Coordinating Criminal and Civil Justice as a Means of Recovery for Fraud Victims

Norman Groot

On May 5, 2015, Assistant Crown Attorney Renna Weinberg, Team Lead, Financial Crimes Unit, Toronto office of the Ministry of the Attorney General, and Norman Groot of Investigation Counsel PC (Civil Fraud Recovery Lawyers) provided a presentation entitled Coordinating Criminal and Civil Justice as a Means of Recovery for Fraud Victims at the AGM of the Association of Certified Forensic Investigators held in Toronto.

Ms. Weinberg presented on restorative justice issues for fraud victims such as criminal restitution orders and fines-in-lieu-of-forfeiture. Norman Groot presented on civil fraud recovery strategies such as pre-action tracing and asset freezing orders. A comparison of the criminal and civil justice process was provided as described below. The presentation emphasized the importance of civil fraud recovery lawyers coordinating their litigation with the criminal process to obtain restorative justice for fraud victims.

The Issue

Is it reasonable for fraud victims to rely on police prosecutions and criminal restitution orders as a means to recovering their lost money? The short answer is no, although periodically partially recoveries do occur. This blog explains what fraud victims should consider when coordinating civil recoveries with criminal complaints to police.

Perceptions of the Criminal Justice System

In our social welfare state, the public who receive socially funded health care and socially funded law enforcement, amongst other socially funded public services, are under the perception that the public police will socially fund the investigation and prosecution of their fraud recovery as well. As part of that this perception, some believe the Canadian criminal courts will instill retribution onto the fraudster by sending them to jail and at the same time assist them recover their lost money by ordering restitution (payment) orders or face a return to prison.

The unfortunate reality is that, unlike the health care system which is a sacrosanct single tier system, Canada has a two-tiered justice system – one for those who can afford it, and another for those that cannot. To state the Canadian reality otherwise, due to the volume of fraud complaints, unless the complaint involves a socially vulnerable aspect of society, or unless the quantum of the loss meets a certain threshold (often being over a millions of dollars), the police often do not investigate most complaints for months, if not years, and often complaints are never investigated but remain as unsolved reports indefinitely. Even when the police do investigate and lay charges, and even if the Criminal courts convict a fraudster, the Courts only impose restitution orders payments in amounts that they believe the fraudster can afford, leaving the balance of criminal restitution order to be registered as civil judgment or to expire.

A further unfortunate reality in this country is that even when the Criminal courts impose a restitution order and place fraudsters under house arrest and probation, fraud victims find out that probation officers are slow to arrest fraudsters for breaching the terms of their probation for failing to make payments as they prioritize other offences, such as violent offences, ahead of collecting for fraud victims. In other words, relying on criminal restitution orders as a means of recovery of fraud losses is high risk and low yield recovery strategy at best.

It is for this reason that in past blogs we have provided information on how we recommend fraud victims respond to the discovery of a loss – see “Triaging” Your Fraud Case. We recommended that fraud victims discuss the loss with a family member, friend or advisor they trust for the purpose of getting a reasoned second opinion on the appropriate response. We recommended that fraud victims not attempt to confront the fraudster, as those who have lied in the past will lie again once they learn that their fraud has been uncovered and will further frustrate the recovery of evidence and the missing funds. We recommended that after consulting with a trusted family member, friend or advisor, they consult with a lawyer who focuses on fraud recovery (not just any lawyer) to have their case assessed before contacting police. This blog provides further information of the reasons for these recommendations.

Setting Objectives

Although objectivity may be difficult when a fraud is discovered, fraud victims should consider their objectives before reacting to the discovery of fraud. If recovery of the lost money is the priority, than commencing a civil tracing process and thereafter a civil recovery action is the preferred response. If the loss is being written off and retribution (the arrest and incarceration of the fraudster) is the primary objective, then immediately reporting the fraud to police is the priority. Of course the choices are often not so black and white, so we recommend you read on.

Coming to terms with setting objectives is the most important decision a fraud victim will make – because once the decision is made to put a fraudster on notice the fraud has been discovered, and once the investigation has been turned over to police, the chances of recovery of the lost money are reduced dramatically. For those who naively believe a full recovery should be obtained by simply contacting the police, you too should read on.

