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The Law of Fraud
and White Collar Crime
in Canada
Tony Wong
Partner
416.863.2180
tony.wong@blakes.com
Blake, Cassels & Graydon LLP
199 Bay Street, Suite 2800
Commerce Court West
Toronto, ON M5L 1A9
www.blakes.com
The Law of Fraud and White Collar Crime in Canada
Tony Wong, Blake, Cassels & Graydon LLP1
INTRODUCTION
In the aftermath of the corporate scandals of the early 21st century, the criminal
law is increasingly being viewed by public authorities in Canada as a viable and
appropriate tool for addressing wrongdoing in the corporate world. In 2004, the
government of Canada passed sweeping amendments to the Criminal Code to
specifically address “white collar crimes”. Among other things, these amendments
expanded the scope of potential criminal liability for “organizations”, established new
criminal offences relating to conduct that affects capital markets, expanded powers for
law enforcement agents to investigate “white collar” crimes and imposed harsher
sentences for those businesses – and their directors, officers and employees –
convicted of wrongdoing. In addition, the Royal Canadian Mounted Police has
established Integrated Market Enforcement Teams (“IMETS”) -- with participants from
multiple agencies and multiple jurisdictions -- for the purpose of deterring criminal
securities fraud and ensuring that those who commit such acts will face a real risk of
being detected and prosecuted.
With these clear indications that public authorities in Canada will be using the
criminal law to punish wrongdoing in the corporate world, it is important to be familiar
with what has often been referred to as the “workhorse” offence in the Criminal Code
when it comes to white collar crimes – the offence of fraud. The offence of fraud not
only sanctions acts that involve false or misleading statements but, more generally, acts
that a reasonable person would consider to be “dishonest”. For liability to arise, the
“dishonest” acts need not result in actual deprivation to a member of the public. The
mere risk of deprivation is sufficient. The acts need not have been carried out with
“actual knowledge” that they are dishonest or that they would result in the risk of
deprivation. Rather, proof that the acts were carried out recklessly or with wilful
blindness will be sufficient to establish liability for fraud.
To those who operate in a corporate world where principles such as caveat
emptor, freedom of contract, and the advancement of self interests are well-accepted,
the broad scope of the offence of fraud appears to be a serious obstacle to “doing
business”. In some respects, the criminal law of fraud and its active enforcement by law
enforcement agents will impose limits on how business is conducted in this country.
However, a familiarity with the law of fraud, and when liability for this offence arises, will
ensure that in most cases business can proceed as usual without a significant risk of
liability for fraud.
1 Tony Wong is a Partner at Blake, Cassels & Graydon LLP.
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SECTION 380 OF THE CRIMINAL CODE
The offence of fraud is created by s. 380 of the Criminal Code. The offence is
defined as follows:
380(1) Every one who, by deceit, falsehood or other fraudulent
means, whether or not it is a false pretence within the meaning of
this Act, defrauds the public or any person, whether ascertained or
not, of any property, money or valuable security or any service,
(a) is guilty of an indictable offence and liable to a term of
imprisonment not exceeding fourteen years, where the subject
matter of the offence is a testamentary instrument or the value of
the subject-matter of the offence exceeds five thousand dollars; or
(b) is guilty
(i) of an indictable offence and liable to imprisonment
for a term not exceeding two years, or
(ii) of an offence punishable on summary conviction,
where the value of the subject-matter of the offence does not
exceed five thousand dollars.
(2) Every one who, by deceit, falsehood or other fraudulent
means, whether or not it is a false pretence within the meaning of
this Act, with intent to defraud, affects the public market price of
stocks, shares, merchandise or anything that is offered for sale to
the public is guilty of an indictable offence and liable to
imprisonment for a term not exceeding fourteen years.
THE PROHIBITED ACT
The prohibited act that makes up the offence of fraud consists of two distinct
elements. They are as follows:
1. A prohibited act of deceit, falsehood or other fraudulent means. In the
absence of deceit or falsehood, what the courts will look objectively for is a
“dishonest act” - i.e. what a reasonable person would consider to be a
dishonest act; and
2. The deprivation must be caused by the prohibited act, and deprivation
must relate to property, money, valuable security, or any service.
