I am often put in a precarious position when asked to discuss the types of cases that I work on.
At one particular well-attended family function, one of my teenaged daughters asked,
"Dad, did you nab the crook who ran away with everyone's money??"
Due to the highly confidential and sensitive nature of recovery work that I perform, I never discuss specific examples. But the keen interest is telling: more people are becoming aware of civil fraud as an emerging area of law. At the same time, civil fraud is poorly understood.
My daughter's question was not an absurd one. I am a commercial litigator by training. In practice, however, I am also called upon to act as an investigator, and when I assist in recovering assets, I could be labelled as a sheriff.
THE CHANGING NATURE OF RISK: THE INTERNATIONAL INTRICACIES OF CIVIL FRAUD
Civil fraud is a broad concept that has drawn extensive international attention in the business community and in the press for such high-profile cases as Enron, WorldCom, and YBM Magnex. In addition to the falsification of books and records, civil fraud arises in many other large-scale contexts, including when bankrupt or insolvent debtors attempt to hinder, defeat or prejudice creditors by way of preferences, reviewable transactions, settlements or fraudulent conveyances. Civil fraud also arises when rogue employees, officers or investment advisers embezzle funds offshore from unsuspecting business entities.
Gone are the days when all one had to worry about was one lone rogue employee cooking the books. The risk that large corporations, banks and financial institutions will be defrauded has become increasingly complex. E-commerce, globalization and other factors have created fertile ground for sophisticated white-collar criminals. Collusion among higher-ranking officers and management or outside "advisers" to perpetrate and disguise fraud also contributes to increased incidences for civil fraud recoveries.
Sophisticated international civil fraud has become increasingly common, for a number of reasons. First, there are numerous complexities to conducting joint cross-border civil and criminal proceedings. Court proceedings in foreign jurisdictions often result in significant delay, especially if there are language barriers and if counsel are unfamiliar with the intricacies of obtaining civil remedies in foreign courts. This delay provides perpetrators with time to avoid detection, and to escape with the proceeds of crime. In contemplating a fraud, perpetrators are increasingly more inclined to commit a fraud, especially when they recognize that moving money offshore through a number of foreign jurisdictions is more likely to make their fraud activities successful.
Recovery of fraud losses requires well-organized, multi-jurisdictional strategy. It may require obtaining court orders from several different countries, especially if the proceeds of crime have been distributed to various jurisdictions to avoid detection. Often, recovery experts will require disclosure of documents from different countries so that stolen assets can be traced and frozen. However, courts in some foreign jurisdictions are slower than others in granting these types of orders. This allows criminals to flow the proceeds of crime to other jurisdictions with weaker and less-efficient court systems.
Fraudsters will incorporate fictitious companies or small financial institutions to launder the proceeds of crime-usually in jurisdictions where local enforcement authorities are weak and ineffective. Banking confidentiality laws can also be difficult to pierce in these particular jurisdictions. For example, the lure of tax benefits for offshore Caribbean investments has been used to disguise many investment frauds in recent years. All of these international criminal strategies make detection and recovery more difficult and expensive. It is particularly difficult to effect recoveries in most Eastern European countries and in Caribbean financial centres such as the Cayman Islands, Turks and Caicos Islands, St. Vincent, Antigua, Vanuatu, and Liechtenstein.
The result is that never in history has international fraudulent attack been more prevalent. Because defrauding a business entity now involves complex global strategies, victims will need a more resourceful law firm, comprised of not just lawyers, but also in-house forensic fraud investigators.
EXAMPLES OF INTERNATIONAL CIVIL FRAUD PERVADING THE BUSINESS COMMUNITY
The following scenarios help illustrate the complexities of combating international civil fraud:
ANTON PILLER ORDER
Employee X, a sophisticated former fraud investigator, facilitates a multimillion-dollar theft from a major Canadian corporation, Corporation Y, by forging a wire transfer of funds. To avoid detection in Canada, Employee X transmits the proceeds of his crime to an Eastern European bank account, which he controls directly. This bank account is in the name of a fictitious foreign corporation. These proceeds are then, in turn, transmitted to yet another Eastern European bank account of an accomplice.
