fraud
Penny Hill, Chapter Administrator
October - December 2017 Newsletter
Kathleen Watson CFE, Newsletter Editor
A Message from the Chapter President h The holiday season is upon us once more, or as many like to refer to the season as Christmas or Hanukkah. Regardless of our beliefs, we all enjoy time to reflect and be with family and friends. The commerce that takes place appears to start earlier each year and to get us into the spirit of season and spending, television stations have been playing Christmas movies and radio stations started to play Christmas music as early as mid-November.
Volume 11, Issue 7
acfe.toronto@sympatico.ca
Dinner Meetings Update The ACFE Toronto Chapter hosted our November dinner meeting on November 28th at The Royal Canadian Military Institute. The meeting was well attended and the presentation of “CYBERCRIME: INSURANCE COVERAGE ISSUES AND OPTIONS?” was extremely informative. The chapter would like to thank Reid Lester for his expert presentation.
You all work hard at your chosen profession and to be successful we need to take stock of our strengths and weaknesses. It’s time to assess our successes and our not so successful outcomes; and evaluate what we did right, and what we could improve on in the coming year. Most importantly, we need to recharge our batteries. It is a time to take a breath, to look around us and celebrate the season with family and friends, those individuals who have supported our passions, and overlooked our 24/7 work habits. It’s time to reach out and show our appreciation to those who supported us and to offer our support and comfort to those we pass by on a daily basis. We must remember that this is also the season for heightened financial and cybercrime activity and there is a continuing need for vigilance at this time of year. Have a Happy Holiday, a Merry Christmas and a Happy Hanukkah. See you all in the New Year.
Erik Bettencourt and Reid Lester Don’t forget: At every dinner meeting we have a draw of the names of the attendees. If your name is drawn, you will receive a certificate good for one free dinner meeting!!!
Our next dinner meeting will be held at the RCMI on January 30th , 2017. At that time, Linda Lister will present Assessing the Risk of Fraud. William Vasiliou, MBA, CPA, CGA, CFE, DAC Chapter President
Is It Open Season On Banks? - Teva Canada v. Bank of Montreal: 2017 SCC 51 By Reid Lester
Once upon a time, the victims of phoney payroll scams had a fairly good chance of being able to recover most of all of their fraud losses from banks by advancing a so-called conversion claim. When the facts were right, a case in conversion was an excellent way to make a good recovery against a bank, in cases where the fraudster was either long gone, or had spent all the money. Obviously, this was not so happy a situation for the banks. Over the past ten or fifteen years, the banks had obtained a number of favourable decisions that had made it much more difficult for victims of payroll scams to recover from banks. The recent decision of the Supreme Court of Canada (SCC) in Teva Canada v. Bank of Montreal, 2017 SCC 51 may have undone all of the recent progress made by the banks, and in fact, it may have created new and better opportunities for victims of fraud to sue the banks in conversion. With the review of a few cases below, we will try to explain this somewhat arcane area of the law and explain how important this new decision may be in the context of allocating losses in certain types of cheque fraud losses. Conversion and the “Fictitious Payee” Defence A so-called “collecting bank” converts a cheque when it accepts for deposit a cheque which bears a legitimate drawer’s signature, but which is deposited in an unauthorized fashion into the account of someone who is not entitled to the cheque; normally, someone other than the payee. This situation can arise in the context of phoney vendor scams, or, for example, in cases where a fraudster steals and negotiates a cheque made payable to someone else. Conversion is a “strict liability” tort, meaning that the due diligence of the collecting bank, or the negligence of the plaintiff, is no defence, and is of no relevance. The seminal decision in Canada on cheque conversion cases is the SCC’s ruling in Boma Manufacturing v. CIBC [1996] 3 SCR 727. Because conversion is a strict liability tort, it is pretty easy for a plaintiff to prove the basic elements of the case. However, the banks have (or had) one major defence to a claim in conversion: the “Fictitious Payee” defence. [This defence is especially relevant in phoney payroll scams where the cheques are procured through a fraud and are in respect of non-existent debts.] Section 20(5) of The Bills of Exchange Act provides that where the cheque at issue is made payable to a “fictitious” or “non-existing” person, the bill may be treated by the collecting bank as if it bore a legitimate endorsement so that the bank would take good title to the bill, and the claim for a conversion would fail. Moreover, the law is clear that if the name of a real person is inserted as payee by way of mere pretence, with no “intention” that such person should receive the funds, then this would be a “fictitious payee”. The key to the s. 20(5) defence is the intention of the drawer. It has been generally accepted that the SCC in Boma greatly restricted the application of the Fictitious Payee defence, to the great disadvantage of the banks. The Boma Manufacturing Decision In Boma, the fraudulent bookkeeper (Donna) convinced her employer to sign certain cheques to non-existing persons. She had signing authority on the account, and she signed many more of these cheques. She then forged the endorsements and deposited the cheques to her own account. The majority of the SCC held that while these payees were “non-existing” and “fictitious”, still, the drawer (the owner of the business) was “reasonably mistaken” in believing that all of these payees were legitimate because the payee names were similar to the names of real suppliers. This was the case even for those cheques which were signed by Donna, since the SCC held that it was the owner’s (drawer’s) intention that mattered, and not Donna’s. Thus, the SCC ruled that the Fictitious Payee defence did not apply in that case and in doing so, the SCC was effectively holding that the test for the drawer’s intention should be subjective, and even presumptive in nature. The Metroland Decision A good example of the application of the Boma decision can be found in the decision of Metroland v. CIBC, from the late 1990s. [The writer was counsel for the plaintiff in this case.] In that case, the fraudster, Sandy worked as a payroll supervisor at Metroland Inc., a company that published a number of local newspapers in Ontario. Metroland regularly used the services of independent truck drivers to deliver their papers to various locations. The truck drivers were paid by cheque. Over a period of some five years, Sandy orchestrated a payroll fraud on her employer: she regularly entered payroll information into the Metroland computer system to reflect that Metroland owed monies to certain non-existing independent contractors (she used names that were similar to Continued on page 3…
Is It Open Season On Banks? - Teva Canada v. Bank of Montreal: 2017 SCC 51 …continued from page 2 the names of real Metroland truck drivers) when in fact, no amounts were owing to these “people”. During the bi-weekly cheque-printing runs (one run to print the cheques; one run to have them mechanically signed), when no one was looking, she physically removed the cheques that were generated pursuant to her fraud. She then forged the endorsements of the payees, and deposited the cheques into her own accounts at TD Bank and Scotiabank. Like many fraudsters, she started off slowly, with relatively modest dollar amounts, but over time, she grew bolder and more reckless. Ultimately, someone at Metroland noticed that the delivery expenses were way up. An audit was undertaken and the fraud was discovered. The total loss was in the range of $500,000. Once she had been discovered, Sandy committed suicide. Metroland had fidelity insurance to protect against employee dishonesty. The insurer paid out the amount of the loss to Metroland and took over recovery efforts. Sandy’s estate had little left, and the insurer then sought to recover from Sandy’s banks, advancing a claim in conversion. There was obvious conversion at first instance here, because the collecting banks accepted for deposit to Sandy’s accounts genuine cheques which were made payable to third parties. The cheques did not belong to Sandy and her forged endorsements did not pass good title to the cheques to the collecting banks – textbook cheque conversion. The banks argued that the payees were fictitious since the payee names were placed on the relevant cheques as a mere pretence (Sandy’s pretence) with no “intention” that the payees should receive the money. They also argued that since the cheques were signed mechanically in the course of a large cheque run, no one at Metroland could legitimately claim to have “intended” anything, let alone that the phoney payees were to receive the proceeds of the cheques. The plaintiff argued that it did not matter if anyone at Metroland had any actual intention. Instead, the plaintiff argued that the SCC in Boma had held that in such a case, the court was entitled to presume that Metroland (the “drawer” of the cheques) intended that any and all cheques created and signed in its cheque runs were legitimate. In other words, the plaintiff argued that the