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The Meaning of “Dishonest”
The broad definition of fraud as including objectively “dishonest” conduct raises
real questions about what acts will expose a corporation to liability for fraud. In a
competitive free-market economy, private enterprises are expected to act in their own
self interests and to conduct business in a manner that is directed at advancing those
interests. Where there has not been a deliberate deceit or falsehood, when does
conduct undertaken to advance the corporation’s best interests cross the line and
expose the corporation to liability for fraud? Is it fraudulent to take advantage of a
loophole or gap in a contract that the other party failed to notice when it signed the
contract? Can a corporation that has entered into a “bad” contract complain that it has
been defrauded because the other side took advantage of its poorer negotiation skills?
Is it fraudulent to enter into a contract through a corporate entity rather than personally
so as to limit liability? Is there a duty on a seller of property to disclose facts to the other
party that are material to its price if no inquiry is made? The answers to these questions
are not always clear.
While the Supreme Court of Canada has not provided an exhaustive definition of
what constitutes fraudulent conduct, it has provided some guidance and answered
some of the questions raised in the previous paragraph. In R. v. Zlatic, [1993] 2 S.C.R.
29, McLachlin J. defined “dishonesty”, at paragraph 32, as follows:
...Dishonesty is, of course, difficult to define with precision. It does,
however, connote an underhanded design which has the effect, or
which engenders the risk, of depriving others of what is theirs. J.
D. Ewart, in his Criminal Fraud (1986), defines dishonest conduct
as that "which ordinary, decent people would feel was
discreditable as being clearly at variance with straightforward or
honourable dealings" (p. 99). Negligence does not suffice. Nor
does taking advantage of an opportunity to someone else's
detriment, where that taking has not been occasioned by
unscrupulous conduct, regardless of whether such conduct
was wilful or reckless. The dishonesty of "other fraudulent
means" has, at its heart, the wrongful use of something in which
another person has an interest, in such a manner that this other's
interest is extinguished or put at risk. A use is "wrongful" in this
context if it constitutes conduct which reasonable decent persons
would consider dishonest and unscrupulous. [emphasis added]
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Further guidance is provided in R. v. Théroux, [1993] 2 S.C.R. 5, where
McLachlin J. provided the following description, at paragraph 40, of what conduct is
“dishonest” and what conduct is not:
The requirement of intentional fraudulent action excludes mere
negligent misrepresentation. It also excludes improvident
business conduct or conduct which is sharp in the sense of taking
advantage of a business opportunity to the detriment of someone
less astute. The accused must intentionally deceive, lie or commit
some other fraudulent act for the offence to be
established. Neither a negligent misstatement, nor a sharp
business practice, will suffice, because in neither case will the
required intent to deprive by fraudulent means be present.2
[emphasis added]
In order to determine whether acts are “dishonest” for the purposes of
establishing liability for fraud, it is necessary to examine all of the circumstances
surrounding the commission of the act and determine whether the hypothetical
“reasonable decent person” would view those acts as being “dishonest”. The
commercial norms, practices or customs in an industry necessarily inform this
examination. In particular, it would be difficult to find that a transaction that conforms
with accepted commercial norms or customs in an industry would be viewed as
objectively dishonest. For example, the acceptance and legitimacy of using a
corporation to ensure limited liability would make it difficult to argue that it is fraudulent
to use a corporate vehicle as a contracting party to achieve limited liability. Similarly,
the acceptance, in Canada, of freedom of contract would make it unlikely that a
prosecutor will be able to prove that a person who has merely entered into a bad deal
has been defrauded. Further, where two sophisticated, arms length commercial parties
with the benefit of legal counsel enter into a transaction, it would be difficult for one
party to argue that the other has acted “dishonestly” because that party has acted solely
in its own self interests in the course of negotiations absent deceit or falsehood. In such
a situation, a reasonable decent person would not view such self interest as “dishonest”.