To trace where the stolen assets have ended up, private forensic investigators will need to interview both Corporation Y staff and the bank staff. Private forensic investigators will also use computer imaging, and they will review other material such as pass cards, telephone cards, and long-distance call records to track who the actual perpetrator is, and where the assets were channelled.
Once the identity of Employee X is discovered and a Canadian civil action is commenced against Employee X, an Anton Piller order can be obtained by Corporation Y. These are essentially civil search warrants. A court order can authorize the entry of either Employee X's place of business or home to search for and seize evidence of fraud. To successfully obtain an Anton Piller order, among other things, Corporation Y must demonstrate a very strong prima facie case of fraud or other misconduct. Corporation Y must also demonstrate potential or actual damage that is serious, and there must exist a "real possibility" that Employee X may destroy that material to defeat Corporation Y's claim. These types of orders can be obtained without notice to the defendants.
To recover Corporation Y's stolen assets that are abroad, a foreign court order directing that documents be disclosed needs to be obtained so that the proceeds can be traced to both Eastern European bank accounts. Problems may arise, however, if the courts of those countries are hesitant to relinquish the stolen proceeds. In some situations, an order to freeze and arrest assets is easily attainable, but in most instances, actual recovery of assets will involve utilizing not only the court system, but utilizing prominent international contacts.
It helps in forensic civil fraud work to have a network of international contacts in diplomatic circles and/or in foreign governments. These officials may add support for court remedies sought in their jurisdiction and, in some countries, may be in a position to persuade their courts that the stolen funds should be released to defrauded victims in Canada.
MAREVA INJUNCTION/NORWICH
PHARMACAL ORDER
A rogue senior bank officer defrauds millions from a large Canadian financial institution using complex and sophisticated transferring techniques. These assets are wired to a U.S. casino.
The defrauding bank officer is a compulsive gambler, so he decides to head south to the United States to gamble the stolen proceeds.
The bank can bring both a Canadian and U.S. civil action against the casino to restrain the proceeds of fraud while the proceeds migrate through banking systems, to recover the stolen assets, and to obtain an injunction. This claim can be based on the argument that the casino knew or should have known that the bank officer was gambling stolen proceeds.
Specifically, the bank can seek a Mareva injunction in Canadian courts. A court-ordered Mareva injunction will freeze the casino's assets up to the value of damages claimed, and the casino can be restrained from dealing with its assets in any manner. In an appropriate case, the restraint can be world-wide and can cover all proceeds of the crime.
To be successful in obtaining a Mareva injunction, there must be: (i) a strong prima facie case of fraud or other misconduct; (ii) a "genuine risk" that assets will be disposed or removed outside the usual and ordinary course of business to defeat judgment; (iii) full and frank disclosure of all material facts in the aggrieved bank's knowledge; and (iv) the bank's undertaking as to damages. These types of injunctions are also often obtained without notice to the defendants.
The bank can also seek a Norwich Pharmacal order in Canadian courts. These are court orders permitting the discovery of fraud evidence from innocent third parties. In this case, the casino or its Canadian bank may have inadvertently facilitated a fraud. A Norwich Pharmacal order requires senior officials at the casino or bank to produce documents and, in an appropriate case, to be examined. The evidence obtained under a Norwich Pharmacal order can be used to trace and preserve the bank's assets. Norwich Pharmacal orders can now be obtained from the courts of most commonwealth countries, and similar orders can be obtained in the U.S. and elsewhere.
WHY IS CIVIL FRAUD A MASSIVE
THREAT TO CORPORATE ENTITIES?
Civil fraud can have a crucial and long-term impact on the reputation and financial security of business organizations.
Inherent in any civil fraud investigation is reputational risk. A corporate entity that has been defrauded may trigger concerns that senior management was incompetent, negligent
and failed to adequately protect the company. It could adversely impact individual reputations of directors.
Most significantly, corporate accounting scandals can rive stock prices of publicly-traded companies down, since the public has good cause to doubt the accuracy of accounting records and other financial statements. These risks have caused many corporations and financial institutions to assess the adequacy of their internal fraud loss controls.
