Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 13 - Evidence - Meeting of May 18, 2005
OTTAWA, Wednesday, May 18, 2005
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:35 p.m. to examine and report on consumer issues arising in the financial services sector.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Honourable senators, welcome. This is our final meeting on our study of consumer protection issues within the financial services sector. Our meeting is being broadcast live across Canada on CPAC and the Internet.
We welcome the representatives from the RCMP. This is a new and very important area of concern that we want to investigate and we appreciate your assistance and cooperation in this. We are delighted that you are here to tell us about the work you are doing with respect to the ultimate form of consumer protection — criminal prosecution. This is something the committee wants to pay more attention to. I thank you for your excellent and pointed brief.
Please proceed.
Chief Superintendent Peter M. German, Director General, Financial Crime, Royal Canadian Mounted Police: Thank you, Mr. Chairman, for your kind comments. With me is Superintendent John Sliter, who is Director of the Integrated Market Program for the RCMP. We bring greetings from Commissioner Zaccardelli. We are pleased to be here. We have been following with interest the work of the committee and look forward to being able to assist in any way we can.
Honourable senators, investor confidence in Canada was threatened following corporate scandals in the United States, such as Enron and WorldCom in 2001-02. The Government of Canada, in an effort to strengthen and maintain the integrity of Canada's capital markets, announced in the 2003 budget that the RCMP and federal partners would receive up to $30 million a year over five years to create integrated market enforcement teams, IMETs, composed of police, lawyers and other investigative experts in Canada's four major cities: Toronto, Vancouver, Montreal and Calgary. Through collaborative efforts, the IMETs objective was to ensure that individuals and companies that violate the public trust face punishment consistent with the seriousness of the violation.
The RCMP commenced implementation of the IMET initiative in June 2003. We can attest that the initiative has strengthened the law enforcement community's ability to detect, investigate and deter capital markets fraud by focussing resources on the investigation and prosecution of the most serious corporate frauds and market illegalities. It sends the message that those who commit serious capital markets fraud offences will be brought to justice in an effective and timely fashion. We are well on our way to promoting compliance with the law in the corporate community and ensuring investors that Canada's markets are safe and secure.
Six IMETs are currently operational across Canada; three in Toronto and one each in Vancouver, Montreal and Calgary. These teams are backed up by a support branch in Ottawa that provides effective centralized management and accountability mechanisms. The RCMP is awaiting authority from Treasury Board to launch the final three IMETs as per the implementation schedule; one additional IMET in each of Vancouver, Montreal and Calgary.
The teams are jointly managed by are the RCMP, Justice Canada and partner departments and agencies. They work very closely with securities regulators and other federal and provincial authorities, building on the RCMP's existing partnerships for these organizations.
An important element of IMET is our intention to complete large and complex investigations in a shorter period of time. By using an integrated team-based approach, with the knowledge of many experts, it is hoped that we will conclude an investigation in a fraction of the time it would otherwise take. This ultimately means more criminals can be brought to justice in a timely manner.
With respect to human resources, the RCMP component of the IMET mandate consisted of 106 employees, approximately one half of whom are civilians. Police officers chosen for IMET work are highly qualified financial investigators. The RCMP has adopted a competency-based selection process that ensures only the most qualified candidates are even invited to apply. Successful applicants are asked to commit themselves for a minimum of three to five years. Our goal is to ensure that we have the right people in the right place for the right period of time. The civilian component of the IMET program consists of accountants, market experts, investigative analysts, electronic major case management support and legal advisors from the Department of Justice.
IMET's authority in the enforcement of securities fraud-related offences found in the Criminal Code stems from a Treasury Board decision of May 4, 1967 that called for the establishment of security fraud investigation squads. That original mandate was revitalized in the fiscal 2003 federal budget as a component of an initiative calling for enhanced protection of Canada's capital markets.
The RCMP component of the IMET mandate consists of 106 FTEs and is outlined in the approved Treasury Board decision of February 2, 2004.
The scope of the RCMP's securities fraud enforcement mandate was widened by Parliament on March 30, 2004 when Bill C-13 received Royal Assent thereby creating a new Criminal Code offence, in section 382.1, of improper insider trading that will target those who use privileged information not available to others in order to benefit themselves.