The Required Deprivation
Even if a business has committed an objectively dishonest act, this does not
mean that the offence of fraud is made out. What is also necessary is proof that the
dishonest act has resulted in a deprivation or risk of deprivation to the victim’s economic
interests. Notably, however, actual economic loss by a victim is not an essential
element of the offence of fraud. All that is required is proof of detriment or prejudice, or
risk of prejudice to the victim’s economic interests. The risk of prejudice to economic
interests can be established upon proof that a complainant has taken some form of
economic action which, but for the accused’s dishonest conduct, he would not have
2 Theroux, supra, para. 40
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otherwise taken. This will be the case even if the action taken by the complainant does
not give rise to an actual economic loss or to an increased risk of loss. So for example,
a fraudulent statement that induces another person to enter into an agreement to
purchase a piece property does give rise to a risk of deprivation even if the property
purchased subsequently increases in value.
THE “CRIMINAL INTENT” REQUIRED FOR FRAUD
A further element that has to be proven in order to establish liability for fraud is
proof that the prohibited act was committed with the requisite criminal intent. The
criminal intent for fraud requires proof that the accused was subjectively aware that
he/she was undertaking a prohibited act (i.e. aware of the deceit, falsehood, or other
dishonest act) and was subjectively aware that in carrying out this prohibited act, he/she
could cause deprivation by depriving another of property or putting that property at risk.
In R. v. Théroux, supra, McLachlin J., at paragraph 24, defined the intent element
of fraud as follows:
…The mens rea would then consist in the subjective awareness
that one was undertaking a prohibited act (the deceit, falsehood,
or other dishonest act) which could cause deprivation in the sense
of depriving another of property or putting that property at risk…If
this is shown, the crime is complete. The fact that the accused
may have hoped the deprivation would not take place, or may
have felt there was nothing wrong with what he or she was doing
provides no defence. To put it another way, following the
traditional criminal law principle that the mental state necessary to
the offence must be determined by reference to the external acts
which constitute the actus reus of the offence, the proper focus in
determining the mens rea of fraud is to ask whether the accused
intentionally committed the prohibited acts (deceit, falsehood, or
other dishonest act) knowing or desiring the consequences
proscribed by the offence (deprivation, including the risk of
deprivation). The personal feeling of the accused about the
morality or honesty of the act or its consequences.
The fact that a person does not know “for certain” that an act is “dishonest” or
that it creates a risk of deprivation does not necessarily provide a defence against a
charge of fraud. “Recklessness” has been found by Canadian courts to be sufficient to
establish the criminal intent element of the offence of fraud. To prove that an accused
acted with “recklessness”, it is necessary to show that he/she was aware that there was
a danger that his/her conduct could bring about the result prohibited by the criminal law,
but nevertheless persisted in the conduct where it was objectively unreasonable to do
so. Similarly, proof that the accused was “wilfully blind” to the commission of the
prohibited act or the risk of deprivation will be sufficient to establish the criminal intent
element of fraud. Wilful blindness refers to a situation when an accused is aware that
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certain facts may exist which would make his actions criminal, but deliberately refrains
from making any inquiries so as to remain ignorant. In the Law of Fraud and Related
Offences, (Toronto: Carswell, 1996) at pp. 11-6 to 11-7, B.L. Nightingale summarized
how criminal intent for fraud could be established through proof of “recklessness” or
“wilful blindness”.
To apply the doctrines of recklessness and wilful blindness to the
mens rea with respect to the conduct elements of “deceit” or
“falsehood”, if an accused made a false representation, but which
he believed to be true or at least does not know to be probably
false, the accused was not reckless. This is so even if the
accused should have known that the representation was false or if
a reasonable person would have known that the representation
was false. An accused would be reckless, however, if he made a
representation that fact x existed with the knowledge that there
was a risk that fact x did not exist. The accused would be wilfully
blind if he or she made a representation that fact x existed and
had suspicions that fact x did not actually exist, but failed to make
inquiries with respect to its existence.
With respect to recklessness and wilful blindness as to the
consequence element of the actus reus, an accused will be
reckless if it is established that he or she was subjectively aware
that there was a risk of deprivation even if he or she did not
subjectively know that deprivation would occur as a result of such
conduct. An accused will be wilfully blind to a consequence if
suspicions were aroused that deprivation may flow from such
conduct, but failed to make further inquiries with respect to it.