AN INTEGRATED MULTIDISCIPLINARY APPROACH
Leading multidisciplinary teams today combine the legal expertise of litigators with the skills, abilities and reach of experienced fraud investigators and security specialists. These teams offer preventative, investigative, and recovery services for clients who suspect they may have been duped by fraudulent conduct. They focus on tracing assets, maximizing asset recoveries, minimizing the risk of having one's reputation tarnished and strengthening fraud prevention. They advise on fraud risk management, and they provide discreet, effective solutions to mitigate organizational exposure to adverse events within the corporate realm.
Increased large-scale fraud on an international level is one of the major reasons why specialized civil fraud teams have developed in recent years. Their expertise extends to Anton Piller orders; Mareva injunctions; Norwich Pharmacal orders; bills of exchange issues such as cheque kiting and forgeries; mortgage fraud or fraudulent conveyances; financial transaction fraud for equipment, automobiles, stocks and bonds; e-commerce and Internet fraud; credit card and ATM fraud. When a multidisciplinary approach is combined with a global network of contacts, the team's strength is maximized for combating civil fraud.
The recovery process often begins with a preliminary assessment and report. The report often provides a recommended strategy for asset recovery with a timeline and pricing proposal.
Investigations should be tightly focused and results-oriented. Accounting forensic teams may be enlisted to review and document the problem. Steps are often taken to ensure that the relevant records, including e-mail and deleted materials, are seized and preserved. Personal background searches may be conducted and key witnesses interviewed, including officers, directors, industry people, competitors, staff and customers.
Civil fraud specialists usually offer computer forensics services, which include the recovery of deleted materials relevant to investigations and litigation. That evidence is often found on computer hard drives and on other electronic devices. Most password-protected and encrypted documents can be recovered.
Once civil remedies have been pursued, a comprehensive investigation package can be turned over to the relevant authorities for dealing with the matter in a criminal context.
Pricing
Creative pricing packages are gaining wider acceptance for fraud loss recovery efforts. Specialists can draw upon a track record of successful recoveries to customize a unique and innovative pricing package for each situation. Billing arrangements may include fixed fees, blended rates, reduced rates combined with success-based rewards and, where permitted, contingent fees. An effective pricing structure should reward quick solutions, overall fee savings and timely reporting.
PRACTICAL TIPS ON HOW TO PROTECT YOURSELF
Regulatory compliance, auditor independence, fraud risk management policies and rigid enforcement laws are all necessary to avoiding exposure to risk. But they're inadequate when dealing with sophisticated perpetrators of fraud.
Electronic theft is more commonplace than most people would like to believe. In this day and age, hackers are quick-witted and plentiful. Firewalls can be shattered, and the list of potential electronic mayhem that can strike a business entity can go on and on.
With proper preventative measures, a worthwhile investment in fraud prevention at preliminary stages may end up saving a business entity millions of dollars in the long run.
To minimize the risk that corporate entities will be defrauded, you should advise your clients that they should really get to know their senior executives, management, directors, investment advisers, suppliers, potential joint-venture partners, clients and financing sources. Heightened scrutiny at initial stages of employment or appointment will probably save a business entity a lot of money in the future. In short, corporate entities need to know the people with whom they are doing business.
In today's world, a fraudster can target anyone. Because corporate transactions will inevitably become increasingly complex in our intricate electronic reality, and because more corporations are pursuing business opportunities in foreign markets, the need to protect business entities from fraudsters has never been more essential.
Advise your clients to protect themselves from fraud prevention now. Investing in fraud prevention can save a business much more money in the long run. Waiting until fraud strikes is uneconomical, especially when one has to resort to civil remedies to reverse the damage.
We are becoming aware of a growing understanding among sophisticated clients for the need to protect themselves from white-collar fraud on an international scale. As criminals grow more sophisticated, major corporations and financial institutions will continue to be targeted more effectively. The business community will need more help in addressing fraud prevention and recovery issues in the years to come.
The fact that we're witnessing tremendous advances in sophistication of fraud risk management within certain segments of the business community is promising. This trend will no doubt permeate the business community as long as cunning fraudsters continue to target corporations and financial institutions in our complex cross-border and electronic reality. And I will still have to be careful in explaining what I do.
* The authors wish to acknowledge the contributions of Farah Malik, a student-at-law at Gowling Lafleur Henderson LLP.