mere fact that the cheques were created and signed meant that Metroland must have intended that the payees should receive the money, even if Metroland was duped into issuing the cheques in the first place. Meanwhile, the fact that the collecting banks had done nothing wrong, and that, arguably, Metroland had been in better position (than the banks) to prevent the fraud was irrelevant: conversion in a “strict liability” tort where negligence (on the plaintiff’s part) or due diligence (on the bank’s part) are not factors to be considered. The lower court accepted the plaintiff’s arguments and awarded judgment for the full face value of the cheques. This decision was upheld by the Ontario Court of Appeal (ONCA) and leave to appeal to the SCC was denied. Criticism of Boma and Evolution of the Law There has been a lot of criticism of the SCC’s decision in Boma (and of the decisions in Metroland.) There has been a steady effort on the part of the banks to scale back the scope of the decision. One complaint has been that the drawers of the cheques (account holders) are in a much better position than the collecting banks to prevent fraud so that it would be fairer and more efficient for the law to allocate the risk of such losses onto the drawers, and away from the banks. Another complaint is that the decision in Boma overlooked or ignored certain commercial realities in the manner in which cheques are generated in the business world and in particular, that the test in Boma attributed a positive intention to drawers in cases where no actual intention existed because the cheques were signed mechanically, in large cheque runs. The ONCA has been quite receptive to these arguments in recent years. Thus, in its recent decision of Rouge Valley v. TD Canada Trust 2012 ONCA 17, the ONCA considered a phoney vendor scam in which the fraudster caused the plaintiff RV to issue cheques payable to phoney entities to which no debts were owed. The plaintiff argued, as per Boma, that it had had a reasonable belief that the payees were legitimate. The ONCA disagreed, holding that the payees names bore no similarity to real suppliers, and that in any event, the plaintiff could not establish that it had had any actual intent in the creation of the cheques since they were created and signed mechanically. Thus, the Court held that no one responsible for running RV had actually considered the cheques at issue in any meaningful way, such that no one at RV could say that the cheques were being issued to a known entity. Accordingly, the s. 20(5) (Fictitious Payee) defence succeeded and the action was dismissed. In this decision, the ONCA effectively shifted the onus for demonstrating intent onto the drawer.
Is It Open Season On Banks? - Teva Canada v. Bank of Montreal: 2017 SCC 51 …continued from page 3 The facts were similar in Teva: the fraudster employee requisitioned and then stole and negotiated a large number of cheques (for non-existent debts) that were payable to six phoney entities, two of which were invented names - albeit names which were similar to actual vendor names - while four were names that matched the names of legitimate customers; three of them current. The fraudster employee (with some accomplices) had opened bank accounts in the names of each of the phoney entities and then deposited the cheques into these accounts after which the funds were withdrawn and dissipated. In issuing the cheques, Teva failed to follow its own internal procedures. Teva argued that the court should infer that it had intended (however mistakenly) that the payees should receive the funds so that the s. 20(5) defence should not apply. The motions judge accepted this and granted judgment. The ONCA reversed and held Teva could not demonstrate that it held an “honest, though mistaken, belief” since it (i) had not led any evidence to show that anyone in a position of authority had ever looked at the cheque reqs or the cheques themselves, and (ii) had not followed its own internal procedures in the manner in which the cheque runs were prepared. Thus, the ONCA held that the plaintiff could not demonstrate that it had actually held any “reasonable belief” as to the payees. SCC Decision in Teva In the Teva appeal, the majority of the SCC allowed the appeal, and endorsed the approach set out in Boma, and in the earlier SCC decision in RBC v. Concrete Column Clamps [1977] 2 SCR 456. Among other things, the majority held that in the absence of a challenge to the validity of the cheques, it must be presumed that a drawer intends that the payees receive the proceeds. There is no need for a drawer to demonstrate actual intention, as was demanded by the ONCA. The SCC reaffirmed the Boma finding that a payee will be “non-existing” when the payee lacks an existing relationship with the drawer unless