Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 2 - Evidence
OTTAWA, Wednesday, March 10, 2004
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-13, to amend the Criminal Code (capital markets fraud and evidence gathering), met this day at 4:05 p.m. to give consideration to the bill.
Senator Richard H. Kroft (Chairman) in the Chair.
[English]
The Chairman: Honourable senators we have one piece of administrative business to attend to before we begin. There is an internal economy budget meeting going on downstairs and I want to get approval on an item that will provide funds for our study on charitable giving. It will provide us with some funds for the balance of the fiscal year to allow us, if indeed we are able to get going before the end of the fiscal year.
It is a provision that we may or may not need but if we do not get moving on it today we will not be able to do so later. It allows for a small amount of money for a consultant and some working meals to a total of $252.
Senator Moore: Do you want a motion?
The Chairman: Yes.
Senator Moore: I so move.
Senator Meighen: I second that motion.
The Chairman: Is it agreed?
Hon. Senators: Agreed.
The Chairman: Approved.
Senator Kelleher: Believe it or not, I actually looked at the file and read the various submissions presented, some by people who are here, some by people who are not. I will be quite honest. I do not know how valid their concerns and objections are, or how serious they are.
Do we still have our government witnesses here?
The Chairman: Yes. We arranged to have the people from the Department of Justice here in case there were any further questions.
Senator Kelleher: I know that you would like to go clause-by-clause.
The Chairman: I only want to do so if we are comfortable. You can raise whatever is on your mind. Issues have been raised and spoken to before, but we have officials here to speak to any questions that you may have.
Senator Kelleher: It might be helpful if they could respond to some of the concerns that have been raised.
The Chairman: Do you have any particular questions or do you want to wait to see what is covered first?
Senator Kelleher: I will wait until we see what comes out here.
The Chairman: Would the members from the Canadian Bankers Association please take a seat at the table?
Welcome. We are continuing our hearings on Bill C-13, an act to amend the Criminal Code (capital markets fraud and evidence-gathering). Our first witnesses are from the Canadian Bankers Association.
Mr. Warren Law, Senior Vice-President, Corporate Operations & General Counsel, Canadian Bankers Association: Mr. Chairman, I should like to thank you for giving the Canadian Bankers Association the opportunity to appear before the committee concerning the proposed Bill C-13.
As you have indicated, I am the Senior Vice-President, Corporate Operations and General Counsel, of the CBA. I brought along Ms. Sandra Stephens, CBA legal counsel, to keep me out of trouble in the event that I say things that I should not say.
The CBA is the professional industry association that represents banks on public policy issues. I would like to raise some issues largely of a technical nature about Bill C-13, but I would like to start by indicating that the CBA generally supports this proposed bill.
We believe that there is a need for strong deterrence against capital markets fraud to protect investors and to maintain confidence in our capital markets. We believe that there is a complementary role to be played by the federal government in working with provincial securities authorities to prosecute capital markets offenders. We believe that the proposed Criminal Code offences for insider trading and tipping, and the protections given to employees who have provided information about an offence, may serve as useful tools in these efforts.
Our comments about the proposed bill focus on clause 7, which authorizes the issuance of production orders. The stated purpose of these orders, as set out in the Department of Justice news release dated February 12, 2004, is to:
...enhance the evidence-gathering tools available to investigators for criminal offences by allowing them to obtain pertinent documents or data from third parties within a specified time period.
My understanding is that the purpose of such orders is to speed up the investigative process. Our view is that this worthy objective should be balanced against the practicalities of trying to comply with production orders.
The production order mechanism in clause 7 gives rise to a consideration of the role to be played by banks in the investigation process in the context of the responsibilities that banks have to keep customer information confidential. As we all know, there is a clear duty of privacy owed by banks to their customers, but there are also exceptions to this rule recognized in the law that require banks to disclose information about their customers without their consent.
For example, within this framework, the banking industry is obliged to respect the authority of search warrants under the Criminal Code, the authority of requests for information under the Income Tax Act, and is obliged to file reports of suspicious transactions under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
There is, clearly, an important role to be played by banks in complying with lawful requests for information. However, we believe that the provisions of Bill C-13, as currently drafted, would place inordinate burdens on financial institutions to comply with production orders.
Clause 7 provides for both general and specific production orders. The specific production order relates to financial institutions and has a lower threshold of issuance. Both orders are made on the basis of ex parte applications, can be issued in relation to any offence under the Criminal Code or any other act of Parliament, and both require that the documents or data must be produced within the time period at the place and in the form specified. The failure to comply with a production order may result in a $250,000 fine or imprisonment for up to six months.
We have a comment to make about the broad reach of the production order mechanism in Bill C-13. We note that production orders relate to any criminal offence, or any offence under any act of Parliament. We question why it is necessary or appropriate to extend the production order mechanism beyond the relatively narrow confines of Bill C-13. In fact, we are uncomfortable with the wide application that the production order mechanism could have. We believe that production orders should only be available for the offences specified in Bill C-13.
