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Fraud Prevention Requires Detention

If March were Fraud Awareness Month, we could spend it celebrating Canada’s investor education programs. But it’s Fraud Prevention Month — and the truth is we aren’t doing nearly enough to deter investment fraud in this country.

Just look at some of the numbers. The Canadian Securities Administrators (CSA), a collective of all provincial and territorial securities commissions, reports that 27% of Canadians believe they’ve been approached with a possible fraudulent investment at some point in their lives, and 4.6% of Canadians have fallen victim to such scams. That’s 1.6 million people.

Victimization is highest in three of the largest and wealthiest provinces. It reaches an astonishing 8% in Alberta and approaches 6% in British Columbia and Ontario.

Seniors make up a disproportionate number of the victims. According to a 2012 study by the B.C. Securities Commission, almost one-in-five older Canadians (17%) believe they’ve been defrauded on an investment.

And the financial toll is tremendous. In the relatively small number of cases the RCMP’s Integrated Market Enforcement Team pursued between 2004 and 2009, investor losses were estimated at more than half a billion dollars. Furthermore, the CSA’s 2012 Investor Indexfound that 56% of investors lose all the money they put into a fraudulent investment, while 23% recover less than half of it.

These staggering numbers suggest that securities fraud warrants the most potent response our regulators, criminal prosecutors and judges can muster using every resource at their command. But is that what we’re getting?

A total of 1,205 individuals and companies were prosecuted for securities offences in Canada between 2012 and 2015. Of that number, at least 314 respondents faced allegations of fraud (the actual number is higher — possibly much higher — because, as the CSA notes, fraudulent activity also was a feature in an unspecified portion of 447 cases classified simply as illegal distributions of securities).

Yet, over that period, the vast majority of fraud allegations were pursued only through administrative proceedings, not criminal or quasi-criminal ones in which penalties can include imprisonment. Fewer than 40 accused persons were sentenced to incarceration. Hardly any drew sentences long enough to be served in a penitentiary. The average was less than one year, which would translate into serving just a scant few months until parole eligibility.

From a swindler’s point of view, these are great odds: In almost 90% of cases, they get a statistical likelihood of never having to spend a day behind bars even if they’re convicted. And those who do go to jail can expect to be out again well before their next dental checkup rolls around.

There’s no deterrent effect here. Nor is there any deterrence from big fines. Not when it comes to fraud. Regulators can congratulate themselves all they like for levying a record $117 million in administrative penalties and restitution orders against fraudsters in 2015, but the hard fact is that none of it will be paid. Fraudsters don’t pay fines; and even if regulators manage to freeze a few con artists’ bank accounts, all they’ll likely find there are remnants of victims’ money, not crooks’ assets. The seizures might cause some inconvenience, but they won’t inflict any pain on the bad guys.

Nothing short of lengthy jail time will deter them. It’s really just that simple. And it’s a reality we have to face if we want to stop the world’s charlatans from viewing Canada as a haven for investment fraud.

This doesn’t mean we should abandon our current approach altogether. Wrongdoers must still be banned from Canada’s capital markets, so administrative proceedings remain crucial for that purpose.

It’s great, too, that securities regulators and police forces are working closer than ever to detect and disrupt fraud. It’s also good to see that our most sophisticated financial surveillance tools, including some the Financial Transactions and Reports Analysis Centre (FINTRAC) uses, are finally being made available to support those efforts as well as the difficult task of recovering victims’ money wherever possible.

It’s also laudable that extensive efforts are being made to educate the public on how to recognize and avoid investment scams.

However, we must remember that fraud schemes, by their very nature, are always designed to circumvent people’s innate skepticism and even their educated doubts. Frauds work by getting us to suspend disbelief, so we’d be foolish to bank heavily on public education as the prime mechanism for preventing investment fraud. That pivotal role must be played, mostly, by deterrence — and our securities regulators, Crown prosecutors and judges must get more focused on that fact.

This article appears as an Inside Track op-ed in the online version of Investment Executive.

March 21, 2016