The IMET program has also incorporated a quick-start capability, allowing the RCMP to respond swiftly to major corporate frauds and market irregularities anywhere in Canada. All team members are available to be deployed rapidly if we must launch an immediate investigation in a location other than Toronto, Montreal, Calgary or Vancouver. In the short term, these resources develop the necessary operational plan, begin investigative work, and set up the necessary infrastructure. Over time, their duties are assumed by local commercial crime investigators, counsel and support staff. A permanent coordination capacity is established at RCMP headquarters in Ottawa.
The term ``integrated'' in the IMET nomenclature refers to both internal and external partners. The IMET program has accepted full-time secondments or assigned employees from a number of securities and law enforcement agencies in Canada. Currently, in the final year of implementation, the IMET program has secondments from each of the following agencies: British Columbia Securities Commission, Sûreté du Quebec, Ontario Securities Commission, Canada Revenue Agency, Organized Crime Agency of British Columbia and Vancouver Police Service.
IMETs enhance the traditional commercial crime mandate of securities fraud enforcement by utilizing an integrated, team-based approach and focussing on cases of national or international significance that pose a serious threat to Canada's capital markets. The IMETs focus only on cases that are most significant and demanding of a team approach to the investigation and are not intended to investigate each and every reported capital markets crime. This focus on project status investigations requires the dedication of one full team to each investigation. Therefore, upon reaching full strength of nine teams, as scheduled for 2005, the IMETs will have the limited capacity to investigate approximately nine project status investigations at any given time. This will likely result in IMET managers having to turn away some complaints. The complainant may similarly be turned away by our commercial crime sections or other local police jurisdictions, as those units often have a very limited capacity to undertake project status investigations.
Finally, the IMET program has some very significant investigations underway. We have seven active project status investigations and 26 somewhat less serious active investigations. The capitalization of the companies at risk is estimated at $55 billion Canadian.
We would be glad to expand on those remarks in response to your questions.
The Chairman: Thank you for those remarks.
Senator Moore: Welcome, gentlemen.
Superintendent Sliter, what is your role within the service?
Superintendent J.R. (John) Sliter, Director, Integrated Market Enforcement Branch, Federal and International Operations, Royal Canadian Mounted Police: I am the director of the IMET program based in Ottawa.
Senator Moore: Are the complaints that you investigate originated by another party or are they situations that arise from other investigations that the RCMP have carried out at another level? You mentioned that with the number of teams you have you can currently have seven active project status investigations. Did you receive only seven complaints, or did you reduce the cases to seven after preliminary investigation determined that a full-blown IMET investigation was not warranted?
Chief Supt. German: I will give you a framework for the response and then will turn to Superintendent Sliter for some details.
As the Director General, Financial Crime, I have three areas of reporting, two of which are relevant to this discussion. One is our commercial crime sections, which have been around for many years. The other is this new entity, the IMETs, which Superintendent Sliter operates. The third component is money laundering, or proceeds of crime, which is not relevant here.
In response to your question, we receive complaints from any number of sources. The issue is which complaints we will investigate. Complaints come from the public, securities commissions and other RCMP units. Complaints could also be self-generated, that is, issues that have come to the attention of the IMETs through other investigations. We assess the complaints we receive, prioritize them and determine which ones we are in a position to investigate within our mandate.
Supt. Sliter: You asked how many complaints it would take to arrive at seven project status investigations. We would do several hundred reviews of complaints from the various sources that Chief Superintendent German listed. The complaints are refined through that review process. Some of them result in the launch of investigations, and some of those go on to become project status investigations.
Senator Moore: Is that several hundred complaints per year or in the history of the IMET program?
Supt. Sliter: Since our implementation last year, we have done close to 200 investigations for review.
Senator Moore: You do not investigate credit card crime, do you? That is another division.
Chief Supt. German: It is important to understand that there are a large number of investigators doing commercial crime work. Although the IMETs may not take on a particular case, that does not mean that our commercial crime offices, or other police departments, will not take it on.
