The International Investigations Review - Canada Chapter

I INTRODUCTION

In the aftermath of the global financial crisis, high-profile corporate scandals and growing public mistrust, there is a trend in Canada towards broadening the scope of corporate liability and strengthening the enforcement tools used to detect and prosecute corporate wrongdoing.

A regulatory or law enforcement investigation or prosecution against a corporation or a single individual within the corporation can be devastating and cause significant business disruption. Corporations facing allegations of wrongdoing should be prepared to react and respond in a timely and effective manner. The form of reaction and response will depend heavily on the nature and severity of the allegations; however, in all circumstances, the corporation must consider appropriate and necessary steps to mitigate potential business, legal and reputational risks.

There are a number of regulatory and law enforcement agencies in Canada empowered to investigate and prosecute not only corporations, but also their directors, officers and employees for corporate misconduct. The overlapping jurisdiction of these agencies has created a dense enforcement mosaic.

Federal, provincial and municipal police agencies are empowered to investigate suspected violations of Canada's Criminal Code,2 such as fraud and insider trading, in addition to criminal offences under various other statutes.3 Recent legislative amendments give exclusive authority to the federal police agency, the Royal Canadian Mounted Police ('RCMP'), to investigate and lay charges for foreign corruption and anti-bribery offences.4 The RCMP currently has special investigation units in two major cities dedicated to the investigation of corruption offences.

Federal and provincial prosecution agencies in Canada also share jurisdiction to prosecute certain criminal offences arising from corporate misconduct, including fraud. There are standing and ad hoc cooperation arrangements between the federal prosecution service, the Public Prosecution Service of Canada5 ('PPSC'), and provincial prosecution services to enable cooperation and coordination over such criminal prosecutions. The PPSC has exclusive responsibility for prosecuting offences under more than 50 federal statutes, including the Competition Act,6 the Income Tax Act7 and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.8

In an effort to strengthen and streamline the investigation and prosecution of capital market fraud offences, the Government of Canada established the RCMP Integrated Market Enforcement Team ('IMET') in 2003.9 IMET currently has 10 specialised investigative teams operating in four major financial centres.10 However, 10 years after its implementation, the IMET programme has been heavily criticised for its lack of effectiveness and poor track record,11 including its low conviction rate.12

During a criminal investigation, law enforcement agencies may exercise a range of powers, including searching corporate offices, searching and seizing electronic and other documents, and engaging in electronic surveillance. The investigatory powers of police are not without limitation and under ordinary circumstances, prior authorisation, in the form of a warrant, is required and the investigating officers must show that they have 'reasonable grounds' to conduct the search.13 In the case of more extreme measures such as wiretapping, in the absence of imminent harm, investigators must seek prior authorisation and demonstrate that the surveillance is in the best interests of the administration of justice and that there is 'investigative necessity'.14 Police authorities are also increasingly using production orders, which are court orders used to obtain disclosure of relevant documents or electronic information from organisations and individuals not under investigation.15

There is no national securities regulator in Canada. Each of the 13 provincial and territorial securities commissions has the power to investigate and prosecute securities-related misconduct.16 These provincial regulators also provide assistance and cooperation to each other under various voluntary cooperation protocols and through an umbrella organisation, the Canadian Securities Administrators. Each of the provincial and territorial securities commissions has broad powers for both the commencement and conduct of an investigation under separate securities statutes.17 Investigators and examiners appointed by the securities commission have the right to (1) examine documents, (2) enter into the business premises of any person or company named in an investigation order to inspect documents or other things used in pursuit of the company's business, (3) compel testimony or the production of documents or other information or things, and (4) apply to the court without notice for an order authorising the search of any premise or place and the seizure of any item specified in the order. The provincial and territorial securities commissions have jurisdiction to prosecute securities law violations administratively or quasi-criminally.

II CONDUCT

i Self-reporting

Self-reporting or voluntary disclosure of corporate misconduct is encouraged by various regulatory and law enforcement agencies in Canada, including through the use of leniency or immunity programmes for self-reporting as a means to increase the detection of criminal misconduct. In certain circumstances self-reporting is required, such as the duty to report the spill of pollutants under the Environmental Protection Act.18 Apart from self-reporting, a public company may otherwise be required to disclose corporate misconduct or the fact of an internal investigation as part of its continuous disclosure obligations under provincial securities law regimes.

In the securities regulatory context, some Canadian securities regulators have formal policies which recognise and encourage self-reporting.19 The Ontario Securities Commission ('OSC') has a formal Credit for Cooperation programme, which allows potential respondents to benefit from a variety of leniency measures if they have acted responsibly during the course of the investigation and have self-policed, self-reported and self-corrected the matters under investigation. In particular, the OSC may reduce sanctions or refrain from prosecutions altogether.20 Leniency under the Credit for Cooperation programme is not available in certain circumstances, including when the corporation puts its own interests (or the interests of its officers, directors or employees) ahead of its obligations to shareholders or the integrity of the capital markets, arranges its affairs to delay reporting a matter or claims privilege to avoid providing details of potential breaches of Ontario securities laws.21

Since its enactment, there has been limited use of the Credit for Cooperation programme and it is generally viewed as ineffective.22 The investigation of CP Ships Ltd remains the best example of a corporation receiving credit for cooperation from the OSC. Largely due to the credible process undertaken by the corporation, the OSC did not institute legal proceedings against CP Ships Ltd, notwithstanding that the company failed to disclose a material change in a timely manner and several of its insiders engaged in insider trading. In granting credit for cooperation, the OSC favourably considered the steps taken by CP Ships Ltd, including establishing a special committee of the board of directors to investigate the issues, providing the findings of its internal investigation and other relevant information to the OSC, publicly disclosing the investigation, and undertaking a voluntary review of its insider trading and corporate disclosure policies.23 In Re Nortel Networks Corp, a case involving misleading and inaccurate financial statement disclosure, the OSC approved a settlement agreement and did not order any monetary penalty against Nortel Networks Corporation ('Nortel'). Nortel was cooperative throughout its review of the matters, conducted an internal independent review, provided periodic reports to the OSC on the status of the review, implemented new accounting measures and procedures, and assisted the OSC in its investigation.24 Similarly in Re Research in Motion et al, a matter involving improper stock option practices and inaccurate financial reporting, no administrative or other monetary penalties were ordered against the corporation, largely as a result of the credible voluntary internal investigation, cooperation and remediation undertaken by the corporation.25

Although encouraged under Canada's foreign corrupt practices regime, there are no formal programmes, protocols or guidelines for self-reporting, leniency or immunity. Two recent high-profile cases may provide some indication of the benefits of self-reporting. In R v. Niko Resources Inc,26 Niko Resources Inc ('Niko') was fined $9.5 million for providing gifts to a foreign public official worth approximately $200,000. Niko cooperated with the police investigation but did not self-report. In R v. Griffiths Energy International Inc,27 a new board and management team discovered the company had previously made payments in excess of $2 million and provided certain securities to a company controlled by the wife of a foreign official while the company was negotiating with the foreign government for the grant of oil concession rights. The company commenced an independent internal investigation, self-reported and shared the results of their internal investigation with the police and the PPSC and implemented a robust anti-corruption compliance programme. Griffiths Energy International Inc ('Griffiths') paid a fine of $10.35 million, an amount just slightly more than the fine paid by Niko even though the value of the bribe was more than ten times greater than the bribe made by Niko.

In contrast, under the Competition Act, two distinct programmes of selfreporting are available: the Immunity...