Appeal court reaffirms financial watchdog’s discretionary power

Quebec’s financial watchdog cannot be compelled to exercise its discretionary power to conduct an investigation into the “moral character” of individuals seeking a money-services business license as it is at the “very heart” of its specialized jurisdiction, held the Quebec Court of Appeal.

The decision will likely have a reach beyond the Autorité des marchés financiers (AMF) and extend to Quebec administrative deciders such as the Autorité des marchés public, a rather new entity responsible for overseeing and managing public contracts between enterprises and Quebec government entities, according to litigators. The ruling may even make it far more tougher for individuals to challenge administrative deciders such as the AMF over their determinations concerning moral character.

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Suspected PlexCoin founders agree to pay nearly US$7 million

Dominic Lacroix and Sabrina Paradis-Royer lived the good life, while it lasted. He leased a $140,000 luxurious Mercedes Benz and bought a T-Rex, a three-wheeled sports car manufactured by a now bankrupt Canadian company. He purchased a $2.52 million home in a chic neighborhood in Quebec City, and then poured nearly half a million dollars in renovations. And he amassed a healthy fortune, hovering around US$3.3 million, not counting 1,677 bitcoins and other virtual currencies, in the span of a couple of months.

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Quebec judge stays insider trading trial against former Amaya CEO

Gaffes by the Quebec’s financial watchdog prompted a Quebec judge to stay charges of insider trading and market manipulation against former online gambling mogul David Baazov and his co-accused.

In an oral ruling lasting two hours, Court of Quebec Judge Salvatore Mascia granted the defence’s third motion to stay proceedings against Baazov six weeks into the trial after holding that good faith errors in disclosing evidence are to be expected but “there are limits.” Repeated errors by the Autorité des marchés financiers (AMF), such as failing to properly disclose documentation to the defence, were “preoccupying,” showed a “lack of rigour,” and “laxism,” added Judge Mascia.

“In this case, do the accumulation of mistakes require a stay of proceedings? Yes,” held Judge Mascia.

Baazov, the founder and former chief executive of Amaya Inc., now known as The Stars Group Inc., filed a motion calling for a stay after the AMF inadvertently shared with defence more than 320,000 privileged documents that were seized from various companies during the investigation in one of the largest insider fraud cases in Canadian history. The AMF then asked defence to return them and pretend they were not seen.

“We are going to analyze the judgment very closely as well as assess the pertinence of filing an appeal,” said the AMF in a statement.

The charges against Baazov and his co-accused stemmed from an investigation into the US$4.9 billion deal to acquire PokerStars in 2014. The AMF alleged that Baazov and two associates conspired to try to raise the price of Amaya stock before the takeover.

The fiasco is the latest that highlights how daunting it is to successfully prosecute financial crimes. In its defence, the AMF boasts it prosecuted approximately 15 insider-trading cases over the past five years, winning most of them.

That may be the case, but regulators and the Crown alike have in the past couple of weeks failed to win high-profile cases in Quebec involving fraud. Quebec’s Director of Criminal and Penal Prosecutions (DCPP) recently announced it will not appeal the acquittal of former Montreal Executive Committee Chairman Frank Zampino and his co-defendants in a high-profile corruption case. Zampino and the construction contractor were accused of fraud, breach of trust and conspiracy in connection to the Faubourg Contrecoeur real estate project.

More recently still, the DCPP announced that it ordered a stay of proceedings in two fraud trials involving Bernard Trépanier, a fundraiser also known as Mr. Three Per Cent for former mayor Gérald Tremblay’s now-defunct political party.

Alleged PlexCorps founder ordered to hand bitcoins to Quebec financial watchdog

A Quebec City businessman believed by Quebec’s financial watchdog and the U.S. Securities and Exchange Commission to be behind PlexCorps, a controversial cryptocurrency start-up accused of fraudulently selling up to millions of dollars’ worth of tokens, has been ordered to hand all bitcoins in his possession within 48 hours, ruled the Quebec Financial Markets Administrative Tribunal.

The Tribunal, in a ruling that will likely create precedence given the dearth of case law, also issued new freeze orders against Dominic Lacroix and his spouse — on top of the ones he already faces — in a bid to protect the public and prevent them from transferring or “squandering” monies in their possession.

“Cryptocurrencies have changed the approach the Tribunal must adopt in order to protect the sums held in this manner because there exists no other third party like a financial institution to ensure the respect of decisions issued by a tribunal,” said the two-member panel of the Tribunal in a ruling issued on May 24th.