We also have concerns about the workability of the production order mechanism itself. By way of comparison, search warrants under the Criminal Code, for example, in section 487, allow a peace officer to search a particular place. Financial institutions, of course, comply with the terms of search warrants served, but search warrants do not place on a third party an obligation to produce documentation in a specified time. However, in the new production order provisions, it is left up to the justice or a judge hearing the application for a production order to decide when the documents or data should be disclosed, and in what form by third parties.
Banks already often face practical obstacles in complying with warrants, orders, or for other lawful requests for information. Requests are often overly broad or unclear. Sometimes, it is necessary to locate and compile large amounts of documentation or data, and sometimes the information needed to be collected is located all across the country or in other jurisdictions. The time and cost to banks in complying with document production is already high. In some cases, tens of thousands of dollars are spent compiling documentation, beyond staff time and effort. We believe that these problems would only be exacerbated if the production order provisions as currently drafted were to be passed.
The fact that production orders could be obtained on an ex parte basis means that the judge or justice hearing the application would not likely be aware of any practical difficulties that compliance with the production order could involve. It is unlikely that the Crown attorney presenting the application, or the law enforcement agency involved, would be aware of how much time would be needed for a bank to comply with the order. As a result, a production order could be issued for the production of documents or data within a time-frame or in a form which the financial institution could have difficulty meeting.
We recognize that the proposed bill provides for a process to obtain an exemption, or to vary the terms of a production order already issued. However, having to make these additional steps would only make the process more time-consuming and costly to the financial institution.
We also recognize that in the course of investigations law enforcement agencies might need to obtain information as quickly as possible but this should be balanced against the practicalities involved in collecting, retrieving and producing the information. Therefore, as stated earlier, we believe that production orders should be limited to Bill C-13 offences.
We also believe that the concept of reasonableness should be included in clause 7 in terms of when the documents or data should be produced. It should be sufficient that the information sought is produced within a reasonable time. If this were the case, after the production order is issued, the law enforcement agency seeking the information and the financial institution to which the order is directed could work out what is a reasonable time period for complying with the order.
We believe that it would be very unfair to expose the financial institution or other persons to criminal penalties for non-compliance with the production order. A production order may be very broad and impose a tight time-frame. A production order is also issued on an ex parte basis without input from the financial institution. In these circumstances, where a third party is attempting to assist the police, it seems excessive to expose the third party to criminal liability. Existing sanctions for contempt of court are more than sufficient to ensure compliance with production orders.
We ask the committee to consider the following recommendations: Production orders should only be available for Bill C-13 offences; the concept of reasonableness should apply to the time-frame within which information is to be provided by financial institutions and other persons under the terms of a production order, whether general or specific; and the sanctions directed at financial institutions and other persons for non-compliance with production orders should be removed.
Mr. Chair and honourable senators, thank you again for providing the CBA with the opportunity to meet with you. We would be pleased to answer any questions you may have.
Senator Kelleher: Did your organization have any discussions with the Department of Justice during their drafting procedures?
Mr. Law: They were kind enough to share with me the information about the proposed legislation last summer. It was of a general nature and we did not get into the technical aspects of the proposed bill.
Senator Kelleher: I ask that because your biggest concern appears to be the broad net that they are casting, or have the potential to cast, under this clause for production orders.
Have you had any discussions in that area?
Were you aware that they would cast their net as wide as they appear to have done?
Mr. Law: I am not aware of any discussions we may have had but it may be a fault of my recollection. I did not raise that concern at that time during our general discussion.
Senator Kelleher: Why do you suppose they have drafted it with such a wide net rather than stay to the original wording?
Mr. Law: I suppose if I were in their shoes I would want it as wide as possible. I cannot answer that question otherwise, not being in their shoes.
Senator Kelleher: Would the information they would be looking for be stored on computer, or would you have to undertake a costly manual examination of hard copy material?
Mr. Law: I think it is a fair statement that a large amount of the datum would be on computers, but a costly manual investigation may also be required.
It is worth noting that given the practices of banks today and the extent to which back-office functions are outsourced, the requirement to produce information under a production order would require, perhaps, an outside party to retrieve this information. That creates two problems: time and an additional expense because of the payment required to be made to a third party to provide the bank with that information.
Senator Kelleher: Would any of that information be available to a judge on an ex parte application?
Mr. Law: By definition, it is an ex parte application and so the banks would not be represented in that application. I do not think that information would be available.
The Chairman: You raised my curiosity in your reference to retrieval from your back-office operations, which I understand may be at the bank or a pool of collective efforts serving more than one bank.
To access that information in the back office, you would need to retain a third party. Is that your suggestion?
Mr. Law: It is a possibility. Of course, the circumstances would determine it but it is not beyond the realm of possibility.
The Chairman: Would that tend to be old information? Does the information get farther away the older it is?
Mr. Law: The answer to that question would be conjecture on my part.
Senator Harb: That intrigues me. When a court passes an order for you to provide the information that a bank has about me, that is fine. However, you could not have a third party do that without the court specifically authorizing that third party. I thought the Privacy Act might prevent you from doing that unless you go back to the court to ask specifically for the information. Could you please explain?
