Law Times

Law Times • March 18, 2013 Page 9 FOCUS Fraud a big challenge in insolvency cases Early intervention key to finding where missing funds went BY Julius Melnitzer For Law Times F raud can be a live issue in insolvency investigations. But it's the kind of thing that needs to come to light early if there's going to be any realistic chance of recovery. And while experienced trustees and receivers can often smell a rat, they need to bring in forensic accountants familiar with the red flags to determine whether and how fraud has actually occurred. "One of the first things I look for are whether the books and records are available," says Patricia Harris, a forensic accountant and partner at Fuller Landau LLP in Toronto. "If co-operation or access is not given by the business owners, that's a real red flag." This is so, Harris adds, even where the owners have sent the books and records to an external accountant or lawyer. "The records should be open and available to the receiver at all times," says Harris. Related warning signs include removing computers and denying access to data by failing to provide passwords or logins. Disorganized records are also troublesome. "People who have committed fraud often try to bog down the receiver or forensic accountant in paper," says Harris. "So what you may encounter are boxes of random documentation, no record of what's in the boxes, and no overall listing of documentation provided." Lack of co-operation can also take the form of personal unavailability. "In a recent case, the chief financial officer of a corporation had to leave for emergency dental care," says Harris. "If you couple that kind of unavailability with problems regarding the books and records, the warning signals really start popping up." Business owners or employees with something to hide can also be remarkably difficult to communicate with, especially when they're travelling. "When I start to hear that there's no access to e-mail or voicemail, it's almost certainly a delay tactic, a way of avoiding the inevitable," says Harris. "In these situations, it's not uncommon to get a lot of unreasonably strange responses to things." It's essential that receivers take control of all relevant bank accounts if a forensic investigation is to proceed expeditiously. "The first thing I look for is whether the banking activity is different over the last few months and particularly in the last month before the receiver takes over," says Harris. "What we frequently see in suspicious circumstances are roundnumber transactions, a lot of debit memos written to financial institutions, and debit memos that are not necessarily typical of most business transactions." Payments to financial institutions can be red flags indicating the movement of funds to personal accounts or to pay down debts guaranteed personally or by family members. In the same category are wire transfers to family members and other corporate entities, unusual credit card payments that have nothing to do with the business, payments to casinos, and, of course, cash withdrawals. "The receiver and the lawyers involved should be alerted to all these red flags so as to ensure that they are fully vetted," says Harris. Having a security agreement, of course, can make life a lot easier for receivers and their advisers. "A security agreement allows you to get your hands on documents and assets right away so recovery doesn't depend as much on red flags as it might in other circumstances," says John Polyzogopoulos of Toronto's Blaney McMurtry LLP. Absent security, receivers can resort to asset-freezing Mareva injunctions. "Marevas, however, require strong evidence of a valid claim, such as a promissory note," says Polyzogopoulos. "But even if you have that evidence, you still must demonstrate that assets are being dissipated for the purpose of Bank Act allows applicants to freeze deposits at a chartered bank by bringing an action against avoiding creditors." Other remedies include Norwich orders, Anton the fraudster and the bank to recover embezzled Piller orders, targeted preservation orders, and de- funds traced to a deposit account; serving the statement of claim on the branch and the bank's posit freezes under s. 437 of the Bank Act. Norwich orders are tracing orders aimed at locat- legal division; and providing a cover letter stating ing assets, wrongdoers, and evidence of wrongdoing that the bank's power to pay out the deposit is reincluding information in the hands of third parties voked by statute. Then there's always the option of reporting fraud to innocently associated with the fraud. For example, a Norwich order can require a bank to provide a target's the police and having them do some of the work. "But it's hard to get the police involved unless you statements to an alleged victim without advising that gift wrap the case for it has done so. them, primarily due To obtain Norwich Maybe the accounts contained funds and to a lack of resources," orders against third maybe they didn't, but no one was prepared Polyzogopoulos says. parties, applicants In the end, advismust show that they to spend the money it would take to get the ing whether or not it's have a bona fide claim; necessary order, which would still require worthwhile to pursue the third party is inenforcement in a foreign jurisdiction. hidden assets is, at best, volved in the matter an educated guess for and is the only practicable source of information; and the interests of justice counsel. Polyzogopoulos cites a case in which a debtor favour granting the order. Applicants must also un- had gambled away millions of dollars in funds transdertake to cover the reasonable costs of the third party. ferred online to an offshore account. "Maybe the accounts contained funds and mayAnton Piller orders are a civil form of search and seizure aimed at securing and preserving informa- be they didn't, but no one was prepared to spend tion. They're often wide ranging and can provide the money it would take to get the necessary order, access to a target's home, computers belonging to which would still require enforcement in a foreign family members and associates, and all manner of jurisdiction," he says. "It's really a gamble and whether you take it deelectronic devices. Preservation orders, like Mareva injunctions, pends on how deep-pocketed the client is and how involve freezing assets. And s. 437(2) of the important it is to find out what really happened." LT ms . Fir azine aw ag lL na er m gio Lawy Re io ian tar anad On C ee of hr ers pT d To rea the the f y eo nb On ose ch as NOT TOO BIG. NOT TOO SMALL. We are a law rm that combines experience, leadership and teamwork. We are a law rm that aligns best practice with exibility and pragmatism. We have an innate appreciation for each client's unique challenge. If this sounds like the right t for you, you've discovered Right-sized ThinkingTM. Let us show you where it can lead. Business Law • Commercial Litigation • Commercial Real Estate Construction • Insolvency & Corporate Restructuring Labour & Employment • Wills, Estates & Trusts www.lawtimesnews.com Untitled-1 1 13-03-11 9:35 AM

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