The Tribunal felt then “it had no choice but to innovate in the application” of article 249 of the Quebec Securities Act. The article stipulates that that the Autorité des marchés financiers (AMF), Quebec’s financial regulator, may for purposes of an investigation request the Tribunal to order a person to refrain from disposing funds, securities or other assets in his possession. By its own admission, the Tribunal noted that article 249 did not have enough bite. Lacroix, the Tribunal pointed out, repeatedly ignored orders against him. The Tribunal, as a result, turned to article 94 of the Act respecting the Autorité des marchés financiers which allows for the Tribunal to “take any measure conducive to ensuring compliance.”

“In the opinion of the Tribunal, this article gives it the possibility to adjust an order that would be adapted to the virtual reality of bitcoins,” said the Tribunal “It is clear that new technologies and new ways of holding assets pose important challenges to those responsible upholding the application of the law.”

Faced with an “exceptional situation,” the Tribunal adopted a “large and liberal” interpretation of article 94 that allowed it to take measures just as exceptional to protect investors. In this vein, the Tribunal “believes it is justified” to use the powers conferred to it under article 94 to order Lacroix to transfer bitcoins in his possession to the Quebec financial watchdog but only to safeguard it, and not as the AMF hoped to sell them.

Lacroix was found guilty last October of contempt of court for failing to adhere to broad ex parte orders issued by the Tribunal on July 2017 that forbade him and his company DL Innov Inc. from “engaging in activities for the purpose of directly or indirectly trading in any form of investment” covered by section 1 of the Quebec Securities Act, either in Quebec or from Quebec to outside of the province. On December 2017, he was sentenced last year to a two-month jail term and fined $10,000 for contempt of court while DL Innov was fined $100,000. Both decisions have been appealed.

In spite of the orders issued against him over the past year, the Tribunal found that Lacroix has used his entourage, including his spouse, his brother and his employees, to circumvent “by all means possible” the restraint orders issued against him.

On April 23, 2018, PlexCoin wrote in its Facebook page that “we assure to these people that 100% of the money used to buy their PlexCoin, by credit card, is still in the bank accounts and ready to be used to pay you back, we have proposed this option to the SEC and the AMF but we still have not received their agreement for the process.”

Yet the Tribunal notes that in spite of this statement, evidence revealed that amounts obtained from investors who used their credit cards to purchase PlexCoins were deposited in Lacroix’s bank accounts with CIBC and Tangerine and used for personal purposes. Further evidence revealed that Lacroix and his spouse paid more than $100,000 to suppliers who worked on his luxurious $2.5 million home in Quebec City. As well, evidence also revealed that Lacroix and his spouse spent in the space of a couple of months 314.75 bitcoins to “maintain a luxurious lifestyle” in part by monies obtained from PlexCoin investors.

According to an AMF investigation, the PlexCoin initial coin offering generated US$3.3 million, 1,677 bitcoins. Testimony provided by an AMF investigator alleges that Lacroix still controls 464.22 bitcoins as of May 7, 2018. The value of each bitcoin at that date is estimated to be between $9,000 and $12,000. All told, according to the investigator, Lacroix has more than US$4 million in bitcoins.

“To ensure that the bitcoins held or under Lacroix’s direct or indirect control are preserved, the Tribunal has no choice under the circumstances but to order Lacroix to transfer to a third party, in this case the regulator, the AMF, his bitcoins,” said the Tribunal. “Prime facie evidence revealed to the Tribunal leaves it with no alternative in this case given the repetitive wrongdoing attitude demonstrated by Lacroix.”

The Tribunal also ordered the Bank of Montreal, Tangerine, Caisse Desjardins de Charlesbourg and the CIBC to refrain from disposing funds, securities or other assets belonging to Lacroix or his spouse.

Investment counsellor fined $2.1 million

Nearly 10 years after Quebec’s financial watchdog launched penal proceedings against an investment consultant, a Court of Quebec judge fined Denis Patry $2.1 million after being found guilty of 89 counts of securities violations.

Patry was charged for aiding, by act or omission, Les conseillers en valeurs Planiges inc., with making misrepresentations in securities transactions on 81 occasions and failing to fulfill an undertaking with the financial regulator, the Autorité des marchés financiers, on six occasions.

