally, as discussed above and reported in previous blogs, fraud victims must be aware of limitation periods. Often victims, such as in the Alberta R. v. Sorenson and Brost case, lose their right to civil recovery because they mistakenly believed they could sue after the criminal system has run its course if a recovery through the ‘public’ system was not successful. The hard reality is that often criminal and regulatory cases take longer than the civil limitation period allows – resulting in victims losing their right to sue when they realize there will not be a recovery for them through the criminal or the securities regulator processes.

Inquiries

At Investigation Counsel, we investigate and litigate fraud recovery cases. If you discover you are a victim of fraud, contact us to have your case assessed and a strategy for recovery mapped out before contacting police or alerting the fraudster. We also promote victim advocacy and academic discussion through various private and public professional associations and organizations. If you have an interest in the topics discussed herein, we welcome your inquiries.

[1] For example, see: Ontario (Attorney General) v. $13,900 in Canadian Currency (In Rem), 2015 ONSC 2267 at para 35: “If the Attorney General shows that the property is the proceeds or the instrument of unlawful activity or both and the respondent fails to prove that he or she is a legitimate or reasonable owner, the Court shall forfeit the property in question unless it is clearly not in the interests of justice.”

[2] Section 6 of the Act provides that forfeited money or property is to be deposited in a “Special Purpose Account,” within the province’s Consolidated Revenue Fund.

[3] Regulation 498/06 may be found at:

http://www.e-laws.gov.on.ca/html/regs/english/elaws_regs_060498_e.htm

[4] See Ontario (Attorney General) v. $13,900 in Canadian Currency (In Rem), 2015 ONSC 2267

[5] See Ontario (Attorney General) v. $13,900 in Canadian Currency (In Rem), 2015 ONSC 2267

[6] Civil Forfeiture in Canada, Canadian Constitutional Foundation (2015-2016),  http://theccf.ca/wp-content/uploads/2016/06/Civil-Forfeiture-Report-2015-2016-online.pdf

[7] Ontario Bill Could Reward Police Forces for Seizing Property in Illicit Tobacco Busts, CBC News, April 9, 2016, http://www.cbc.ca/news/canada/civil-forfeiture-contraband-tobacco-1.3453200

[8] Judge Slams Application to Seize Cash from Man, The Law Times, June 27, 2016,

http://www.lawtimesnews.com/201606275497/headline-news/judge-slams-application-to-seize-cash-from-man

[9] Civil Forfeiture in Canada, supra, note 2.

Norman Groot

About Norman Groot

Based on my police experience and my experience thereafter as a litigator, I have joined forces with other lawyers with police experience and created the law firm Investigation Counsel Professional Corporation.

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