The commercial crime units deal with the full gamut of white collar crime — political corruption, counterfeiting, credit card crime and telemarketing. They have a huge mandate. The IMET mandate is quite restricted by comparison to that of the commercial crime units, which is a bit of a catch-all in the white-collar crime area.
Senator Moore: IMETs deal primarily with corporate offences?
Chief Supt. German: Yes. The mandate of the IMETs is to protect the largest publicly traded companies in this country to ensure that we do not run into an Enron-WorldCom situation. If there were not criminal enforcement on the markets, there would be a lack of confidence. The focus is the companies with the largest capitalization.
Senator Oliver: You stated that you are interested in large cap companies, the capitalization of which is $55 billion. You also stated that the main thing you are looking at are cases of national or international significance that pose a threat to Canada's capital markets. Are you working with Interpol and CSIS to get information on companies that may have interests outside of Canada?
Chief Supt. German: We do work in close partnership with many agencies. Interpol tends to be a clearinghouse for warrants. It serves many useful purposes, but we tend to deal directly with law enforcement agencies in other countries.
CSIS is a strong partner of the RCMP, but with regard to investigative work we must ensure that whatever we come into possession of can be used for evidentiary purposes in court. In the U.S., our partners are the SEC and the FBI, the traditional enforcement agencies on the civil and criminal side. Within Canada, we work very closely with the Ontario Securities Commission, the British Columbia Securities Commission and local police.
Senator Oliver: Of the 26 cases that are somewhat serious that you are now investigating, are they mostly insider trading and fraud cases, or is there another major category?
Chief Supt. German: There is a fraud component to virtually all the cases.
Senator Oliver: What about insider trading, which is the new section?
Chief Supt. German: The majority of them would not be insider trading cases. This section is new, and although that is something we are interested in exploring from the criminal perspective, most of the cases we now have fit under the general rubric of fraud.
Senator Oliver: Could you give us an example of the types of fraud into which those 26 cases fall?
Chief Supt. German: Market manipulation is an area of great interest. There are fraud provisions in the Criminal Code, but there are specialized forms of fraud, including market manipulation, false financials and fraudulent bankruptcy.
The Chairman: Superintendent, could you give us a list of those crimes along with a statistical analysis of their categorization? We do not want details about individual prosecutions, but we would like to see the statistics on what you are investigating to see whether you have sufficient finances and whether you have directed your attention to the broad spectrum of the code. That is what Senator Oliver is getting at.
Senator Angus: I consider you the thin edge of the wedge on this matter. I am concerned about restoring investor confidence in our capital markets and I rejoiced when the 2003 federal budget provided various measures that led to Bill C-46, although it unfortunately died on the Order Paper
You started the IMETs prospectively without the enabling legislation in place, and therefore you did not have the money to do it the way the RCMP would have liked to do it. Is that a fair statement?
Chief Supt. German: It is a fair statement, sir. We are probably the thin edge of the wedge. Some would describe this as a target-rich environment. That is the situation of white-collar crime everywhere and is not specific to Canada. There are more cases than we can deal with.
The commissioner has been personally involved with the IMET initiative from the beginning. Once we knew that the federal government was interested in pursuing this initiative, he was prepared to risk manage the setup of the program, which is what we did. The enabling legislation has followed. With the implementation of three more teams, we will be fully operational.
Senator Angus: That is encouraging. I do not want you to infer any pejorative connotation from what I am saying, because I think we are all on the same page on this. In this study we are trying to get a sense of what has been put in place for the protection of the consumers of our financial services industry subsequent to the institution of big reforms in Bill C-8 several years ago.
This committee studied that and we recommended that we should have the RCMP try to correct what was referred to by witnesses as a ``leaking sieve'' in Canada. We were told that the industry was rampant with insider trading and a great variety of corporate fraud, far beyond the several examples you outlined for Senator Oliver.
What can we do to help you get the tools you need to really make a difference in this area? I do not think there is any controversy about whether you should be doing this. There is no controversy or debate that $30 million over five years is a drop in the bucket, and I do not think there is any debate that your budget should be beefed up and you should be given the tools of the trade in this modern electronic age when billions of dollars can be transferred in a nanosecond by the push of a button.
Tell us what resources, be they legislative, financial or otherwise, that, if reasonable, we could recommend.