Patry was president and director of Planiges, a firm founded in 1982 that offered investment consultant services. Between 1991 and 1995, the value of the portfolios managed by the firm declined substantially. In February 1996, Patry persuaded the vast majority of his clients to transfer their money, until that time held by Desjardins Trust, which was acting as a securities custodian, into an account held by Planiges at Royal Bank of Canada. Some $10,000,000 was transferred as a result.

Over the following months, some clients asked to be repaid, and were given some $7,000,000, leaving about $3,000,000 in the account. At some point during the 2000’s, the quarterly statements of account sent to clients and prepared by Planiges according to the Patry’s instructions contained falsified values. Patry was trying to use this scheme to hide the fact that, because of his use of the funds to perform futures or options transactions as well as to finance the operations of Planiges, the cash had evaporated. In reality, nothing was left in June 2005, whereas the quarterly statements showed substantial amounts.

The case took so long to resolve because the courts had to grapple with the admissibility of the defence of mental disorder for a strict liability offence, its limits, and the nature of evidence required. On February 2011, Judge Claude Millette of the Court of Quebec concluded that it had been proven beyond a reasonable doubt that Patry had aided with making misrepresentations to investors and had failed to fulfill an undertaking with the AMF, but because he was afflicted with a serious illness – bipolar disease — he had been found not responsible by reason of mental disorders, a ruling upheld by Quebec Superior Court.

The Quebec Court of Appeal however overturned the lower court decision.

“In my view, the Court of Quebec judge erred in law by confusing the physical consequences of an act with the objective sought,” said appeal court Justice François Doyon in Autorité des marchés financiers v. Patry, 2015 QCCA 1933. “He also erred in law by considering the mental disorder defence when it does not meet the minimum air of reality test, or by giving it effect when the evidence was clearly insufficient to rebut the presumption. The evidence did not support the defence.”

The Quebec appeal court convicted Patry of 89 counts of securities violations and returned the dossier to the Court of Quebec case for sentencing.

Court of Quebec Judge Claude Leblond said in Autorité des marchés financiers c. Patry, 2018 QCCQ 1144 that were it not for extenuating circumstances, in other words his mental illness, he would have sentenced him to a 30-36 month prison sentence in addition to the fines.

Montreal man ordered to pay largest fine ever issued for Quebec securities offences

A Montreal man was fined $11.2 million, the largest fine ever issued in Quebec for securities offences, and sentenced to a three-month jail sentence for fraudulent penny stock practices commonly referred to as a “pump and dump” scheme.

Jean-François Amyot is among one of five people and two companies that plead guilty to charges laid against them nearly three years ago by the Quebec financial watchdog, Autorité des marchés financiers, during a trial earlier this year.

They were accused of market manipulation involving five companies, including Spencer Pharmaceutical Inc., Energy 1 Corp., Andes Gold, Kender Energy et Wanderport Corp. They were accused of attempting to influence the market price or the value of securities by means of unfair, improper or fraudulent practices, and misrepresentation, breaching articles 195.2 and 207 of the Quebec Securities Act.

A plea agreement reached earlier this year that was approved by the Court of Quebec led Amyot to plead to five counts of market manipulation and two counts of conspiracy.

  • Under the same deal, Francis Mailhot plead guilty to three counts of market manipulation and one count of conspiracy, and was fined $5 million.
  • Daniel Ryan plead guilty to two counts of market manipulation and was fined $500,000. Ryan plead guilty to another count of market manipulation in another matter and was fined $225,000.
  • Conseils Hilbroy Inc. plead guilty to one count of market manipulation and was fined $1 million.
  • IAB Média Inc. plead guilty to one count of market manipulation and was fined $500,000.
  • Andrew Barakett plead guilty to one count of market manipulation and was fined $50,000.
  • Eric Boyd plead guilty to one count of market manipulation and was fined $30,000.

“The manipulation of securities on the markets is a very serious offence that deserves appropriate sanctions,” said Louis Morisset, AMF’s president, in a statement. “The convictions obtained in this case are the culmination of lengthy investigative procedures and the sustained work of our teams of investigators and prosecutors.”

Amyot was involved in a similar scheme several years ago. In October 2015, the U.S. Securities and Exchange Commission (SEC) described Amyot as a “Canadian Pump-And-Dump Operator” and fined him, IAB Media Inc. and Hilbroy Advisory Inc. (two Canadian companies controlled by Amyot, according to the SEC) and Spencer Pharmaceutical Inc., a publicly-traded company with addresses in both Boston, Massachusetts, and Canada, to more than $7 million.