Mr. Law: The banks are subject to the Privacy Act but, as I understand, in certain circumstances the bank may require the use of a third party to retrieve this information.
Senator Harb: You would have to have either the authorization of the individual that the court order would have been issued against or you would have to go before the court for that authorization, thereby making your job more difficult.
Mr. Law: Yes, that is true. The thrust of my point is that the retrieval of information by the banks, given the geographical nature of the branch system as one example, would, in some circumstances, be a very time-consuming and expensive proposition.
Our real concern is that when the Crown attorney presents the ex parte application to the court, it would be unknown just how much time would be required to comply with the order. As a result, a judge could easily establish a time-frame in the order, which is not practical from our standpoint.
Senator Plamondon: Would you explain the extent of the consent that you have your customers sign when opening an account and compare that with your preoccupations?
When someone opens a bank account, he or she signs a broad consent form to transfer information.
Mr. Law: From the standpoint of the issues that are before this committee in respect of the proposed bill, it is important to note that under the federal privacy legislation, there are exceptions to the situations where consent is required to disclose information. One of those specific exceptions, of course, would be a lawful order presented to the bank to produce this information. We have no choice in that case. In the past, specific consents were search warrants, or orders under the Income Tax Act. The provision for the production orders in Bill C-13 would be an extension of the exceptions to the Privacy Act in Canada.
Senator Plamondon: If there is consent on the part of the consumer opening an account, I would like to know the nature of that consent. To what is the consumer consenting? Perhaps the consumer does not know the nature of the consent and what he or she is signing.
Mr. Law: It is dependant upon the nature of the consent that is actually signed, and that varies from institution to institution.
Senator Plamondon: You can give information to Equifax and to other institutions. How does this compare to what we are studying right now?
Mr. Law: If a production order were issued, the release of the information would be without the consent of the individual.
The Chairman: Are you saying that whether there is consent or not is not relevant to your obligation to respond?
Mr. Law: Correct.
Ms. Sandra Stephens, Legal Counsel, Canadian Bankers Association: You would not need consent in the agreement because the law provides for it.
Mr. Law: Bill C-13 acknowledges this. This situation does not do anything where consent has been given for the release of the information.
Senator Mercer: I want to continue the line of questioning on the third-party aspect. Are a lot of third parties already doing record-keeping for the bank? We are not talking about getting new people involved in the process. It is third parties who are already involved in the process.
Mr. Law: That is correct. Every additional step in the process adds time, and, under the legislation as presently drafted, if we are one day late in complying with a production order, we are exposed to a $250,000 fine.
Given the fact that these orders can be issued, and the contemplation is that the orders would be issued on an ex parte basis, then the legal requirement to produce the information will be crystallized prior to a judge ever hearing about the difficulties that a bank may have in complying with the order. For that reason, I suggest an appropriate amendment to this legislation would be simply to provide that the information should be provided within a reasonable time period.
The Chairman: I guess you would also have to say that the degree to which you store or process information also has to be reasonable. For instance, if you kept ledgers in London and had to fly there to retrieve them, that would be unreasonable.
Mr. Law: Yes.
The Chairman: They are only there because it is convenient and efficient for you to do it that way. It is a balance of reasonableness and convenience.
Senator Plamondon: If a customer transfers money outside Canada, what do you do if you are asked details about transactions? Does this apply?
Mr. Law: As I understand it, Bill C-13 would reach information stored outside Canada.
Ms. Stephens: If the funds are transferred outside of Canada, part of the transaction would have come from Canada, so I am sure those records would apply.
The Chairman: Since there are no further questions, thank you very much.
Next we will hear from the Ontario Securities Commission. Please proceed.
Mr. Michael Watson, Director, Enforcement, Ontario Securities Commission: Mr. Chairman, honourable senators, I am very pleased to be here today representing the Ontario Securities Commission.
The Ontario Securities Commission cannot be stronger in its support for the initiatives of the Government of Canada to ensure more effective enforcement and deterrence in Canada's capital markets. The commitment of the Government of Canada to the creation of the RCMP-based IMETs teams to enforce not only existing Criminal Code provisions but also the proposals of Bill C-13 is an enormous step forward in restoring the confidence of investors in the capital markets.
My primary purpose today, however, is to speak to the proposed new insider trading offence. The material that is filed relates to a longer-term proposal, and I will make a proposal much simpler today.
Studies have shown that the mere creation of an insider trading offence does nothing to deter insider trading, and in fact the creation of an insider trader offence without effective enforcement may have the opposite effect. Studies have found that when an insider trader offence has been created and not enforced, there is an adverse impact on the amount of illegal insider trading in the market place. It is clearly the effect of enforcement of insider trading laws that creates the deterrence.
We are hopeful that the IMETs teams will offer a viable mechanism to investigate unlawful insider trading and provide a criminal deterrent where appropriate. However, we are concerned that the proposed insider trading offence sets an unprecedented level of mens rea such that there will never be a successful prosecution under the legislation.
