In July, Canada’s Supreme Court ruled that securities regulators’ fines can only stand if they are directly related to fraud, such as ordering the repayment of money obtained through fraud.Sean Kilpatrick/The Canadian Press
According to market regulators in British Columbia and Ontario, dozens of financial criminals have managed to avoid paying tens of millions of dollars in fines by filing for bankruptcy.
When Canada’s Supreme Court ruled last month that criminals can use the bankruptcy process to evade fines imposed by securities regulators, the case involved a single pair of pump-and-dump fraudsters. While regulators and investor advocates are now renewed calls for federal lawmakers to close what the BC Securities Commission calls the “emergency loophole,” new data shows that the loophole is being used frequently.
Ottawa, on the other hand, does not seem to be in a hurry to make the legislative changes needed to close this hatch.
Since 2001, the BCSC says more than 40 individuals and companies owing the BCSC a total of about $80 million have had their fines waived through the bankruptcy process. While the Ontario Securities Commission does not keep similar data on Canada’s largest single market, OSC spokesman JP Vecsi said the regulator is aware of more than 40 individuals and companies that have been involved in bankruptcy proceedings since 2011 and have not yet paid. However, he could not provide details on the fines that were ultimately not paid.
The Supreme Court ruled that securities regulator fines must be directly related to fraud to survive bankruptcy proceedings. This can be the case, for example, when money obtained through fraud must be repaid, also known as disgorgement orders. This is in part because the federal Bankruptcy and Insolvency Act contains exceptions that prevent court-imposed fines from being discharged in bankruptcy proceedings.
But those exceptions do not apply to fines imposed by administrative bodies such as securities regulators, the Supreme Court ruled. As a result, when Thal and Sharon Poonian – the appellants in the Supreme Court case – complete their bankruptcy proceedings, they will still be liable for a $5.6 million disgorgement order imposed by the BCSC, but they will no longer have to pay any of the much higher $13.5 million in administrative penalties.
In 2018, then-British Columbia Finance Minister Carole James sent a letter to Bill Morneau – her then-federal counterpart – and then-federal Minister of Innovation, Science and Economic Development Navdeep Bains, formally requesting that the bankruptcy code’s exemptions be expanded to include fines imposed by securities regulators. In her letter, she noted that U.S. bankruptcy law allows securities regulator fines to continue to apply even after a bankruptcy, while Canada’s does not.
She renewed that call in early 2020, but Ottawa said at the time there were no plans to make the requested legislative changes. Now, as BC prepares to take the lead for a third time, Ottawa appears to remain noncommittal.
Finance Minister Chrystia Freeland’s office referred questions about whether Ottawa would accept the BCSC’s latest call to the Treasury Department. The Treasury Department referred questions to Innovation, Science and Economic Development Canada, and spokesperson Hans Parmar responded by email.
The Supreme Court’s decision “provided additional clarity on which debts are beyond forgiveness under the Bankruptcy and Insolvency Act and under what circumstances forgiveness of certain debts and administrative fines will be denied,” he said.
“The Canadian government continues to review the decision and its impact on Canadian insolvency law and the economy.”
BCSC chair and CEO Brenda Leong said in an email to The Globe and Mail that her team is “still considering how best to raise awareness of the importance of the issue among federal ministers, MPs and civil servants.” She also plans to resume discussions with British Columbia’s finance minister after the Oct. 19 provincial election.
“This Commission has long advocated for changes to the bankruptcy legislation to specifically exclude securities sanctions from bankruptcies,” Ms. Leong said during a press conference on July 31, hours after the Supreme Court’s decision was released. “The federal government must act now to make this change to protect investors in this country.”
“An obvious solution is to revise the law to close this ’emergency exit,'” Ms Leong said in an accompanying statement.
Stan Magidson, CEO of the Alberta Securities Commission and current chair of the Canadian Securities Administrators – an umbrella organization of market regulators across Canada – echoed Ms. Leong’s call for Ottawa to take urgent action.
“When it comes to imposing sanctions, ultimately we can only use the tools the law provides us,” Mr. Magidson said by email. “Only the federal government can fill the gap highlighted by the Supreme Court of Canada’s decision.”
Larry Ritchie, former vice chairman of the OSC and current chairman of the risk management and crisis response department at Osler Hoskin & Harcourt LLP, said one of the reasons the problem has gone unnoticed for so long is because “there are so many loopholes that regulators or politicians can point to and blame someone else for it falling through the cracks.”
The main problem, he said in an interview, is that politicians “don’t get their act together and don’t have a coherent system to combat financial crime.” He added that in addition to changing the existing bankruptcy law, a more committed approach to combating financial crime is needed.
During the 2021 federal election campaign, the Liberal Party promised to create the Canada Financial Crimes Agency, which would combine resources from the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC), the RCMP and the Canada Revenue Agency into a new law enforcement agency.
The CFCA is still a long way from being operational: the 2024 federal budget only allocates $1.7 million over two years to the Treasury Department to complete the agency’s design and legal framework.