According to the SEC’s complaint, filed on December 17, 2012, Amyot, Spencer, Hilbroy, and IAB Media were involved in a “pump-and-dump” scheme in 2010 and 2011 involving Spencer’s publicly-traded stock.

According to the complaint, Amyot worked with the three companies, as well as Spencer’s two officers and directors, to create and disseminate false and misleading press releases and to otherwise promote Spencer’s stock, including via websites and newsletters.

Quebec financial watchdog raids offices of man prohibited from promoting PlexCoin

The Quebec financial watchdog raided last week the offices of Dominic Lacroix, a Quebec City man who has been prohibited by a tribunal to promote and solicit investors for a new virtual currency called PlexCoin.

The raid turned up a list of people from around the world, including Quebec, the U.S., and Africa, who expressed an interest in investing in PlexCoin, said Sylvain Théberge, a spokesperson with the Autorité des marchés financiers (AMF), the regulatory and oversight body for Quebec’s financial sector.

On July 20, 2017, at the request of the AMF, the Quebec Financial Markets Administrative Tribunal issued a broad ex parte forbidding Lacroix and his companies DL Innov inc. and Gestio inc. from “engaging in activities for the purpose of directly or indirectly trading in any form of investment” covered by the section 1 of the Quebec Securities Act (Act), either in Quebec or from Quebec to outside of the province. The tribunal issued the same order against PlexCorps and PlexCoin. (An ex parte order is an order granted by a judge at the request of and for the benefit of one party only, without notice to or contestation by the other party.)

The AMF alleges that Lacroix, among others, have not complied with the orders issued by the tribunal. As a result it is now considering whether to launch penal proceedings against Lacroix and his companies before the Court of Quebec (a provincial court) or to hand the case over to police authorities. “We are now in the midst of examining all our options,” said Théberge.

In a filing before the Tribunal obtained exclusively by Law in Quebec, the AMF revealed that it began its investigation on Lacroix, Dl Innov and other companies affiliated with him on May 8, 2017. On July 4, 2017, the AMF’s investigation branch received an anonymous tip about PlexCorps. The person “sought to bring to the AMF’s attention” that PlexCorps was seeking public financing while boasting high returns, without a prospectus.

In its filing, the AMF argued that investing in PlexCorps by purchasing PlexCoin “constitutes an investment contract” as per the Quebec Securities Act, and that neither PlexCorps nor PlexCoin registered with the AMF as a securities dealer as required by the Act. The filing also notes that PlexCorps and PlexCoin did not submit a prospectus to the regulator as required by the Act. It points out that neither PlexCorps nor PlexCoin has a “legal existence” in Canada or Quebec, and that no such organization can be found in the widely-used company database web site opencorporates.com.

In its filing, the AMF alleges that PlexCoin actively participated in a French-language forum entitled cryptofr.com. According to the filing, an AMF investigation shows that discussions emanating from PlexCoin about the virtual currency in the French-language forum stems from an internet protocol address that is linked to DL Innov Inc, a Quebec City firm that was established as a holding company on December 2012 under the Quebec Business Corporations Act. DL Innov has never registered with the AMF as a securities dealer.

The filing also notes that in discussions about PlexCoin in the French-language forum, PlexCoin itself stated that “Gestio Inc., a company related to DL Innovo Inc, was mandated to manage the French-language social network of PlexCorps.” Gestio inc., a registered Quebec City company established on February 2013, operates in the IT sector and conceives and leases management software. Gestio Inc.’s major shareholder is DL Innov, and its president, secretary and treasurer is Domenic Lacroix. Like DL Innov, Gestio and Lacroix did not register with the AMF as a securities dealer.

The Tribunal ordered Lacroix, DL Innov, Gestio, PlexCorps and PlexCoin to withdraw advertisements or solicitations on the internet or elsewhere relating to securities or any forms of investment, published or distributed by them directly or indirectly on the internet or elsewhere.

In issuing its broad ex parte orders, the tribunal notes that it was important to render a quick decision to protect the public.

Quebec financial watchdog considering its options over PlexCoin

Quebec’s financial watchdog is considering handing over the case involving Dominic Lacroix and his companies, who have been prohibited by a tribunal to promote and solicit investors for a new virtual currency called PlexCoin, to police authorities.