In the investigations that we do at the OSC on insider trading, there are essentially three different ways that insider- trading activity takes place. One is selling in advance of bad news. These are the ones we do most frequently, and are the easiest ones to detect. They usually arise in relation to true insiders who have not organized their affairs in such a way to hide their trading; they get caught because the shares they sell are already identified as their shares. Others who sell in advance of bad news on insider information may do it through short selling.
The other category, and it seems to be the one that people most focus on in relation to insider trading, is people who buy in advance of good news. These are not usually true insiders of companies, because the true insiders normally have lots of shares and are waiting for the value to go up so they can sell. The people who buy in advance of good news on the basis of undisclosed insider information usually tend to be people who have been tipped or people who have been providing professional services, often relating to the matter, et cetera. These people tend to be the hardest to catch. Either they have organized their trading to disguise the beneficial owner of the account, or it is very difficult to make a connection between the person who traded and access to the undisclosed information.
The third area of insider trading relates to options trading. It is the most sophisticated, the least liable to be detected, and it does not form part of my discussion today.
In the fall of 2002, securities regulators from across Canada met to examine the issue of insider trading based on a couple of factors. We realized we were devoting a lot of resources to investigating insider trading without a concomitant result. We were not getting a lot of prosecutions for insider trading in relation to the resources. Second, there is a perception that Canada is viewed both locally and internationally as having a problem with insider trading.
As a result of the work we did, thirty-two recommendations were prepared, and these have been referred to the CSA, the umbrella group for securities commissions across Canada. We are currently working towards analysis of those recommendations with a view to implementation.
Recommendation 29 of that report specifically suggests that the provisions set out in 382.1 of the proposed bill, the insider trading prohibition that would create the crime of insider trading, be revisited.
There is a specific concern that the requirement that the offender knowingly used insider information sets a bar that enforcement or prosecution officials will be unlikely to clear. However, there is one possible exception to that about which I can think from the years in which I have been involved in enforcement in the securities industry. I can only think of one case that we investigated where, I suspect, we probably could clear the bar of demonstrating somebody knowingly used the information.
These concerns arise largely in relation to people who sell in advance of bad news, as opposed to people who buy in advance of good news. However, those are the cases that most often cross our path.
In these investigations we wind up with people providing all sorts of explanations for why they sold which, in my view, may well preclude prosecutors from getting over the hurdle of proving that the individuals knowingly used the information.
There is one explanation that comes up with some regularity. For example, a case we are doing right now involves companies trading into trading windows. There are corporate policies that allow people to trade only during certain occasions. In one case, the trading window, because of various transactions that had been going on, had been closed for a long time. When the trading window opened according to the policy, all the insiders sold into it. In our view, there was undisclosed material information. However, their explanation was that they had the trading window and sold for that reason. They explained that it had nothing to do with the other information.
Similarly, we find people routinely providing the explanations that they sold because they had taxes to pay, or for tax planning purposes, or because their broker advised them to sell. Other explanations have been selling in order to come up with the down payment for a new home, or selling to meet loan obligations, or to pay down lines of credit. Recently, somebody said they had a charity commitment that they had to fulfil and therefore sold the shares for that particular purpose.
If the standard is knowingly used, then in all these circumstances where people say, that they sold in order to meet another obligation, it may be impossible to surmount the hurdle of proving that the information was, in fact, used.
What we are really looking at is a provision that does not speak to mens rea, as such; it speaks to motive. "Knowingly used" means you have to prove the reason the individual sold was to avoid the loss they were going to incur, as opposed to selling for some other purpose. The necessity of proving motive in criminal law is really very rare. Rather than including it in the offence, I suggest that there are simple ways to avoid it that would make it more practical.
This is not a perfect parallel, nor can I think of one. However, to require the knowledge of the material information as being the reason that has to be proof for the action would be akin, in a case of prosecuting somebody for having sexual relations with a person under 14, to having to prove not only that they knew the person was under 14 but that was the reason they had sexual relations with the person. It requires getting inside somebody's head, something which you will seldom do. It will be only the odd case where somebody calls up their broker and says, "I got this hot tip. I have to sell," or, "I got this hot tip. I have to buy." That does not happen in our world. We do not get that kind of evidence. As I said, I can recall only one case of all the ones we have done where it was, in fact, perhaps possible that we would be able to obtain a conviction.
I do not want to hold up the process of this proposed legislation at all by revisiting it. The proposal before you, out of the task force report, is something that I think would be worthy of consideration on a longer-term basis. There are some other areas that may also be worth considering, not for the purposes of this process but to strengthen the law.
Creating a criminal law of insider trading would get Canada to where the rest of the world is concerning this issue. In the rest of the world, insider trading is in fact a crime. There are areas that are not covered here, or in most other jurisdictions, where, down the line, there may be an opportunity to cover up other sorts of circumstances, to make us a leader rather than bringing us up to the standard.