Evaluating Cost and Return on Investment on Civil Tracing and Freezing Applications

As is apparent, we advocate a civil tracing investigation prior to notifying a fraudster of the discovery of the fraud or reporting the matter to police. Another unfortunate reality is that civil tracing investigations and applications for asset freezing orders are expensive and sometimes, for various reasons, are not granted by the civil courts.

Fraud victims, whether individuals who lose money through investment frauds, or businesses who lose money through employee or other frauds, often struggle with whether to potentially through good money after bad and invest further funds into a civil investigation and litigation. Because of the cost involved, we sometimes advise fraud victims that it may not be worth their while to attempt to trace and freeze their money immediately and that their best hope is wait out a police investigation and criminal prosecution. We do, however, recommend that they have lawyers who focus on fraud recovery to assess their case for them and provide them an opinion on the most prudent approach to take before giving up hope.

Coordinating and Comparing Civil and Criminal Prosecutions

Fraud victims should inquire of their counsel how the criminal and civil prosecution systems operate and why, when and how their civil prosecutions and criminal complaints should be coordinated. What follows is a cursory summary of what we normally explain to fraud victims who make inquiries on these issues.

The Investigation

To start, fraud victims should prepare a comprehensive and coherent investigation brief for both their civil fraud recovery counsel and their criminal complaint to police. But many fraud victims do not know how. We typically suggest that summaries of witness information and the documents which support these statements should first be assembled. Civil counsel should conduct the first level of analysis and review to ensure the necessary information is provided and that it is well presented. In other words, civil counsel should assist fraud victims in preparing an investigation brief to be filed with a complaint to police, as it is the mostly the same information as will be required to draft a civil Statement of Claim.

Fraud victims should also be aware that the investigation processes for police and for civil counsel often have similarities. For the police it generally involves background cross referencing through police data banks, obtaining documents through production orders from financial institutions and / or others, obtaining evidence through search warrants, and analysis of evidence through computer forensics and interviews amongst other strategies. Likewise, the investigation process through the civil counsel often involves background investigations through private investigators, obtaining documents through tracing applications (Norwich applications) from financial institutions and / or others, obtaining evidence through civil search warrants (Anton Piller orders) and analysis of evidence through computer forensics and interviews amongst other strategies.

Of course much of the upfront investigation in the civil process cannot take place if the fraud victim cannot justify or afford the cost. And of course if a criminal complaint is made before fraud victims bring a motion for an Anton Piller order, they should ensure it is not taking place at the same time police apply for a criminal search warrant. These, and other issues, are discussions beyond the scope of this paper.

Instigation of the Process: Civil Claims versus Criminal Charges

Once an initial investigation is completed, a judicial process should be commenced. The civil process is instigated with a Statement of Claim. The criminal process is instigated by the police swearing to what is referred to as a criminal ‘information’.

Depending on the case, often a civil process should be instigated before a criminal complaint is made. A Statement of Defence in a civil proceeding is a public document and can provide insight into the fraudster’s justification for their conduct, and may influence whether the police actively investigate and prosecute a fraudster in a timely way. In their Statement of Defence the fraudster may explain in detail their justification for their conduct or simply deny the claims. If the fraudster does not respond at all, the plaintiff can move for default judgment, and seek remedies thereafter. A failure to respond is indicative of those attempting to evade responsibility.

If a criminal investigation is conducted, and a charge is laid, the accused fraudster can attempt to resolve the matter through criminal defence counsel by way of a guilty plea or an informal resolution, or deny the allegation and go to trial. In the criminal system an accused cannot just refuse to respond at all. Some people feel that if a civil process is started, the police will be less inclined to investigate and charge, and will not consider using their investigative powers such as search warrants and production orders. This may have been the case years ago, but within recent years has not been our experience, although we respect that some people hold onto these views.

It is important for fraud victims to note that if a fraudster cannot be located for the purposes of the civil justice system, service of a Statement of Claim can be made through a court order for substituted service at the last known address of a fraudster, through an email address or through another person. The process is dictated by the plaintiff. In the criminal justice system the fraudster must be located and arrested for the process to commence. Where the fraudster is not located by police, the best the police can do is issue a warrant for arrest – and the process is then stalled until an arrest takes place.

