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In July, the Supreme Court of Canada ruled that to survive bankruptcy proceedings, fines issued by securities regulators must be directly linked to fraud, such as orders to repay money obtained through fraud.Sean Kilpatrick/The Canadian Press
Dozens of financial criminals have managed to escape paying tens of millions of dollars in regulatory penalties by declaring bankruptcy, according to market watchdogs in British Columbia and Ontario.
When the Supreme Court of Canada ruled last month that criminals can use the bankruptcy process to erase punitive fines imposed by securities regulators, the case was about a single pair of pump-and-dump scammers. Now, as regulators and investor advocates renew calls for federal lawmakers to close what the BC Securities Commission calls an “escape hatch,” new data show that hatch has seen a lot of use.
Ottawa, meanwhile, appears to be in no hurry to make the legislative changes required for that hatch to be closed.
Since 2001, more than 40 individuals and companies, owing a total of roughly $80-million to the BCSC, have had their fines wiped out through the bankruptcy process, according to BCSC data. While the Ontario Securities Commission does not actively maintain similar data on Canada’s single largest market, OSC spokesperson JP Vecsi said the regulator is aware of more than 40 people and companies with outstanding fines who have been involved in bankruptcy proceedings since 2011, though he could not provide a dollar figure for the fines that ultimately went unpaid as a result.
The Supreme Court ruled that, to survive bankruptcy proceedings, fines issued by securities regulators must be directly linked to fraud, such as orders to repay money obtained through fraud, also known as disgorgement orders. That is partially because the federal Bankruptcy and Insolvency Act includes exemptions that prevent fines imposed by courts from being discharged through the bankruptcy process.
Those exemptions, however, do not apply to fines imposed by administrative bodies such as securities regulators, the Supreme Court determined. As a result, whenever Thal and Sharon Poonian – the appellants in the Supreme Court case – complete their bankruptcy proceedings, they will still be liable for a $5.6-million disgorgement order imposed by the BCSC, but they will no longer have to pay anything toward the much larger sum of $13.5-million in administrative penalties.
In 2018, then-B.C. finance minister Carole James sent a letter to Bill Morneau – her federal counterpart at the time – and then-federal innovation, science and economic development minister Navdeep Bains formally requesting the Bankruptcy Act exemptions be expanded to include fines issued by securities regulators. Her letter noted the United States bankruptcy code allows securities commission fines to survive bankruptcy, while Canada’s does not.
She renewed that call in early 2020, but Ottawa said at the time it had no plans to make the requested amendments to the law. Now, as B.C. prepares to lead the charge for a third time, Ottawa appears to remain non-committal.
Finance Minister Chrystia Freeland’s office referred questions on whether Ottawa would accept the BCSC’s latest call to the Finance Department. Finance referred questions to Innovation, Science and Economic Development Canada and spokesperson Hans Parmar responded by e-mail.
The Supreme Court’s decision “has provided additional clarity as to which debts survive discharge under the Bankruptcy and Insolvency Act, and the circumstances in which discharges for certain debts and administrative monetary penalties will be refused,” he said.
“The Government of Canada continues to review the decision and its implications for Canada’s insolvency regime and the economy.”
BCSC chair and chief executive officer Brenda Leong said in an e-mailed statement to The Globe and Mail that her team is still “considering the best approach to engage federal cabinet ministers, members of Parliament and officials on the importance of the issue.” She also plans to re-initiate discussions with whomever is B.C.’s finance minister after the Oct. 19 provincial election.
“This commission has long advocated for changes to the bankruptcy legislation in order to expressly exempt securities sanctions from bankruptcy,” Ms. Leong said during a July 31 press conference a few hours after the Supreme Court decision was released. “The federal government needs to act now to make that change in order to protect investors in this country.”
“An obvious solution is to revise the law to deal with this ‘escape hatch,’” Ms. Leong said in an accompanying statement.
Stan Magidson, CEO of the Alberta Securities Commission and current chair of the Canadian Securities Administrators – an umbrella group for market watchdogs across Canada – echoed Ms. Leong’s call for Ottawa to take urgent action.
“Ultimately, when it comes to collecting sanctions, we can only use the tools that the law provides to us,” Mr. Magidson said by e-mail. “Only the federal government can address the gap made clear by the Supreme Court of Canada’s decision.”
Larry Ritchie, former vice-chair of the OSC and current chair of the risk management and crisis response practice at Osler Hoskin & Harcourt LLP, said part of the reason the issue remains unaddressed for so long is because “there are so many gaps that regulators or politicians can point to and say somebody else is responsible that it falls through the cracks.”
The main issue, he said in an interview, is politicians are “not getting their act together and not having a coherent” financial crime enforcement regime, adding that a more dedicated approach to tackling financial crime is needed in addition to amending existing bankruptcy laws.
During the 2021 federal election campaign, the Liberal Party pledged to establish the Canada Financial Crimes Agency, which would combine resources from the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC), the RCMP and the Canada Revenue Agency into a new law enforcement agency.
The CFCA is still a long way from getting up and running, with the 2024 federal budget allocating just $1.7-million over two years for the Finance Department to finalize the design and legal framework of the agency.