The proposal I was going to make was to take the mens rea requirement one step back. It is only a minor wording change to the proposed legislation as it appears. I suggest changing the phrase "trading, knowingly using insider information" to "buy or sell a security with knowledge of insider information". An individual who has inside information as defined in the legislation simply should not be trading.
If you require proof of the intention to use that knowledge, not only will you create an insurmountable barrier, you will also create the risk of having the IMETs teams not able to provide enforcement in the area. If the studies are correct, there is the risk of having an unenforceable piece of legislation that may have the opposite effect to what it is intended.
That is the gist of my submission. As I said, there are a few other areas not currently covered that might be worth giving consideration. I could provide something in written form later, or I could address them now, if you wish.
The Chairman: That would be welcome.
Senator Meighen: Mr. Watson, what words do you suggest replacing "knowingly using" with?
Mr. Watson: "Knowledge of."
Senator Meighen: Is it a fair summary to say that your difficulty has been the successful prosecution of offences because you do not have the tools to do the job?
Mr. Watson: My concern is that there is not an effective criminal deterrent and this measure will not provide an effective criminal deterrent. We are able to prosecute insider trading under existing provincial legislation. However, it does not require proof of use. People continue to provide these explanations. There is an argument raised in every case about having had a prior commitment to do so. That does not work because the prior commitment is not to sell the shares, it is to pay a loan. You cannot break the law to meet the prior commitment. People raise these arguments routinely. In my view, they will be raised more effectively in response to this proposed legislation as drafted than they can be in relation to provincial legislation.
Senator Meighen: Let me ask you a tangential question. This proposed legislation would increase the penalty for fraud over $5,000 and fraud affecting a public market to 14 years from 10. We have heard from witnesses who have objected quite strenuously to that on the grounds that the 14 years puts it right up there with some pretty horrific types of criminal offences.
In your view, does 10 to 14 years make any difference in what you are trying to achieve?
Mr. Watson: I think it makes a powerful statement both to the public and to the courts that Parliament views economic crime as a serious matter. The kinds of crimes that those offences deal with go to the heart of the Canadian economy. Making strong statements about the willingness of Parliament to protect the Canadian economy is thoroughly justified.
Senator Meighen: Does the fact that it is up there with aggravated assault, torture and sexual assault with a weapon bother you?
Mr. Watson: No, it does not.
Senator Meighen: Senator Kelleher has been the leader in the view that the only way we will restore complete confidence is to see some people successfully prosecuted and put in jail.
Senator Kelleher: I said "orange suits."
Senator Meighen: I thought I would avoid that terminology.
I agree with him that successful prosecution is the key. You have raised some concerns. I can see how difficult it would be to prove "knowingly using." "Knowledge of" may be only slightly less difficult.
The other side of the coin is, of course, they would have "knowledge of", because, how could they not, let us say, if they sit on the board?
The only answer would be no trading, as you suggested.
Is that not what corporations have endeavoured to do by establishing no-trading periods?
Mr. Watson: That is what they have endeavoured to do by establishing no-trading periods, but those tend to relate to the regular flow of financial information. However, companies can get involved in unusual transactions where there may be discussions going on in the trading window, and people still ought not to be trading during that period of time.
We had a case not that long ago where an individual was in a meeting where a specific item was discussed. After the meeting, he went out and traded in the securities, but nobody in the room could positively say that he had been present when the discussion took place. The court decided that it could not be satisfied that the person had knowledge of the transaction. Even proof of knowledge itself can sometimes be difficult. I think that was a ridiculous judgment. The logical inference could be drawn in the circumstances, but it was not. If it is that hard to prove the knowledge itself, going the next step and proving use of the information on top of the knowledge will, in most circumstances, be insurmountable.
Senator Meighen: Do you have any concerns about the use of ex parte applications for protection orders, and do you have to do it ex parte? Why can you not do it with both parties present?
Mr. Watson: It is for the sake of efficiency. The information being sought under production orders is not the kind of intrusive information that can be gathered through search warrants, and the kind of activity involved is similarly far less intrusive than the execution of a search.
In response to the previous submission, I have a lot of concern about shifting to a reasonable standard, because "reasonable" is entirely debatable in every circumstance. When we try to get information, we deal with many major financial institutions that throw up all sorts of roadblocks because they are not interested in responding to our subpoenas.
In most jurisdictions, financial institutions regulated by the securities regulators are required to maintain their records in such a way that they are readily available to the regulators. To suggest that some institutions cannot keep their records in such a way avoids the realities of technology in the 21st century, in my view.
Senator Harb: What you have brought up is interesting. Perhaps with the proposal in the legislation, including the stiff penalties, the whistle-blower protections and all of those measures, that is a step forward, but you are asking to go further.
Would you not think that would perhaps create a situation where the whole notion of presumption of innocence until proven guilty would go out the window?
How do you define knowledge of something that is going to go wrong?
It is a very abstract matter. You have been able to recoup quite a bit of money, in particular, from cases that were quite fairly publicized. With this particular measure, you should be able to hit well over 85 per cent of your cases. Would you not agree?
Mr. Watson: I am not sure I understand the point about being able to hit over 85 per cent of our cases.
