Evaluation of the Integrated Market Enforcement Teams Reserve Fund

4. Evaluation Findings

This section of the report describes the evaluation findings related to the IMET Reserve Fund. The information is based on findings that emerged from both the document review and interviews.

4.1. Relevance of the Integrated Market Enforcement Teams Reserve Fund

The subsections below explore the relevance of the Reserve Fund over the period covered by this evaluation, as well as the expected demand for the Fund in the future. They also address the extent to which the program aligns with both the role of the federal government, and its current Strategy for Enhanced Protection of Canada’s Capital Markets.

4.1.1. Demand for the IMET Fund

Overall, there were two IMET Reserve Fund cases during the evaluation period which included six applications for funding. Information on the number of IMET cases where charges were laid were available for years 2004 to 2014. These statistics provided by PID demonstrate that IMET cases are infrequent and that there is a strong correlation between the small number of IMET Reserve Fund applications and the small number of IMET cases where charges were laid. Ten cases were reported during the ten-year period and the numbers by region are as follows: two from British Columbia, one from Alberta, six from Ontario and one from Quebec. It is important to note that Ontario exercises its right of first refusal in most cases and will probably continue to have a majority of IMET cases. This can be explained by the fact that the Toronto region is the hub of the Canadian financial industry where the vast majority of the banks, investment firms, pension funds and insurance companies are headquartered.

During the evaluation period, the Ontario provincial Crown successfully applied for Reserve funding five different times for the same case. The total amount disbursed was $283,012. The Alberta provincial Crown applied once and the total amount disbursed was $160,674. The total amount spent to both provinces was $443,686 during years 2010 to 2013. No monies were allocated during fiscal years 2013-14 and 2014-2015. All applications were approved for their full amount, but the actual amount disbursed was less than the approved application amount because not all funds were spent by the provincial Crowns. Unspent funds were returned to the fiscal framework.

Table 1 shows the Reserve Fund’s budget, allocations (application approved amount), amount spent and unspent by fiscal year during the evaluation period.

Table 1: IMET Reserve Fund, 2010-11 to 2014-15
  2010-11 2011-12 2012-13 2013-14 2014-15
Budgeted amount $2,250,000 $2,250,000 $2,250,000 $550,000 $550,000
Amount allocated $491,819 $106,286 $55,000 $0 $0
Unspent amount $137,315 $44,567 $27,536 $0 $0
Amount spent $354,504 $61,719 $27,464 $0 $0

The amount spent represented on average 6% of the Reserve Fund’s total budget for the three first fiscal years of the evaluation period. The amount allocated and spent steadily declined in the first three years of the evaluation period, and the budgeted amounts for the last two years of the evaluation period were substantially reduced, in part because the Fund was underutilized. No Reserve Fund applications were received during the last two years.

Respondents emphasized that although the future demand for the IMET Reserve Fund is unpredictable, and that it is unknown when capital market investigations will result in charges laid, having resources available to fund subsequent prosecutions is necessary, given fiscal restraint felt at the provincial level. Key informants indicated that, despite lower than expected applications, provincial Crowns continue to feel funding pressure in prosecuting CMF cases.

4.1.2. Continued need for the IMET Reserve Fund

Key informants noted that there is an ongoing need for the Reserve Fund, but uncertainty existed about why the Fund was underutilized. They suggested that the lack of applications for the Reserve Fund could be due to the lack of awareness of the Fund and the restrictive nature of the Terms and Conditions application criteria. Key informants also pointed out that the Reserve Fund should be viewed as a contingency fund for provinces who needed more funding to defray additional and not only exceptional costs associated with IMET prosecutions. Several suggested that the funding criteria be expanded to advance the objective of the Fund. This could include other aspects of the prosecutorial process that would be helpful in building capacity and knowledge and improving the effectiveness of prosecutions. For example, conferences, webinars and training sessions on lessons learned from previous prosecutions may help develop capacity and prosecutorial expertise. Some mentioned further expanding the Fund for salaries to hire lawyers but overall, there was consensus that the Fund’s current activities are not necessarily the most appropriate.

The documentation reviewed as part of the evaluation indicates that CMF is a growing concern to Canada and other Organisation for Economic Co-operation and Development countries. The recent focused attention on tax evasion and the current government’s renewed interest in CMF suggests that more IMET cases may arise in the future.