SENTENCING ON CONVICTION FOR FRAUD
Relevant considerations in determining appropriate sentence
The Criminal Code provides for a number of potential sanctions for organizations
and their directors, senior officers or employees who are convicted of fraud and other
criminal offences. The precise sentence to be imposed – be it imprisonment, fine,
probation or any other sanction – depends on a consideration of all relevant
circumstances (see s. 718.21 of Criminal Code for relevant circumstances3) and the
3 Relevant circumstances under s. 718.21 include any advantage realized by the organization as a result of the
offence; the degree of planning involved in carrying out the offence and the duration and complexity of the offence;
whether the organization has attempted to conceal its assets, or convert them, in order to show that it is not able to
pay a fine or make restitution; the impact that the sentence would have on the economic viability of the organization
and the continued employment of its employees; the cost to public authorities of the investigation and prosecution of
the offence; any regulatory penalty imposed on the organization or one of its representatives in respect of the
conduct that formed the basis of the offence; whether the organization was – or any of its representatives who were
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range of sentences that have in the past been imposed on conviction for similar
offences.
The Criminal Code sets out specific “aggravating circumstances” that a court
may consider (those circumstances justifying the imposition of a harsher sentence) in
determining an appropriate sentence on conviction for offences such as fraud. These
circumstances are:
o the value of fraud committed exceeding one million dollars;
o the offence adversely affected, or had the potential to adversely affect, the
stability of the Canadian economic or financial system or any financial
market in Canada or investor confidence in such a financial market;
o the offence involved a large number of victims; and
o in committing the offence, the offender took advantage of the high regard
in which the offender was held in the community. (s. 380.1)
In addition, the Criminal Code provides that offender’s “employment, employment
skills or status or reputation in the community” are not to be considered as mitigating
circumstances (circumstances justifying a more lenient sentence) “if those
circumstances were relevant to, contributed to, or were used in the commission of the
offence”: s. 380.1(2). Those with “standing” or “good reputations” in the community will
not be able to rely on these factors to support an argument for a more lenient sentence
where they relied on this “standing” or “good reputation” to perpetrate their fraud.
Specific Sentences
Imprisonment is a potential sentence on conviction for fraud. While a corporation
itself cannot be “imprisoned”, its senior officers and directors can be. For frauds
involving amounts in excess of $5000, a term of imprisonment not exceeding 14 years
may be imposed. For frauds involving less than $5000, a term of imprisonment not
exceeding 2 years may be imposed. Alternatively, frauds involving less than $5000
may be prosecuted by summary conviction, in which case the sentence upon conviction
is a fine of not more than $2000 or a term of imprisonment not exceeding 6 months or
both.
In addition to imprisonment, a court may impose fines on a corporation on
conviction for fraud. There is no precise formula for calculating a fine in a particular
case but the amount of the fine would likely take into account the benefit economic
involved in the commission of the offence were – convicted of a similar offence or sanctioned by a regulatory body
for similar conduct; any penalty imposed by the organization on a representative for their role in the commission of
the offence; any restitution that the organization is ordered to make or any amount that the organization has paid to a
victim of the offence; and any measures that the organization has taken to reduce the likelihood of it committing a
subsequent offence.
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obtained by the offender through the fraud, the harm to the public, the need to punish
the offender and the need for deterring similar acts of fraud in the future.
The court may also order the offender to make “restitution” to its victims. In
effect, the offender is ordered to compensate its victims for the economic losses
suffered as a result of the fraud.
The court may also impose a “probation order”. Such an order permits a court to
impose a number of obligations on a convicted corporation in respect to the conduct of
its affairs. These conditions are directed at reducing the likelihood of a re-occurrence of
the fraudulent acts (see s. 732.1(3.1) of Criminal Code). Among other things, the court
can order the corporation to establish policies, standards and procedures and to report
to the court on the implementation of those policies, standards and procedures.
CONCLUSIONS
Public authorities in Canada will be increasingly using the criminal law to punish
wrongdoing in the corporate world. One of their most powerful weapons that will
available to them is the offence of fraud. It is incumbent on those doing business in
Canada to understand the elements of this offence to ensure that acts carried out for
the purpose of advancing the corporation’s best interests – be it marketing, accounting
or aggressive business negotiations – do not give rise to potential liability for fraud.
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