The Autorité des marchés financiers, the regulatory and oversight body for Québec’s financial sector, is also considering launching penal proceedings against Lacroix and his companies, said Sylvain Théberge, AMF’s spokesperson. Such proceedings would take place before the Court of Quebec, a provincial court.

“We are talking about thousands of people who have shown an interest in this system,” said Théberge, adding that a decision as to whether to call in police or refer the matter for penal proceedings will take place this week. “We are extremely concerned. It seems to us, until the contrary is proven, that investors may become involved in a high-risk investment.”

On July 20, 2017, at the request of the AMF, the Quebec Financial Markets Administrative Tribunal issued a broad ex parte forbidding Lacroix and his companies DL Innov inc. and Gestio inc. from “engaging in activities for the purpose of directly or indirectly trading in any form of investment” covered by the section 1 of the Quebec Securities Act, either in Quebec or from Quebec to outside of the province. The tribunal issued the same order against PlexCorps and PlexCoin.

(The decision by the Tribunal has yet to be published. An ex parte order is an order granted by a judge at the request of and for the benefit of one party only, without notice to or contestation by the other party.)

The Tribunal also ordered them to pull out advertisements or solicitations on the internet over any securities or investment vehicles. The Tribunal also ordered them to shut down the site plexcorps.com and plexcoin.com – or at the very least make them inaccessible to Quebec consumers. As of today, both web sites are still operating.

“We have an individual who up until today has decided not to respect the orders issued by the Tribunal,” said Théberge. “Behind PlexCoin in Quebec, it is Dominic Lacroix and his team who manage the site. He is the one looking after the advertising in Facebook. He is the one who is involved here in Quebec, through his Quebec companies, of attracting investors towards these operations.”

PlexCoin is a group of forty people, including programmers, engineers, and cryptocurrency specialists, “all independent” located throughout the world, according to its Facebook account. It recently published a white paper that ostensibly “explains all the details” of the PlexCoin project and supposedly “contains information” about the funding project.

Details about the people behind the project have been excluded in the white paper. In the introduction of the white paper, there is a signature etched above the word president of PlexCorps but it is indecipherable. The spelling of the word president is written in French, and beside it are the initials DG which may mean director general or directeur général in French.

Quebec’s financial regulator is also holding discussions with Facebook. Facebook Canada Ltd. was ordered by the Tribunal to shut down the Facebook pages of PlexCorps and PlexCoin. Facebook declined to comment. “We can’t share details about cases,” said a Facebook spokesperson.

“The problem is that Facebook is located in the U.S.,” said Théberge. “We are holding talks with them. Their lawyers have been informed about the case.”

In a wholly unrelated case, Lacroix was the target of another order by the Tribunal, again at the AMF’s request. The Tribunal issued on June 13, 2017 ex parte freeze and prohibition orders against Lacroix, Régis Roberge, DL Innov inc., Micro-Prêts inc. and Gap Transit inc. in connection with failures to comply with the Securities Act.

On June 29, 2017, the Tribunal partially rescinded its far-reaching order after an agreement was reached between the AMF and the parties.

Earlier still, on February 2013, Lacroix and his company Micro-Prêts plead guilty before the Court of Quebec to six charges of illegal distribution, illegal practice and misrepresentations. The Court ratified the parties’ joint proposal and imposed a $25,000 fine.

“All of this demonstrates that this is an individual, who even though he has been sanctioned, does not seem to understand,” said Théberge. “So we are faced with a potential repeat offender.”

Nearly $8.8 million in monetary sanctions imposed in 2016 for Quebec securities offenses

When Judge Réna Émond of the Court of Québec imposed just before the Christmas holidays fines totaling $120,000 on Danny Gagné and ISpeedzone Inc. for illegal practice as a securities dealer, it wrapped up a good year for Quebec’s financial watchdog.

Nearly $8.8 million in fines and administrative penalties were imposed on 158 individuals and firms in 2016 for various offences under laws administered by the Autorité des marchés financiers (AMF), according to the latest enforcement report by the regulator. Of the $8.8 million in total monetary sanctions, $7.6 million involved securities or derivatives laws violations, with another $1 million stemming from Quebec’s Distribution Act. The report reveals that 15 offenders did more than 11,000 hours of compensatory work, with one offender choosing to pay his fines through a prison sentence of 729 days.

“Our enhanced detection capabilities, resulting mainly from the refinement of our surveillance tools, as well as our ability to obtain stern sanctions that include prison terms, contribute to deterring individuals and firms from violating the laws that we administer,” said AMF President and CEO Louis Morisset. “In 2016, for instance, seven individuals were imposed prison terms totaling 138 months at the conclusion of the penal proceedings we undertook.”

