Originally posted on Lawyers Weekly: http://www.lawyersweekly.ca/index.php?section=article&articleid=640
Many commentators believe that securities law violations are under-enforced and under-prosecuted in Canada. But quite apart from securities regulatory enforcement, what is the role of the criminal law in the enforcement of financial crimes? Criminal prosecutions are necessary not simply as a supplement to the quasi-criminal jurisdiction of securities regulators, but as a first line in the enforcement of financial crimes. But criminal law has been virtually unused for this purpose even though the law on the books is wholly sufficient. This is because its enforcement and application is the “weak link” in the process.
Consider the purposes in Ontario’s Securities Act which are “to provide protection to investors from unfair, improper or fraudulent practices; and to foster fair and efficient capital markets and confidence in capital markets.” In the quasi-criminal context, where the securities commission pursues an enforcement action in provincial court, the commission is bound to adhere to these objectives and, when adjudicating the matter, the provincial court is similarly bound. So the objectives of securities law are generally prospective and preventative for capital markets.
Criminal law, on the contrary, is generally retrospective and punitive of individual misconduct. It is generally accepted that a number of penal objectives are at play when considering punishment for criminal offences. In R v. Lyons for example, Justice Gérard La Forest stated, “[i]n a rational system of sentencing, the respective importance of prevention, deterrence, retribution and rehabilitation will vary according to the nature of the crime and the circumstances of the offence.” These objectives differ significantly from those of securities legislation.
Furthermore, unlike many other crimes, financial crimes are not situational, opportunistic or thoughtless but tend to be premeditated, carried out in a rational manner, with a profit-seeking motive. In order to deter this rational profit motivation, criminal law has a role to play in creating significant down-side risks. A quasi-criminal prosecution pursuant to securities legislation is simply not a significant down-side risk if the accused stands to make millions from a carefully-planned fraud.
Consider sanctions. In terms of jail time, securities legislation imposes a maximum term of five years less a day. Under the Criminal Code, if an accused is convicted of fraud affecting the public market, she is guilty of an indictable offence and liable to imprisonment for a maximum fourteen year term. The maximum term is 10 years for the crimes of fraudulent manipulation of stock exchange transactions, insider trading and tipping, and crimes relating to false prospectus. The prospect of 10 to 14 years per crime must have a greater general deterrent effect than five years less a day.
But this argument is only theoretical, since prosecutions for these crimes under the Criminal Code are virtually non-existent. This is unlike the U.S., where heavy sentences have been levied for financial crimes (e.g. fraud, insider trading, conspiracy). The absence of Criminal Code prosecutions has meant that the burden falls by default on provincial securities regulators to address capital markets abuses. In provincial court matters, this burden has been a heavy one to bear as securities regulators have experienced difficulties succeeding.
In addition to the federal government, which has jurisdiction over criminal matters, the attorneys general of the provinces have constitutional jurisdiction over the administration of justice, which includes the administration of criminal law. Thus, the lack of criminal prosecutions is both a provincial and federal issue. Both federal and provincial attorneys general need to strengthen the commitment to prosecute financial crimes.
This leads to the main point here: we do not need more law! Extensive enforcement provisions exist in both provincial securities legislation and the federal Criminal Code. In particular, the scheme of offences in the Criminal Code is comprehensive and without obvious gaps in its coverage of financial markets crimes. A second layer of legal provisions addressing financial crimes is contained in securities legislation; the scope of quasi-criminal matters seems broad, including “any” contravention of securities law.
Given that the criminal law is comprehensive, the first objective must be to put these provisions to work by developing the infrastructure by which the law is enforced. What are the alternatives? The recent Le Pan report confirmed what many had believed: that since its inception, the RCMP’s Integrated Market Enforcement Team (IMET) simply has not been effective in the enforcement process. The reasons seem clear: its activities are not centralized; there is no oversight of IMET; no coordination of investigations across jurisdictions; and no coordination between IMET and provincial securities regulators.
However, the one overarching barrier to IMET’s effectiveness is coordination of activities. Coordination becomes particularly difficult if there is no oversight body to monitor investigations, especially those that occur across jurisdictions. Another alternative would be to develop a national agency in charge of capital markets criminal enforcement matters, somewhat akin to the FBI and the attorney system in the United States. Centralizing enforcement activities makes sense in that it addresses the coordination issue directly by ensuring that one monitor exists. In enforcement actions that run across jurisdictions, IMET needs to deal with individual provincial securities regulators or with the offices of individual provincial attorneys general.
One oversight body at the federal level could accomplish this with more efficiency and efficacy and would be able to attract the talent needed to staff effective inter-disciplinary investigative teams. Furthermore, there appears to be no constitutional issue with the establishment of a national enforcement agency since this agency would be administering (federal) criminal law and could also invoke the federal trade and commerce power.
Criminal prosecutions matter; as does the ability to bring criminal prosecutions. The key is not to develop more law, but to put existing law to work. Canada does not have an infrastructure in place to accomplish this, and unless it attends to this very basic gap, financial crimes will remain ineffectively enforced in this country.
Anita Anand is an associate professor and associate dean (JD Program) at University of Toronto’s faculty of law. This article is based on remarks prepared for a roundtable on enforcement presented by the Capital Markets Institute at the University of Toronto.