4.1.3. Alignment of IMET Reserve Fund with federal and departmental priorities

Speeches from the Throne early in the evaluation period (2010 and 2011) support the importance of combating CMF. The goals and objectives of the IMET Reserve Fund align with federal priorities, as noted in Speeches from the Throne. In the 2010 Speech from the Throne, the Government of Canada articulated the importance of sound securities regulation to attract investment and address issues related to capital market crime. In the 2011 Speech from the Throne, the Government of Canada identified a need to move forward with willing partners to establish a new national securities regulator, subject to the Supreme Court’s decision on the extent of federal jurisdiction.

The Department’s Program Alignment Architecture for 2015-16 considers the Fund under the “Criminal Justice and Legal Program”. Funding, such as that for IMET, is made available to other partners in the justice system for specialized criminal justice programs and services to improve access to justice, and to develop public legal education resources to respond to the legal information needs of Canadians.

Respondents indicated that the Fund aligns with federal and departmental priorities by ensuring that CMF prosecutions are not avoided due to extraordinary costs.

4.1.4. Activities of the IMET Reserve Fund align with federal roles and responsibilities

Several key respondents referenced that provinces have primary jurisdiction for prosecution under the Criminal Code, but the determination of which level of government (federal or provincial) will prosecute a particular IMET case depends on many factors, including resource availability and the practical working relationship between the federal and provincial prosecution services.

Legislative amendments to s. 2 of the Criminal Code established concurrent federal-provincial jurisdiction to prosecute CMF offences. In order to conduct prosecutions of these offences most effectively, the PPSC and the Provincial Attorneys General in British Columbia, Ontario and Alberta have signed coordinating prosecution protocols which provide provinces a right of first refusal for prosecuting IMET cases.

Currently, the Reserve Fund only provides for coverage of exceptional prosecution costs (relating to exceptional disclosure, specialized contracts, or exceptional technical or equipment expenses). These restrictive criteria are viewed by some respondents as an impediment to provinces applying for funding. If a province decides not to prosecute, the PPSC could take on the prosecution, as per amendments to the Criminal Code and the prosecution protocols signed with certain provinces, but at a considerable expense to the federal government.

Respondents agreed that the Reserve Fund activities align with the federal government’s roles and responsibilities, but the scope on extraordinary costs may need to be expanded to ensure prosecutions are not avoided due to cost issues. A potential addition could include other aspects of the prosecutorial process that would be helpful in building capacity and improving the effectiveness of prosecutions.

4.2. Performance and Effectiveness

4.2.1. Enhanced prosecution capacity

4.2.1.1 Enhanced capacity to prosecute serious capital market fraud

Interview findings suggest that there are few other opportunities or solutions to facilitate federal support for provincial prosecutions in the area of CMF. If the Reserve Fund was not available, it is possible that provincial prosecutions could be inhibited or would have to defer to federal prosecutions due to the high financial costs associated with these types of cases. This could be seen as a forced federal involvement in cases, but considered a necessity if no other options are available. In terms of enhancing the capacity of the provinces to prosecute serious market fraud, the evaluation found that the five Ontario projects that received funding assisted the Attorney General of Ontario in financing the costs associated with specialized contracts for forensic and expert accountants, expert witnesses, and disclosure database of the one IMET case that was the subject of the prosecution. Similarly, the Alberta project funded by the Reserve Fund assisted the Attorney General of Alberta in financing the costs associated with an evidence database concerning the prosecutions related to their IMET project.

4.2.1.2 Success in encouraging provincial Crowns to take on serious capital market fraud prosecutions

The majority of the key informants believe that the Reserve Fund was not promoted enough to provincial Crowns. Prosecutors, and more specifically junior prosecutors, are not all aware of the Fund and do not fully understand its purpose. Others added that the administrative process may be seen as onerous to prosecution services who need financial assistance within a tight timeline.

The evaluation found that the limited number of applications is not necessarily an indicator that the Reserve Fund was not successful in encouraging provincial Crowns to take on serious capital fraud prosecutions because the number of IMET cases where charges are laid is small. As previously mentioned, there were only ten IMET cases where charges were laid during the ten-year period from 2004-2014. There was feedback that there was no need to apply because cases were either quickly resolved and/or resources were not needed at the time.

4.2.2. Improved prosecution of serious market fraud cases

4.2.2.1 Contributed to the improved effectiveness of prosecution

Key informants believe that successful prosecutions of CMF cases are important in terms of attaining all expected IMET outcomes.

The two cases listed below received IMET Reserve Fund assistance and were the only cases funded during the evaluation period. Both had long timelines because of complexity, which in turn delayed the speed of dispositions. According to Crown prosecutors who received Reserve Fund money, provincial Crowns would still have prosecuted their cases without this additional funding. The provincial prosecutors who successfully prosecuted their case noted that with Reserve Fund resources, they were able to access an electronic database which facilitated retrieval of documents and enhanced the efficiency of the prosecution.

