Canadian firms naive about cost of crime

(May 27, 2004) Canadian companies need to take a tougher stance against economic crime, such as fraud and insider trading experts say. At the same time, the RCMP’s newly-created market-enforcement team is promising some high profile investigations in the coming months.

According to a worldwide survey by PricewaterhouseCoopers last year, 50% of Canadian companies have fallen fell victim to economic crime — ranging from misappropriation of assets and fraud, to insider trading and bribery — while the international average was 37%. In fact, the U.S. and Canada ranked second only to Africa in the prevalence of economic crime.

“The diligence with which companies approach their controls is very important,” said OSC chair David Brown at a breakfast meeting today in Toronto. “We’re finding that internal controls are present in virtually every company. In many cases the internal controls, had they been properly applied, would have detected some of the illegal activity at a much earlier stage.”

But despite the high incidence of economic crime, 60% of Canadian firms surveyed believed their existing control systems provide adequate protection against economic crime.

“The survey results reinforce the need for companies in Canada to develop a proactive anti-fraud regime founded on vulnerability assessment, communication, training, testing and fraud response planning,” says Steve Henderson of PricewaterhouseCoopers.

Many industrialized countries view Canada as being too soft on market-related crime, pointing to scandals such as Bre-X and Livent, which have not led to jail terms. In response, the federal government has passed new legislation and last year launched a permanent investigative body to deal with the bad apples in the market.

The RCMP established Integrated Market Enforcement Teams (IMET) to investigate economic crimes such as fraud and market manipulation. The teams have already laid charges against one broker-dealer and continue to investigate such high profile companies as Royal Group and Nortel Networks.

“Over the next year and a half, we’re looking for investigations to hit every one of the markets,” said RCMP superintendent Craig Hannaford. “You’re going to see work done on companies listed on the TSX, the smaller venture exchange, in the broker-dealers and in mutual funds, if the right case comes along.”

Bill C-13 — which has already been passed and will soon come into force — creates the criminal offence of insider trading, which had up to this point been a Securities Act violation. The new law also stiffens penalties for fraud, allowing prison sentences of up to 14 years.

The bill also provides whistle-blower protection, making it an offence to fire or otherwise penalize an employee who brings wrongdoing to light. A new investigative tool, called a production order, is easier to gain than a search warrant and forces the person being investigated to turn over documents.

But Brown says more needs to be done, citing Canada’s fragmented regulatory environment.

“We’ve been seeing in the States, ever since Enron hit the headlines, a series of investigations being made public, prosecutions and even jail time,” said Brown, crediting cooperation between American lawmakers and the main U.S. securities regulator, the Securities and Exchange Commission. “In Canada, because of the fragmentation of our system, you’re not seeing that. As long as we have a fragmented securities regulation system, it’s very difficult to create this coordination.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com