Over the past year the AMF launched 28 lawsuits before the Court of Quebec or the Tribunal administratif des marchés financiers against 55 individuals and firms for various offences. 552 charges were laid for offences under the Securities Act or the Derivatives Act, 10 charges for offences under the Distribution Act, and 21 charges for offenses under the Money-Services Business Act.

The AMF also obtained nine freeze orders against 59 individuals and firms. Freeze orders are issued during an investigation to protect assets and prevent them from being transferred. The watchdog also obtained orders against 45 individuals or firms to cease certain regulated activities, to cease acting as an officer or director, or to cease trading in securities.

The AMF’s new whistleblower program receive 49 reports, 28.6 per cent of which led to an opening of an investigation, reveals the enforcement report. “In light of the results to date, we are confident that our whistleblower program will enable us to detect more infractions, to intervene earlier and to minimize the consequences of infractions for victims,” said Jean-François Fortin, AMF’s executive director of enforcement.

Launched last year, the AMF whistleblowing program does not offer financial incentives to attract tips for potential transgressions. The financial watchdog decided to follow in the footsteps of Australian and United Kingdom’s securities regulators after an internal study determined that it cannot be “established with certainty” that offering rewards leads to “more quality” whistleblowing. A reward-based whistleblowing program may also end up “weighing down and complicating the work of investigators” because individuals may be tempted by the allure of a potential payday and provide tips that fall short of being “high quality,” said AMF spokesman Sylvain Théberge

Financial considerations also came into play. In order to reward whistleblowers, the regulator would have to impose sizeable penalties that could be collected, noted Théberge. “We are relying on receiving pertinent information from honest and loyal people who often face problems at a professional level because they have witnessed something that they cannot accept,” said Théberge.

The Ontario Securities Commission (OSC) has taken a different tack. Drawing from the successful whistleblowing program run by the U.S. Securities and Exchange Commission (SEC), it became the first securities regulator in the country to offer monetary rewards, up to $5 million, to individuals who come forward with information that leads to enforcement action. But to be eligible, a tip must lead to a sanction or a voluntary payment of at least $1 million. Controversially, even “culpable” whistleblowers – individuals who were complicit in the violation of Ontario’s securities laws – are eligible for a whistleblower award.

Quebec’s anti-corruption law proves to be a niche market for accounting firms

Quebec’s anti-corruption law, adopted more than a year ago in the wake of allegations of bribes, collusion, influence peddling, and widespread corruption in the construction industry, is proving to be good business for accounting firms.

Adopted more than a year following the launch of the Charbonneau Commission, a public inquiry mandated to examine potential corruption in the awarding and management of public construction contracts, the Integrity in Public Contracts Act (Act) compels companies to obtain a seal of integrity if they wish to bid on the billion dollars in contracts awarded annually in the Quebec public sector.

Under the Act, the province’s securities commission is the public guardian responsible for granting authorization to enterprises in a call for tenders or an award process for a contract or subcontract with a public body. The Autorité des marchés financiers (AMF) has sweeping discretionary powers to determine the integrity of enterprises and of its shareholders, partners, directors or officers and of any person or entity that has direct or indirect legal or de facto control over the enterprise. The AMF, however, has no choice but to blacklist an enterprise if the company or any of its directors, officers or shareholders holding 50 per cent or more of voting rights, have in the preceding five years been found guilty of a long list of offences.

The AMF works closely with Quebec’s anti-corruption police squad, otherwise known as UPAC. After an authorization request has been submitted by an enterprise to the AMF, the financial watchdog refers the matter to police, who conduct an investigation and scour their databases to see if any of the company’s principals are the subject of investigations or have been named at the Charbonneau Commission. UPAC then provides the AMF with an advisory opinion. Based on the UPAC report, the AMF notifies the applicant about its intention to either to grant or refuse an authorization. In either case, the company’s name enters into a public register.

Jean-Paul David, a partner with the Raymond Chabot Grant Thornton, one of Quebec’s largest accounting firms. In almost all cases, companies who have been blacklisted will have to stop working on public contracts already underway. Even more damaging, the business will automatically be listed in the Register of enterprises ineligible for public contracts (RENA).