The Chairman: Superintendent, it is important that you give us this information. If you cannot give it verbally now, we would like it in writing. We would like you to think about this. We would like you to tell us whether you think the provisions under the Criminal Code are satisfactory. I do not think they are. I know that there are some gaps in the Criminal Code. It is important, as we consider increasing penalties for young offenders and in other areas, that we look at the corporate sector as well. If you feel that Parliament has been insensitive to the needs of a $55-billion industry, which is very important and in which credibility is important, please tell us whether some fair and appropriate amendments to the code would help you in your work.
Senator Angus: It is not only a question of amendments to the Criminal code but also things such as enforcement tools.
The Chairman: Second, we looked at your budget, and we do not think it is enough. I see you nodding in agreement. This has come late and the criticism made of our system is that our regulator is not here but rather in New York City.
Please give us the benefit of your advice to determine whether that is inappropriate. If there are any other administrative issues or issues with respect to regulatory agencies from which you are not getting cooperation, please tell us that as well. I am sure you have a catalogue of complaints. We will not accept them all, but we would like insight into the main problems.
Chief Supt. German: I appreciate that open-ended question. This is not something I have to think about too long. It is something we think about all the time.
In terms of Criminal Code amendments, we have to give the current amendments a chance. Three recent amendments are important to us. One is the criminalization of insider trading. I am a lawyer, but I am not an expert on legal drafting. It remains to be seen how effective that section will be. We have to see some cases in the courts before we can assess that provision.
It is important that the police have the tools to obtain the evidence they require. The amendments also provide for production orders. Again, it remains to be seen how effective the production orders will be. They are being used already. It would be premature to say that they are good, bad or indifferent. We like to say they are an improvement, and whether they require fine tuning is for a later day.
Third, the legislation provides for concurrent jurisdiction to allow the federal government to prosecute fraud cases. We view that as very important. That gives us the best of both worlds. It gives us the opportunity to go to the provincial Crown with a Criminal Code fraud case. If the provincial Crown does not have the resources or the ability to pursue the case, we can ask the federal Crown to take the case. That provision is not yet in force, but we understand that the Department of Justice is consulting with the provinces. We are hoping that that provision of concurrent jurisdiction will be in force soon. That will also be a very good step.
The Chairman: When will that happen?
Chief Supt. German: I do not know. The Department of Justice is working on it.
In terms of legislation, we have to wait and see with regard to those three issues. In terms of resources, the mandate or vision of the IMETs is very narrow in terms of the large sphere of white collar crime, and the program is properly resourced for what we are currently attempting to do. There is no question that we could take on more projects, but we are in a growth period right now. We are putting the program together and it seems to be gathering speed. It is being noticed and I think it is having an impact. It is properly resourced for what we are currently trying to do.
The bigger issue is the commercial crime sections. They have been with us for 40 years and have evolved from being investigators dealing with fraudulent behaviour. It all started with organized crime-related murders in Montreal in the 1960s. That led to the creation of bankruptcy squads, which then led to securities squads. They have now expanded to the point that our units are investigating counterfeit, political corruption and fraud against the federal government and against provincial governments where we are the contract police. Telemarketing is an area where we are spending a lot of time, because the senior citizens of our country, the United Kingdom and the United States are being victimized.
We have to strike a balance between corporate fraud and securities fraud, which is fairly large, and telemarketing cases that involve lone consumer victims. In balancing that we use a system called ``proof'' to prioritize cases. In our larger units, Toronto and Vancouver, for example, we have police officers whose full-time occupation is ``proofing'' incoming files to determine which ones we will take forward.
In areas such as telemarketing fraud, we use the team approach integrated with U.S. authorities. It is an international approach to fighting crime. We are having different successes in different areas. However, with regard to resources, I do not think anyone would deny that white-collar crime is a growth industry in Canada and elsewhere, as is fraud. We see evidence of this with spam on the Internet.
I would not be completely honest if I said that we do not need more resources on the commercial crime side. It is certainly an issue.
The Chairman: Is it fair to say that you have tailored the economic suit to fit the agenda? If you had more resources, could you broaden your spectrum?
