Legal experts hope first remediation agreement under Criminal Code will lead to more

Nearly four years after the federal government added deferred prosecution agreements to the Criminal Code as part of its arsenal to fight corruption and other white-collar crime, legal experts hope that guidance provided by Quebec Superior Court in Canada’s first ever remediation agreement will prompt federal prosecutors and organizations to take advantage of the new way of settling criminal charges.

The comprehensive, meticulous and “important” decision introduces a “welcome” degree of certainty to the new process in the absence of accompanying regulations, guidelines or policies in the remediation agreement regime, according to legal experts. The ruling by Quebec Superior Court Justice Éric Downs sheds light on how remediation agreements will be broached by the courts, indicating that while they will not act as a “rubber stamp” in reviewing proposed settlements, the agreements will be afforded a high degree of deference, added the experts. The judgment also signals that self-reporting, though not a “hard condition,” will carry considerable weight as does “strong cooperation” to help sway the courts to sanction the agreement, they added.

“It’s an important decision because there were question marks around how the courts would approach the approval of a remediation agreement and how involved they would be in the process,” noted Louis-Martin O’Neill, a Montreal M&A and securities litigator with Davies Ward Phillips & Vineberg LLP. “The Court was very mindful of the fact that there is a huge need for stability in the system, and that implies that when a corporation starts to negotiate with the prosecution for a remediation agreement it has to know that unless something very grave happens, that agreement should stick when presented to the court.”

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Quebec court applies Jordan ceilings to white collar crime

A Quebec man accused of tax evasion by provincial tax authorities won an “important” legal battle after the Court of Quebec applied the landmark Jordan ruling and ordered a stay of proceedings and charges.

The decision affirms that the principles set out by the Supreme Court of Canada in R. v. Jordan, 2016 SCC 27, [2016] 1 applies to white collar crimes, clarifies the notion of “complexity of the case,” underlines that the prosecution must analyze the evidence and develop a “concrete management and trial plan” before laying charges, and it may even prompt Revenu Quebec to review its procedures, according to tax lawyers. The ruling also suggests that the Covid-19 pandemic is not in itself sufficient grounds to justify delay, without examining other factors.

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Do jail sentences deter future white-collar crimes?

The courts appear to have heard calls from victims of white-collar crime demanding stiffer sentences against those found guilty of swindling investors.

In October 2009, Vincent Lacroix, a high-profile Quebec white-collar criminal found guilty of masterminding a $130-million fraud with 9,200 victims, was sentenced to 13 years in jail. A little over a year later, in February 2010, former Montreal financial adviser Earl Jones was sentenced to 11 years in prison, after pleading guilty to two fraud charges related to a $50-million Ponzi scheme he orchestrated.

But an accounting professor who published a study on occupational fraud is far from convinced that stiff jail sentences on white-collar criminals will prove to be an effective deterrent.

“Jail sentences do not deter future white-collar crimes,” said Dominic Peltier-Rivest, Chair and associate professor at the department of accountancy at the John Molson School of Business at Concordia University. There is no evidence or studies that suggest that extended incarceration yields additional deterrence, he maintains. “What discourages future white-collar criminals is the fear of getting caught, not the length of sentence.”

Peltier-Rivest asserts in his study, “Detecting Occupational Fraud in Canada: A Study of its Victims and Perpetrators,” that measures such as a fraud hotline or an anonymous reporting program, fraud awareness training programs as well as surprise and external audits can be effective tools to limit the losses incurred by occupational fraud.

Occupational fraud is costly. Peltier-Rivest, a certified fraud examiner (CFE) who earned his PhD studying financial statement fraud, estimates that public and private-sector Canadian organizations lose five per cent of sales to fraud every year, with small business (defined as having less than 100 employees) being particularly vulnerable. Smaller organizations, notes the study, tend to have fewer internal controls largely due to fewer or more limited resources.

The study discloses that 90 per cent of all occupational fraud cases involve asset misappropriation, with a median loss of $200,000. And it reveals that 42 per cent of occupational frauds were committed by employees, 38.6 per cent by managers and nearly 20 per cent by owners and executives.

But while owners and executives perpetrate less frauds, they commit larger frauds, with median losses estimated at $1-million compared to $165,000 for managers and $75,000 for employees. Executives typically have more opportunity to commit larger frauds “due to their high level of authority, which enables them to override controls more easily than lower-level employees,” according to the report. Executives also frequently have greater access to organizational assets than their subordinates, adds the study.

That’s why it is important for organizations to tailor anti-fraud measures, said Peltier-Rivest.  External audits are the most frequently tool to detect frauds, with nearly 80 per cent of organizations examined by Peltier-Rivest resorting to them. But they are from being the most effective anti-fraud measure. External audits detected only 6.7 per cent of frauds. In contrast 13 per cent of occupational frauds were detected by internal audits, 19 per cent by an organization’s internal controls, and a surprising 42 per cent through tips from employees, vendors, customers or anonymous sources.

In fact, organizations that use hotlines detect fraud far quicker and experience much lower median fraud losses than those that did not ($90,000 compared to $197,500). “This result brings some support to new audit committee regulations adopted by most Canadian provinces in the last few years, which require audit committees of publicly traded companies to establish reporting mechanisms to receive and address complaints regarding internal controls and financial matters of the company,” said Peltier-Rivest.

Peltier-Rivest believes that such reporting mechanisms should also apply to investment funds and private or close-end investment firms as a means to minimize and detect fraud such as was committed by Lacroix. At present, investment funds are not compelled to follow Regulation 52-110 respecting Audit Committees, which requires all reporting issuers to have an audit committee. Nor do investment funds and close-end investment firms have to abide by Regulation 52-109 respecting certification of disclosure in issuers’ annual and interim filings, which calls for every issuer to have disclosure controls and procedures and internal control over financial reporting.

“We should work on prevention and earlier detection as opposed to relying on giving somebody 12 years in jail and hoping that it will curb future crimes,” said Peltier-Rivest.

Michel Magnan, editor of the world-renowned quarterly journal Contemporary Accounting Research, also believes that stringent internal controls, rather than heavy prison sentences, are key to preventing occupational fraud. Magnan, like Peltier-Rivest, notes that there is a paucity of evidence emanating from studies over the efficacy of stiff prison sentences to deter occupational fraud.

“It is wiser to invest in prevention, that is, before the monies disappear,” said Magnan. “A stiff sentence will not deter occupational fraud. It will succeed in making these people more careful in the way that they will commit the fraud. Internal controls really are the key.”