I do not think it creates any sort of absolute liability. On the contrary, the difficulties in defining what knowledge is creates a significant hurdle for the prosecutor to get over. A lot of work in these investigations goes into establishing that someone knew financial targets were going to be missed by a long way, and things to that effect.
Once you fix somebody with specific knowledge that falls within the test of insider information, I do not think it is unreasonable to say that you had that knowledge, you went and traded anyway, and that is sufficient proof of mens rea.
Senator Harb: In terms of the Criminal Code how would that situation stand before a judge?
If you were to go with that argument, would you not think the judge would just throw the law out the window, stating that it is not constitutional?
Mr. Watson: No, I do not believe that is the case. There are any number of knowledge-based offences within the Criminal Code where proof of knowledge of circumstances and proof of activity is sufficient to prove the offence.
Senator Harb: Is that beyond the shadow of a doubt?
Mr. Watson: That is beyond reasonable doubt.
Senator Plamondon: People use cell phones all the time and a third party could intercept confidential information. That is use of knowledge. What do you think of that situation?
Mr. Watson: All we can prove in those situations, which we run into with some regularity, is that the person traded.
Senator Plamondon: However, there is no link with the person detaining the information.
Mr. Watson: That is correct. That makes it impossible to prove the ingredient of the offence with knowledge.
Senator Plamondon: If somebody calls someone outside Canada and says to buy or sell, and keep in trust, how can you catch the person?
There is no information and no account in the bank.
Mr. Watson: Those tend to be very difficult situations. We have just laid charges against an individual as a result of an investigation that took us through accounts in the Bahamas, Liechtenstein, Luxembourg and Switzerland. We ordered a track-down of who was behind the accounts, and eventually traced it back to the person who had the information at the outset. It is rare that we can solve those cases.
Senator Plamondon: As regulators, do you have similar laws where you can get the information outside Canada? Is this law similar to other laws outside Canada?
Mr. Watson: The International Organization of Securities Commissions has been doing much work in that area specifically, trying to develop means of information-sharing. The world is becoming a much smaller place, and tools for gathering information from other jurisdictions are becoming much more effective. It is still not that hard for people to hide in foreign jurisdictions, but it is getting harder every day.
Senator Plamondon: Does this proposed bill fit with what is done outside Canada?
Mr. Watson: Yes, it is very much a step in the right direction.
Senator Plamondon: Is it the same as other countries have?
Mr. Watson: It is not identical, but it does not have to be identical in order to allow for international cooperation on the issues.
Senator Biron: I understand that is difficult for you to tell us how long it takes the commission to prosecute a case. However, I am concerned that the time that you take to do your investigation can hurt the shareholders of the company that may not have anything to do with the problem.
I am aware of one case that the commission has been working on for several years; once in a while, it appears in the financial papers. It takes such a long time that it hurts the shareholder.
Does this legislation help you to reduce the length required to prosecute?
Mr. Watson: I do not think it would reduce our time, but I think there is some merit from the point of view of efficiency. In cases where you have police investigations, the police would investigate the offences created under this legislation. They have tools that we do not have available to us to conduct the investigations. They also have much more effective ways of getting people to talk to them than we have. All we can offer in exchange is that we will not reprimand you if you cooperate, as opposed to what the police can say.
The Chairman: It is ominous, the way you put it.
Mr. Watson: All I meant was that the police have jail to trade with which we do not. The police have ways of speeding up investigations that we do not have. From that point of view, it would be useful.
The Chairman: That is the end of my list. Do we have any other questions?
Senator Kelleher: I have another question of this witness. You were here and heard the evidence of the Canadian Bankers Association. They felt that the present drafting of the proposed bill casts too wide a net.
Do you have any opinion on that statement?
Mr. Watson: Let me put it this way: We were sufficiently impressed with the proposed legislation that we have asked the Attorney General of Ontario to create similar legislation for provincial acts.
Senator Kelleher: So you think the net is cast properly?
Mr. Watson: Yes, that is correct.
The Chairman: Does anyone wish to hear anything else? Have these witnesses or any other witnesses raised any questions that you would like to hear officials from Department of Justice comment upon?
Senator Meighen: Yes, I would like to hear their comments.
The Chairman: I invite Ms. Klineberg, Mr. Wong and Mr. Bartlett to come to the table, please.
This will be an open question in the absence of any specific question: Is there anything you have heard in the course of this afternoon's proceedings that you would like to comment upon?
Mr. William C. Bartlett, Senior Counsel, Criminal Law Policy Section, Department of Justice Canada: Thank you. There are comments we would like to make that I think the committee would find helpful. With regard to the concern of the Canadian Bankers Association about the scope of the proposed production order power, this evidence-gathering tool for law enforcement was never intended or represented to be a measure aimed solely, or even principally at capital markets fraud. The title of the proposed bill, capital markets fraud and evidence-gathering, was chosen intentionally because we are dealing with measures specifically aimed at capital measures fraud. At the same time we are dealing with an issue of a slight expansion of the evidence-gathering tools available to law enforcement.