Civil Discovery versus Crown Disclosure

The discovery phase follows the exchange of a claim and defence in a civil proceeding (unless the process gets bogged down in motions – a topic for another day). In the discovery phase there is no right to silence for the fraudster as there is no risk of incarceration. The fraudster is required to produce all documents related to the fraud including those that demonstrate his or her involvement. Thereafter they must submit to examination on the pleadings and the documents that have been produced. In other words, a fraudster is required to tell their story, even if it results in unveiling their involvement in the fraud. Conversely, in the criminal system an accused fraudster has the right to silence and is not required to produce any documents. Rather, the Crown is required to produce all inculpatory and exculpatory documents and produce its witnesses for examination by the fraudster at a preliminary hearing if one is elected.

It is important for fraud victims to note that a fraudster cannot evade civil discovery because he or she is facing criminal charges. The safeguard to a fraudster compelled to give evidence against him or herself in the civil process is that the evidence cannot be used in the criminal process without leave of the court – a concept known as the deemed undertaking rule. Fraud victims can, however, make application to the Court to provide evidence obtained in the civil system for use in a criminal prosecution, and a Crown can use evidence from the civil system to impeach a fraudster who tells a different story at his or her criminal case.

Another important consideration for fraud victims is obtaining evidence for their civil case through access to documents and other materials obtained through a criminal search warrant. Pursuant to Section 490(15) of the Criminal Code, an application can be made by any interested party to access property in control of the police to determine whether a copy should be made for use in the civil discovery phase. We have successfully made use of this provision in an arson case and the results did assist in resolving the civil claim. Conversely, the police and Crown can get access to any evidence of the civil proceeding through various methods, one of which is by fraud victim simply filing the evidence in a motion in a civil proceeding (it then becomes part of the public record and the police, like anyone else, can get access to).

Civil versus Criminal Trials

The most significant difference in civil and criminal trials is the burden of proof. In a civil case, the fraud victim plaintiff is required to prove their case on the balance of probabilities. In a criminal case the Crown is required to prove their case beyond a reasonable doubt. Another significant difference is that in a civil case the fraudster’s discovery transcript can be read into evidence if the fraudster does not give evidence in his or her defence, whereas in the criminal system the fraudster’s right to silence means he or she is not compelled to testify.

Other important considerations include the focus of the trial. In a civil case, the focus is on the fraud victim and their loss. In a criminal case the focus is on the accused and ensuring their rights are respected prior to a conviction being entered. Further, in the criminal system fraud victims are often relegated to providing victim impact statements, whereas in the civil system the fraud victim controls the process and decides who will testify in their case and what evidence will be called.

Civil Court Orders versus Criminal Sentences

As mentioned above, recovery from a fraud loss in the criminal system sometimes is obtained by way of a criminal restitution order. However, the Courts only order fraudsters to pay what the Courts deem they can afford, so as not to set up the fraudster for a breach of the probation order. This results in the majority of restitution orders not being paid, and once off probation, a fraud victim is required to register the restitution order as a civil judgment – or it expires.

Because restitution orders most often must be registered as civil judgments, because civil claims for fraud must be filed before a two year limitation period from the date of discovery of the loss, and because most often the criminal process takes more than two years, we always recommend a civil claim be filed unless the victim is just writing off the loss. After a claim is filed consideration can be given as to whether a fraud victim under takes discovery or simply waits out the criminal justice process – a decision what is subject to a number of variables, such as the following.

Criminal Charges as Leverage for Restitution

Although fraud victims are not permitted to threaten criminal charges as a means to recover their money due to concerns that they themselves are in breach of the criminal extortion provisions, another reality of our criminal justice system is that Crown attorneys in fraud cases will often trade prison sentences in exchange for conditional sentences (house arrest) if the fraudster makes a full payment of the loss, or reduce the prison otherwise sought in exchange for partial payment of the loss. Thus while threats of criminal charges for recover of money is prohibited by fraud victims, trading liberty for money by Crown attorneys is lawful – and a mechanism that fraud victims should consider when coordinating their civil prosecutions with their criminal complaints.

by Norman Groot, LLB, CFE, CFI