Chief Supt. German: It is true that we are being as strategic as possible with what we have. The person in the office next to me heads the drugs and organized crimes unit and on the other side of me is the director general responsible for border integrity. They have very legitimate issues as well, and I am not pretending that ours are more important than theirs.
Some would ask where this will end. We do not purport to be able to stamp out all fraud, but we want to do enough to give confidence in all these areas. We want our elderly to be confident that they will not be victimized. We do not want people to be afraid to accept the $100 bill, so we work on counterfeiting. We try to spread ourselves as evenly as possible.
Senator Chaput: Do you have any statistics on the volume of credit card crimes in Canada? It would be of interest to the committee to have those.
Chief Supt. German: I do not have those statistics with me. There are a number of studies under way on that. The Competition Bureau of Canada and Statistics Canada, partially with funding from ourselves, are trying to determine the extent of such fraud in the country. Currently, the best credit card fraud statistics are from the credit card granters themselves because that is generally the first place people call to complain. In many cases, they will not call the police because their credit granter will deal with it.
We could certainly obtain some statistics for you.
Mr. Chair, may I respond to the question with regard to our relationship with regulatory agencies?
Senator Angus: It was with regard to the OSC and the Toronto Stock Exchange.
Chief Supt. German: They are cooperating with us.
The Chairman: Who is not cooperating?
Chief Supt. German: The securities commissions are not only cooperating; they have seconded people to be on our IMET teams. In fact, the Ontario Securities Commission was the first place we went when we put the IMET strategy together, and they embraced it.
We also have joint intelligence units of RCMP and securities regulators in Quebec, Ontario, British Columbia and Alberta that are in various stages of formation. These units look strictly at the intelligence coming in from the market. They feed both the regulators and us with information that might be of interest to investigative units. It is a good relationship, and that has to be put on the record.
We also work very closely with the Investment Dealers Association and the Toronto Stock Exchange, but in terms of regulators it is a partnership.
Senator Moore: You said that you started with hundreds of complaints and now have seven active ``project status'' investigations and 26 somewhat less serious active investigations. Are we to presume that all or most of those came from the capital market centres of Toronto, Montreal and Vancouver, or are they spread across the country?
The Chairman: Due to our time constraints, will you provide that to us in writing?
Chief Supt. German: I will do that.
Senator Angus: We went down to the United States after Enron to find out what lessons could be learned. We were advised that across the board, be it in New York, Washington, at the SEC, at the New York Stock Exchange or in Attorney-General Eliot Spitzer's backyard, they are short of financial resources. They said that the problem is so massive that they can only deal with a drop in the bucket.
No less a person than the head of the Federal Reserve met with us privately, and he told us that no laws like Sarbanes-Oxley will restore investor confidence. He said that the only thing that will is 10 CEOs in handcuffs and orange suits on the 11 o'clock news. That still pertains. We have still seen a lot of orange suits on the news, but not so many in Canada.
Chief Supt. German: Senator, your point is well taken. We do not aspire to take over the role of compliance with the IMET initiative. Our mandate is to strengthen corporations. As our commissioner has said, our role is that of criminal enforcement.
The Chairman: Would you give some consideration to whether we should centralize federal prosecution in one Crown branch? I know that you are working on this. We think there is a cost benefit to having centralized criminal prosecutions for larger matters. Have you given any consideration to that with regard to efficiency?
It is very difficult to get busy Crown attorneys across the country to focus on these large prosecutions. Would you give us your best advice about how it would work if there were centralized federal Crowns for the major cases?
Chief Supt. German: The Department of Justice is an equal partner with us on the IMET initiative. As I indicated, with the concurrent jurisdiction amendment, we believe that we have the best of both worlds.
We are working closely with the department. In fact, we have a two-day retreat scheduled for next week where we will look at relative roles. The Department of Justice is working on developing their own expertise in this area, which has not been a federal prosecution area.
The Chairman: Perhaps after your retreat you could give us some insight as to whether this would be a good recommendation to make. It is our sense that it would be. It is our sense that some of this is too fragmented and should be more centralized if it will be efficient and reflect the objectives that Senator Angus set out.
Chief Supt. German: We would be pleased to come back or report to you in writing.
The Chairman: Thank you very much.
The committee adjourned.