“To be listed on RENA can be a very hard blow to a company,” said David, who is part of the recovery and reorganization group in Montreal. “It can have immediate consequences, such as losing all government contracts, unless the provincial government makes an exception for work already underway. Also, to be on RENA is to be in the public eye: your clients, your suppliers and your bankers all end up finding out that you are in RENA, and that has very important consequences.”

When the Integrity Act was introduced in December 2012, the Quebec government initially required companies bidding on public contracts worth $40 million or more to obtain authorization. That figure has now dropped to $10 million, and the Quebec government has sent out clear signals that it intends to drop the threshold below the $10 million mark in the future. In Montreal, that figure is even lower, plummeting to $100,000 or more for contracts on road, sewer or water-main projects.

That’s when accounting firms come in. A growing number of enterprises, principally in the engineering and construction sector, are turning to accounting firms to help and guide them with the AMF authorization process. “They have one shot, and they want to do it right and so they come to us,” said Marie-Chantal Dréau, a partner at PwC Canada in Montreal who leads the forensic services practise for the Quebec region.

Accounting firms assist clients in a variety of ways, and at different phases of the AMF vetting process. When clients are in the process of preparing their application, accounting firms will begin by analysing, if not even helping them to develop, internal governance structures, with an emphasis on ensuring that independence is a cornerstone of their operations. They also conduct management reviews, examine the company’s ethical and financial policies and procedures, and often times perform forensic investigations to look for evidence of wrongdoing.

“What you want to prove (to the AMF) is that you have enough independence on your operations that non-ethical behaviour would be caught or at a minimum would be questioned,” explained Dréau, CPA•CA, CA•IFA, MBA, CFE. “Then we look at their policies and procedures as it relates to integrity (to determine) if they have a proper code of ethics that addresses fraud, bid-rigging, and other such issues that were part of the industry motto before. You also want to make sure that before you submit an authorization request to the AMF that you have gotten rid of the bad apples.”

Accounting firms also step in when the AMF warn companies by letter that they are about to be refused. In such cases, the AMF spells out the reasons why they are about to be refused and then provides companies with an option: either withdraw its application or provide the AMF with additional information within 10 days that may help sway the financial watchdog to change its mind in the company’s favour. Some companies opt to withdraw their application because the consequences of being registered in the RENA registry are too deleterious, said David. Others turn to accounting firms to help draft a response to the notice of refusal. “We then often need to educate companies as to what they missed in providing the AMF with some comfort, and (help them) answer every single question the AMF is putting on the table,” said Dréau. “The notice of refusal provides reasons for the refusal so you know what needs to be addressed. Smaller companies don’t necessarily provide all the information the AMF or UPAC needs to give a positive response.”

Sometimes, the AMF hands out a conditional authorization in which case the company has made a commitment to put in place certain measures and to have them verified by an independent monitor such as an accounting firm. If the company fails to meet its obligations, then it risks losing its authorization.

All in all, it’s a new, exhaustive, and time-consuming process that is hard on companies, said David. Before the introduction of the Act, accounting firms were providing these specific services to public companies that had to comply with National Instrument 52-109 or the 2002 U.S. Sarbanes-Oxley Act.

But with the threshold likely to drop in the foreseeable future to below $10 million, chances are it will spur new growth opportunities for accounting firms. Indeed, smaller regional accounting firms like Le Groupe Amyot Gélinas are now considering entering the market. “It’s all about helping our clients,” said Marc Legault, CGA, of Amyot Gélinas. Though the majority of the clients now come from the construction and engineering sector, the Act covers all public contracts. It’s only a matter of time before other sectors will begin to seek out the expertise provided by accounting firms, said David. It’s also likely that there will be an influx of small-and-medium sized enterprises that will have to go through the vetting process, and that presents a different challenge to accounting firms. “Smaller companies are differently structured and have different means so they are likely going to come in and ask us what is sufficient and how to adapt it to their reality,” remarked Dréau. “We are going to have to provide different levels of assistance, much more practical.”

But it is not a line of business that will in and of itself sustain an accounting firm, warned David. “It’s a niche market,” said David. “It’s a market that will likely grow as the thresholds diminish, but I don’t think that there is enough volume to do just this.”

Quebec companies barred from bidding on public contracts have little chance of obtaining legal relief

Companies that have been barred from bidding on public contracts stand little chance of obtaining injunctive relief that would temporarily suspend a new law aimed at curbing corruption in the construction industry, following a closely-watched ruling by Quebec Superior Court.