the drawer could “reasonably have mistaken” the payee (including a completely phoney payee name) to be one with such a relationship. This finding of a “reasonable belief” is not to be unlimited: it will not arise in the case of phoney names that are clearly outrageous, such as “Snow White”, for example. It will now be up to the courts to decide where the line is drawn between “reasonable” and “unreasonable”, although in Boma, Metroland, and in Teva, the phoney payee names used by the fraudsters were similar to the names of real entities with which the drawer had done business. This was a split decision which is unusual in Canada. The majority found that the decision in Boma was consistent with the long history of the common law in this country. The fact that there was frequent academic criticism of the Boma decision was not relevant, according to the majority. In any event, the majority found that fraud losses of the type at issue can bankrupt small companies, while banks have deep pockets and the ability to pay. When allocating risks between innocent parties, this factor was apparently the most important one to the majority. There is one more point that could be very important: in Teva, the cheques at issue were apparently deposited to the named payees’ accounts. In Boma and Metroland, the fraudulent cheques bore forged endorsements and were deposited into third party accounts. It used to be the case that banks were entitled to accept for deposit – and they could take good title to – cheques made payable to the account holder. This decision in Teva suggests that this may now not be the case in conversion cases, and if so, Teva may have taken expanded the ambit of the tort of conversion in cheque fraud cases well beyond what Boma had done. Surely, this too will be the source of future litigation. Conclusion So, going forward, is it now open season on the banks? Maybe in the future, but we likely have a ways to go. The banks will still have good arguments: it may still be the case that a plaintiff in a phoney vendor scam will need to show that the phoney payee names were actually close in form to the names of real suppliers. It may be the case that a bank can indeed take good title to a cheque that is deposited to a payee account (after all, the drawer presumably would have intended (even if induced by fraud) that the payee receive the proceeds of such a cheque so maybe the bank can still become a holder in due course). We will undoubtedly see these issues litigated in the years to come. Still, there is no question that this is a disappointing decision for the banks: any decision that is based in part upon the ability of one party to pay is not going to be favourable to the banks. About the author: Reid Lester is a partner at Laishley Reed LLP. Mr. Lester practices in the areas of commercial fraud, banking and bills of exchange, insurance and all forms of recovery actions. He articled and worked at a large national firm in the early 1990s before moving to an insurance boutique firm where he practised for over 10 years. Prior to joining Laishley Reed LLP in 2007, he spent a further three years as a partner at another large national firm. Mr. Lester was called to the Ontario bar in 1990.
Chapter Events “
Fraud Detection:
Fraud Conference Canada
Words Never Lie but People Do – Detecting deception in everyday communications
Attended by over 300 participants, this year’s Fraud Conference Canada was the largest to date. Beginning Sunday October 29th, Linda Lister presented an extremely informative session on Fraud Risk Management and COSO: What You Need to Know. It was a great start to four days of expert sessions and networking.
This two-day event, taking place September 11 & 12, was completely sold out! Participants were extremely pleased with this expert presentation. The presentation provided an overview of how linguistic lie detection is used in business, human resource and investigative areas that helped participants become more effective in all their business relationships. Here is what one participant had to say: “On September 11 & 12, I attended the Lie Detection Seminar: Words don’t lie But People do. Ms. Nejolla Korris presented the material in a very proffional and easy way to learn and implement the knowledge she shared with us. The atmosphere of study and fun during the study was excellent. I am expecting anxiously the next educational lecture, so I can gain more insights of the great knowledge of Ms. Korris. During the seminar I met so many nice people and made new friends. The venue was excellently organized by CPIO and ACFE. The food was fresh and nicely presented”.
The Toronto Marriotte provided a comfortable, luxurious venue where over 20 presenters of break-out sessions and several key-note speakers shared their knowledge.
