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FAIR CANADA REPORT RECOMMENDS A NATIONAL STRATEGY TO FIGHT FRAUD

http://www.investmentexecutive.com/-/protecting-canadians-from-investment-fraud

By James Langton | 

A new report from the Canadian Foundation for the Advancement of Investor Rights (FAIR Canada) calls for a coherent national strategy for combating investment fraud, improved data collection, better communication with investors, and possibly a new national enforcement agency, to fight fraud. It also calls on regulators to examine whether the exempt market in particular represents a significant source of fraud.

On Monday, FAIR issued A Canadian Strategy to Combat Investment Fraud, a report that that aims to examine the state of investment fraud in Canada. It found that there is no systematic effort to deal with fraud, and that the responsibility is carved up between financial regulators, assorted police forces, and other organizations. “Despite these disparate organizations’ overlapping duties to protect Canadian investors against fraud, no formal strategy or framework exists to ensure that the system works efficiently,” it says in the report.

In particular, it found a lack of comprehensive data on investment fraud. Given this lack of data, the report concludes, “it is difficult (if not impossible) to gain an accurate measure of the prevalence of investment fraud in Canada and the associated harm to Canadian investors. Further, it is also very difficult to evaluate whether those responsible for enforcement are using their limited resources as efficiently as possible and are meeting their objectives.”

From the data that is available, FAIR found that the majority of serious investment fraud is committed by people that are not registered with the regulators. Yet it also notes that the awareness of regulators is low, and that the tools provided to check registration must be improved. And, it warns that the exempt market may “increasingly become a gateway to fraud by providing easy opportunity for fraudsters.” At the very least, FAIR says that the relationship between fraud and the exempt market “warrants closer examination.”

“More data on the exempt market and on investment fraud perpetrated in Canada could help to determine the relationship between prospectus exemptions and investment fraud with a view to developing better protection,” it says, adding, “It is essential to ask how investors can differentiate between legitimate prospectus-exempt investments and fraudulent investments.”

In terms of improved data collection, the report suggests leveraging resources such as the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to provide intelligence to securities regulators, and the introduction of whistleblower programs. It also calls for research into both victim profiles and fraudsters in Canada; stepped up efforts to publicize fraud complaints and trends; and, for campaigns to improve public awareness about the threat of fraud.

Moreover, it suggests that the authorities should set and coordinate enforcement priorities for fighting fraud; that the creation of a national fraud agency to centralize reporting and enforcement should be considered; and that more should be done to obtain restitution for victims of investment fraud.

“The disparate system for combating investment fraud in Canada makes it difficult to evaluate the efficacy of the current system. The results of our research did not provide comfort that the Canadian system responsible for protecting investors against investment fraud is robust,” the report says. And, it notes that, given the possibility that a common securities regulator will be created “there may exist an opportunity to design an optimal national fraud enforcement agency.” In the meantime, it says that “better coordination would improve Canada’s reputation for enforcement and better protect investors.”

“We were surprised by the limited information that is available regarding investment fraud in Canada. Better information would allow responsible agencies (including regulators, governments, self-regulatory organizations and the police) to develop informed strategies to combat investment fraud and better protect investors,” says Lindsay Speed, legal counsel and corporate secretary, at FAIR. “The information needed includes statistics outlining the prevalence and incidence of fraud (and any related trends) as well as who is targeted, how they are approached, and what persuades them to invest.”

She also stresses that the Canadian Securities Administrators (CSA) could take immediate steps to improve the system for checking registration, given that its research showed that many frauds are perpetrated by unregistered individuals. “Investors have a low awareness of the need to check registration and the system provided by regulators is not user-friendly, nor is there a single source that provides all the information needed,” she notes.

“We are pleased to see FAIR’s report and note that a number of their recommendations focus on areas the Ontario Securities Commission has previously highlighted and where we are making real progress,” says Tom Atkinson, director of enforcement at the OSC.

In particular, Atkinson points to the creation of its Joint Securities Offences Team (JSOT) in collaboration with law enforcement. “Since May 2013, JSOT has launched 14 investigations in partnership with police agencies, and we have laid four quasi criminal proceedings before the Ontario Court of Justice in that same time frame,” he reports. “As a provincial regulatory body, we recognize the value of working lockstep with our police partners, and we are committed to delivering strong and effective enforcement in order to protect investors from the potential for harm.”

Atkinson also notes that it is still actively reviewing the concept of establishing a whistleblower program, and that it will publish a concept paper exploring the idea in the fall.

As for the report’s suggestion that the risk of fraud in the exempt market should be examined, Atkinson notes that this is an area where the OSC is focused too, and that it oversees that market through filing reviews, randomly sampling disclosure, and inspecting dealers. “Confidence and trust in the private markets is critically important,” he says.

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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