The following is an overview of the two cases that received IMET Reserve funding.

Case 1: The Ontario Crown received $283,012 of IMET Reserve funding during the evaluation period. The charges evolved into a full investigation of a large multi-national telecommunications corporation. In June 2008, charges were laid against three executives. The trial commenced in January 2012, and the three accused were ultimately acquitted a year later. The Reserve Fund was utilized to cover costs associated with securing software that provided a searchable database due to an extraordinary number of documents (over 10 million documents).

Case 2: The Alberta Crown received $160,674 of IMET Reserve funding during the evaluation period. The Calgary IMET investigation determined that a company had perpetrated a classic “Ponzi” scheme that had raised $36 million. In late 2006 or early 2007, the investors’ money stopped and the scheme collapsed. In 2010-11, the Alberta provincial Crown applied for a contribution from the IMET Reserve Fund to assist in fulfilling its disclosure obligations and ensure that the prosecution proceeds. According to the lead prosecutor, the Fund was very useful for that particular fraud case. They were able to access an electronic database which facilitated retrieval of documents and supported efficiency of prosecution. The case was successfully prosecuted, and a guilty verdict was returned.

4.3. Efficiency and Economy

This section focuses on the extent to which resource use has been minimized in the implementation and delivery of the IMET Reserve Fund.

The Department of Justice has allocated 1.5 FTE to PID to manage the IMET Reserve Fund contribution agreements (receive applications, negotiate funding agreements, ensure the terms of the agreements are met, and process claims for payment). Additionally, these FTEs provide support to the Senior Assistant Deputy Minister, Policy Sector, in his role as a member of the IMET Executive Council Committee. This support is provided through the IMET Working Group. As a member of the IMET Working Group, PID staff:

In light of the small number of applications to the Fund, the Directorate allocates most of its resources to the Secretariat function of the IMET Executive Council Committee.

4.3.1. Alternative ways to better achieve the objectives of the Fund

The Reserve Fund is intended to provide federal resources to provinces for exceptional prosecutorial costs incurred in IMET-generated cases. Disbursement of Reserve funding is subject to the Minister of Justice’s approval, and requires the provinces to enter into a formal agreement with the Department of Justice Canada, specifying the Terms and Conditions for the funding, including the date on which eligible expenditures would be reimbursed, and the requirement for financial statements.

Since its inception, the Reserve Fund has lapsed funds and the overall allocation has been reduced twice. A recent report noted this spending shortfall and suggested that the Horizontal Initiative sponsor a federal-provincial conference on securities fraud to enhance provincial prosecutorial capacity.

Notwithstanding that there are few IMET cases where charges were laid, the lack of Reserve Fund applications was mentioned by all respondents. The most common suggestion from respondents with regard to being able to access the Fund was to expand the Terms and Conditions of the Reserve Fund to include IMET learning activities or other capacity building activities for provincial prosecutors. This expansion would help to fully meet the broader IMET Initiative. Respondents indicated that prosecutors at federal and provincial levels need opportunities to share best practices and exchange knowledge on the few IMET cases that do occur.

4.3.1.1 Best practices and lessons learned in the administration of the IMET Reserve Fund

Prosecuting market fraud is an expensive undertaking. Those suspected and/or charged with CMF often have considerable financial resources and legal expertise at their disposal to defend charges. The prosecution rarely has similar resources at its disposal. Although this initiative may not match defence resources, it does seek to enhance prosecutorial capacity.

Respondents were not able to identify alternatives to the Reserve Fund and reinforced that it should be considered as a backstop source of funds for supporting the prosecution of CMF. They also added that the Fund’s criteria established in the IMET Reserve Fund Terms and Conditions may be somewhat limited in scope. They suggested the need to open the criteria to access the Fund. Examples include promoting the Fund through training and seminars to ensure that the outcomes are being achieved.

According to respondents, it is in the national interest to encourage provinces to take on IMET cases, and the IMET Reserve Fund contributes to this effort. Eliminating the Fund is not necessarily a viable cost saving option since it could possibly discourage provinces from prosecuting IMET cases and force the federal government to prosecute cases. In addition, there would be a missed opportunity for federal and provincial prosecutors to share best practices and knowledge exchange on the few IMET cases that do occur. Documentation also indicates that there is a strong correlation between the small number of IMET Reserve Fund applications and the small number of IMET cases where charges were laid.