In the wake of allegations of bribes, collusion, influence peddling, and widespread corruption in the construction industry, corroborated by testimony before the Charbonneau commission, the Quebec government passed legislation last December that compels companies to obtain a seal of integrity if they wish to bid on the billion dollars in contracts awarded annually in the Quebec public sector.

Under the Integrity in Public Contracts Act (IPCA), the province’s securities commission is the public guardian responsible for granting authorization to enterprises in a call for tenders or an award process for a contract or subcontract with a public body. The Autorité des marchés financiers (AMF) has sweeping discretionary powers to determine the integrity of enterprises and of its shareholders, partners, directors or officers and of any person or entity that has direct or indirect legal or de facto control over the enterprise.

The AMF works closely with Quebec’s anti-corruption police squad . After an authorization request has been submitted to the AMF, it refers the matter to police, who conduct an investigation and then provides the AMF with an advisory opinion. So far, there have been 250 authorizations that have been submitted, 194 of which have been granted, some thirty-odd are still under study, and four have been refused, according to AMF spokesman Sylvain Théberge.

Les Enterprises Bentech inc., a Montreal numbered company that was refused an authorization by the AMF because it allegedly is a shell company, issued false invoices and failed “meet the high standards of integrity that the public is entitled to expect from a party to a public contract or subcontract,” is challenging the AMF’s interpretation of the integrity law in a case that has yet to be heard by the courts. In the meantime Bentech however sought an injunction that would allow the Montreal firm to complete a contract it was awarded. But Quebec Superior Court Justice Chantal Corriveau refused to provide an injunction that would suspend the AMF’s decision to blacklist Bentech. “Contrary to what Bentech submits, the Court cannot conclude that the decision by the AMF exceeded its competence,” said Justice Corriveau before adding that the legislator granted broad powers to the AMF that allows it to “weigh discretionary factors.”

The ruling underscores the challenges faced by companies who are blacklisted by the AMF, said Sébastien Laprise, a Quebec City lawyer with an expertise in public procurement law and municipal law. The new integrity law “is a law of public order and therefore judges will demand convincing evidence before even considering suspending the effects of the Integrity Act,” said Laprise of Langlois Kronström Desjardins, LLP. “That is going to be very difficult.”

Eric Simard, a Montreal lawyer who leads the construction practice group for Fasken Martineau DuMoulin LLP, asserts that unless the constitutionality of the integrity law is challenged companies will face a formidable task to “protect their interests” as temporary injunctive relief will be rarely granted in light of the ruling in 9129-2201 Québec inc. v. Autorité des marchés financiers 2013 QCCS 4857. “The only way that entrepreneurs who consider that their rights have been violated can protect their interests is to launch a frontal constitutional attack on this law,” remarked Simard.

Some believe that the law is ripe for challenge. Daniel Bouchard, the managing partner of the  Quebec City office for Lavery, de Billy,  believes that the new law grants the AMF far too extensive discretionary powers. Under the Integrity Act, the AMF may take into account a non-exhaustive list of factors in exercising its discretion, including whether an enterprise (or its majority shareholder or one of its directors or officers) has links with a criminal organization, was prosecuted for an offence listed in the Integrity Act, and whether the enterprise is under the direct or indirect legal or de facto control of another enterprise that has in the preceding five years been found guilty of an offense listed in the Act. More controversially, the AMF may also refuse or revoke any authorization if the enterprise fails to meet the “high standards of integrity that the public is entitled to expect from a party to a public contract or subcontract.”

“What does that mean,” asked rhetorically Bouchard.  “Personally I find that the legislator went too far and the risks for abuse are large. It’s difficult for me to say that the law is unconstitutional or illegal but they have given the AMF such large discretionary powers that it will often be questioned.”

Christopher Mostovac, a Montreal lawyer defending Bentech, does not intend to challenge the constitutionality of the law. When the case will be heard sometime next year before Quebec Superior Court, Mostovac will be pleading that the AMF went beyond the scope and parameter set out by the Integrity Act when it decided to blacklist Bentech.

“I am not going to take the position that this law is wrong or unconstitutional,” said Mostovac, who teaches a tax litigation course at the University of Montreal. “I am taking the simple position that in the case at hand the AMF has an absolute obligation to follow the parameters which the law gives it in attempting to determine who has a moral standard or who doesn’t, otherwise it becomes dangerous for all concerned because it exposes you to decisions of a completely arbitrary nature.”