Community Partner Update At the ACFE Toronto Chapter, we like to keep up-to-date on what our Community Partners are doing. If any of our members know of anything new taking place with any of our Community Partners please email us at acfe.toronto@sympatico.ca.
As well, we would like to thank the many sponsors who came out to this event. Both the sponsors and the participants agreed, this year’s Fraud Conference Canada was the best to date!
Traveling? Why not check out up-coming events in our sister chapters:
ASSOCIATION OF CERTIFIED FRAUD EXAMINERS (TORONTO CHAPTER) WWW.ACFETORONTO.CA & COUNCIL OF PROFESSIONAL INVESTIGATORS OF ONTARIO (CPIO)
Vancouver, BC
Calgary, AB
Coming Events
Coming Events
WWW.CPIONTARIO.CA
MARK YOUR CALENDARS FOR F.I.T.3 Edmonton, AB Coming Events
Ottawa, ON Coming Events
APRIL 10, 2018 LOCATION: BMO INSTITUTE FOR LEARNING 3550 PHARMACY AVE. PRICING: EARLY BIRD PRICING UNTIL MARCH 20, 2018
South-Western ON Coming Events
Montreal, PQ Coming Events
Member Rate are members in good standing of CPIO & ACFE Toronto Chapter MEMBER RATE: 249 +HST NON MEMBER RATE: 279 +HST AFTER MARCH 20, 2018 MEMBER RATE: 269 + HST NON MEMBER RATE: 299 +HST
Moving company owners charged in alleged fraud scheme
REGISTER GO TO: WWW.ACFETORONTO.CA – IN STORE YOU WILL FIND THE F.I.T. 3 REGISTRATION CART
Police at 33 Division have raided a moving company facing allegations of fraud. Read More
THANK YOU TO OUR SPONSOR:
Phony nurse convicted for botched Botox injections The women wanted their smooth, youthful faces restored by Botox injections administered by a qualified medical professional. Read More
Connect on LinkedIn Did you know the ACFE Toronto Chapter has a new LinkedIn group? Find lots of great connections, articles, discussions, postings. Just go to LinkedIn ACFE Toronto Chapter page by clicking here and ask to be connected to be a part of this lively site.
Your Board of Directors President
William Vasiou, MBA, CPA, CGA, CFE, DAC
Vice President and Training Chair
Astra Williamson, CPA, CGA, CFE
President Emeritus, Secretary and Conference Chair
Tom Eby, MBA, CPA, CA
Treasurer
Erik Bettencourt, CPA, CMA, CFE
Director and Newsletter Chair
Kathleen Watson, CFE
Director and Membership Chair
Ryan Duquette, MsC, CFE, CFCE, CEECS, EnCE, ACE
Director and Social Media Chair
Ryan Watt
Director and Membership and Certification Chair
Mark McManus, B. Comm (Hons.) M.Ed., FICB, CTDB, CAMS, CFE
Director and Community Outreach Chair
Dorian Dwyer, CFE
Director and Chapter Administrator
Penny Hill
About the ACFE The ACFE is the world's largest anti-fraud organization and premier provider of anti-fraud training and education. Together with more than 70,000 members, the ACFE is reducing business fraud world-wide and inspiring public confidence in the integrity and objectivity within the profession. Visit www.acfe.com for more details.
Upcoming Events: January 17, 2018 IIA Toronto presents – Performing an Effective Quality Assessment Speakers: James Chan, Senior Manager, EY Mandy Yu, Manager, EY Venue: The Albany Club - 91 King Street East; Toronto, ON M5C 1G3 8:30-10:00am More Information and Registration
January 30, 2018 ACFE Toronto presents – Assessing the Risk of Fraud Speaker: Linda Lister, CFE, CPA, CMA, CGA, Senior Manager, EY Venue: RCMI 426 University Avenue, Toronto, Ontario, M5G 1S9 5:00 – 7:30 pm More Information and Registration