If you look at the material that was presented when the proposed legislation was first tabled, you will see that this was made as clear as we could possibly make it. We wanted to be sure that people were quite clear that the proposed bill had these two elements.
What the material said was that these powers would apply to all criminal offences, but they would be especially useful in regard to capital markets fraud, which was the other major element of the proposed bill.
They will certainly be very valuable in regard to any other offence, particularly other economic crimes where documents or datum are valuable, and also in other kinds of offences.
I want to refer briefly to the history of our experience with the representations made by law enforcement for exactly this sort of power. My first exposure to it was in the year 2000 with the federal-provincial-territorial National Agenda on Organized Crime. One of the new measures that the police were looking for at that time was a production order power to deal with some of the offences involved in organized crime. It appears as one of the items on the legislative and regulatory tools agenda that the FPT ministers agreed they should look at to deal with organized crime. This has been on our agenda for some time and is certainly not restricted to capital markets fraud.
I think history shows that reasonableness is built into the process. What exists now are search warrants and search warrants with assistance orders. They are granted ex parte and under search warrants police could march in and certainly close down the banks. They do not, and they have not. What they have done is gone in with a search assistance order and dealt with the banks on a voluntary basis. I think the relationship with the banks and the Canadian Bankers Association has always been a positive one and we have appreciated their support for law enforcement. When we met with them, I made an undertaking and I will repeat it again: We will certainly be happy to meet with them to talk about guidelines for the Crown and police about what kind of time will be reasonably needed to deal with the retrieval of datum. If, in particular cases, more time is needed, there certainly is a process to deal with that need.
I will ask Mr. Wong to speak to the issue of the scope of the offences on which this may be used and this issue of the reasonableness of the time to comply.
Mr. Normand Wong, Counsel, Criminal Law Policy, Department of Justice Canada: Mr. Bartlett did a good job of giving you a broad overview. I will cover a couple of other points.
We must remember that the police have been calling for production orders for quite some time. This is because a production order is really a codification of current practices.
Mr. Bartlett alluded to the fact that the bank is served with a section 487 regular search warrant with an assistance order attached to it. The police do not go in and rifle through the bank's records. The police give them the assistance order and the bank provides them with the information that has been requested.
We have already talked about the drawbacks. The primary drawback is the timing mechanism. There have been cases where the police have had to wait for the information from the financial institution for up to a year. That delays the investigation. By having the production order with the timing mechanism in there, it allows the police to proceed with the investigation.
There was some discussion as to the scope applying only to capital markets fraud offences. As Mr. Bartlett said, it was never intended to be that way but to assuage part of the CBA's fears. A production order is limited; it is only applicable to third parties, and by that definition, it will be useful only in certain offences. At the same time, however, it will be useful for police.
The last time I appeared before you I noted that this production order scheme is modeled upon the search warrant scheme. There is no talk about whether or not the judge has to be reasonable in there because it is already built into the process. If the order, or the warrant, or the authorization that the judge issues is unreasonable, it can be quashed either under the Criminal Code or the Charter. It is built in there. For us to say that the judge must be reasonable is insulting the judge and also inconsistent with similar Criminal Code provisions. However, we did recognize that this production order is a departure from what is normally in the Criminal Code and does put the onus on the third party responding. That is why we built in the exemption process where, in the subjective view of the third party, they feel that the order is not reasonable. They can ask for either an extension or that the order be quashed.
Mr. Bartlett: The investigators are not interested in prosecuting banks. They are interested in gathering information. I think the Canadian Bankers Association and all of its members can look at their past involvement with law enforcement and know that this power will be used in a reasonable way because that is in the interests of law enforcement in terms of gathering the information that they need. They are not interested in using this in a heavy- handed way because that will make it more difficult to get the information that is the point of the entire exercise.
Senator Meighen: I would like to Mr. Watson's about his concerns in proving that someone "knowingly used," as opposed to having "knowledge of."
Mr. Bartlett: It is our view that this offence can, in appropriate cases, be proven. It is what we have heard in consultations with police and law enforcement that have experience in closely related offences.
What Mr. Watson has proposed would be essentially an offence that certainly would work well, and I presume does work well, in a regulatory context, which is where the experience lies. You are regulating the trading of securities. You can essentially declare a prohibition on the trading of securities against anyone who stands in a certain position or has inside information and simply not make it relevant to the nature of the offence that they are actually using that information.
However, I am a little surprised to hear him say that they do not have jail available as a sanction. Indeed, they have just raised the penalty for their offences to five years less a day. There is a fairly serious jail term that will apply in Ontario and, I believe, also in Alberta and Quebec. That term seems to be the trend.
We have developed a Criminal Code offence with a maximum 10-year penalty. It is a fairly serious criminal offence.
Senator Meighen: Is it not 14 years?
Mr. Bartlett: It is 10 years. The moral blame limit is involved for an offence bearing 10 years requires more than just a prohibition on trading on behalf of anyone who possesses inside information. It requires the particularly blameworthy act of using that information.
I will ask Ms. Klineberg to tell you about case law in the United States and elsewhere.
Ms. Joanne Klineberg, Counsel, Criminal Law Policy Section, Department of Justice Canada: I can elaborate a bit further.
We are familiar with the inside trading task force report that was referred to earlier. The recommendation in it that dealt with this particular issue spoke of the United States law with respect to insider trading.
We have taken a close look at that recommendation. The understanding is that it is well settled in the United States. The standard is one of trading while in "possession of." Our reading of the history of insider trading in the United States shows that that is not necessarily the case.
The Securities and Exchange Commission recently passed a rule that establishes that standard, but that rule was passed after a couple appeal courts decisions came down saying that the law requires that "use" be proven.
I have a 1998 California Ninth Circuit Court of Appeals decision that makes it clear that a standard of trading "while in possession" would not sufficiently demonstrate blameworthiness on the part of an accused person. It would not contain a fraud element, an element of deception, which the overriding statute required.
It is fair to say that the SEC made this rule, but it is premature to know whether that rule will stand up. It may well be that the SEC as an enforcement body, like many others, would like to cast the net wide, as we have heard today. However, there are limits. The United States laws will keep developing over the next little while.
In terms of Canadian law, we do have case law that says that the type of offence that was referred to earlier with the standard of trading while in possession is a strict liability offence, which is an offence where the Crown only has to prove an act, not any mental state at all. The burden then shifts to the accused person to raise a defence on the balance of probabilities. That is an entirely different judicial process. The burden of proof is different; the elements of the offence are different.
That is not a standard that we can bring into the Criminal Code. The Criminal Code requires that there be not just a guilty act but also a state of mind that goes with the act.
Being in possession of information and trading is simply not good enough from a constitutional perspective. You have to know you are using the information when you are trading.
To separate them in time like that, we do not think will quite satisfy constitutional muster. It might well lead to years of protracted litigation on constitutional grounds of the offence. It could end up being unenforceable from that perspective if you drop the bar too low.
In this regard, I would also make the point that courts have said, as did this Court of Appeal decision from California that while the use requirement renders criminal prosecutions marginally more difficult for the government to prove the difficulties are by no means insuperable. There are statements from the court that say that it is a marginally higher standard, but the criminal law requires that standard.
In any event, the smoking gun is not required. A proof by inferences is all that is necessary. Circumstantial evidence can be sufficient to make out a criminal case. It is in homicide, murder and corruption cases. We certainly believe, and have heard from law enforcement as well, that in this offence that should be provable as well.
Mr. Bartlett: The American courts are speaking to a constitutional situation in which the American federal government might claim to be able to go somewhat beyond the strict bounds of criminal law because they have regulatory jurisdiction. In fact, the American federal government has no criminal law jurisdiction. It can add offences to enforce the jurisdiction it has in other areas. Its regulation of securities is done under its power of interstate commerce.
They have created offences with penalties of such a nature that the courts studying at it have said that they need to have criminal law standards, mens rea standards, that are adequate to those penalties.
In Canada we simply start out with the fact that we are dealing with criminal law. That is what we have the jurisdiction to deal with, so we start out in that framework.
Ms. Klineberg: If there is a case where proof to the criminal law standard might be too difficult to achieve and the RCMP do not think that they can quite make the case out, no one should be left with the impression that there is nowhere to go. In that circumstance, all of the provinces have securities laws. They all have insider trading provisions.
The maximum for insider trading on the lower standard is five years less a day. Criminal law should be used in the cases where that blameworthy, knowing use of the information can be proved. Where it cannot be proved, the securities laws, which have been in existence for decades, are still there to pick up those cases.
The Chairman: Thank you. I appreciate you being here very much. It was helpful to have this addressed at the end of our hearings.
Senators, with your agreement, I would like to move to clause-by-clause consideration of the bill.
Shall the title stand postponed?
Hon. Senators: Agreed.
The Chairman: Carried.
Shall cause 1 carry?
Hon. Senators: Agreed.
The Chairman: Carried.
Shall clause 2 carry?
Hon. Senators: Agreed.
The Chairman: Carried.
Shall clause 3 carry?
Hon. Senators: Agreed.
The Chairman: Carried.
Shall clause 4 carry?
Hon. Senators: Agreed.
The Chairman: Carried.
Shall clause 5 carry?
Hon. Senators: Agreed.
The Chairman: Agreed.
Shall clause 6 carry?
Hon. Senators: Agreed.
The Chairman: Carried.
Shall clause 7 carry?
Hon. Senators: Agreed.
The Chairman: Carried.
Shall clause 8 carry?
Hon. Senators: Agreed.
The Chairman: Carried.
Shall clause 9 carry?
Hon. Senators: Agreed.
The Chairman: Carried.
Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Carried.
Is it agreed that this bill be adopted without amendment?
Hon. Senators: Agreed.
The Chairman: Carried.
Is it agreed that this bill be reported, without amendment and without observations, at the next sitting of the Senate?
Hon. Senators: Agreed.
The Chairman: Carried.
The committee adjourned.