Why the Criminal Process is Secondary in Fraud Recovery – Part II

Criminal Funding Rights Override Victim Mareva Recovery Rights 

In our prior blog, Why the Criminal Process is Secondary in Fraud Recovery – Part I – Criminal Search Rights Override Victim Recovery Rights, we summarized the recently released case of  R. v. Tashanna Mullings, 2019 ONSC 2408, published by the Ontario Courts. The bottom line of that case is that fraud victims need to understand that the Canadian criminal justice system, in its application of the Canadian Charter of Rights and Freedoms, does not put the interests of victims ahead of rogues. Rather, the interests of victims are subordinate to the Charter rights of rogues.

In our prior blog, we also discussed that fraud victims also need to understand that the Canadian criminal justice system will prioritize punishing the police for violating some Charter “right” of a rogue before respecting the rights of fraud victims, notwithstanding that the government’s policy encourages the issuance of criminal restitution orders and retribution by way of a conviction and sentence. We reviewed the unfortunate state of Canadian Charter of Rights litigation in Canada as discussed in the 2018 decision of R. v. Villanti, 2018 ONSC 4259.

Our prior blog, published in May 2019, addressing why the criminal justice system is unreliable, was followed up by a Global News article on July 8, 2019, by Sam Cooper entitled Organized Crime Knows Fraud is the Way to Go. The article’s conclusion is that due to the lack of police resources, weak efforts and lack of interest by Crown attorneys in some cases, and lenient sentencing by the Courts compared to those issued in drug trafficking cases, organized criminals are turning to fraud as the preferred means to finance their criminal enterprises.

Another article published by Andrew Russell of Global News on June 10, 2019, entitled It’s a Travesty: Nearly 800 Criminal Cases Thrown Out Over Delays Since the 2016 Jordan Decision supports the position we took in our blog that the Canadian Charter of Rights and Freedoms does not put the interests of victims ahead of rogues. R. v. Jordan followed the staying of over 47,000 charges in Ontario alone subsequent to the R. v. Askov decision. Based on these decisions, it should be obvious to fraud victims that resorting to the criminal justice system for a restitution order is high risk and should be considered when recovery is not otherwise foreseeable. 

The problem with Charter litigation is that the remedies the Courts have designed to respond to violations of an accused’s Charter rights are unbalanced and have a lack of meaningful regard to the countervailing interests of the accused’s victim. In the case of Curley v. Taafe, 2019 ONCA 368, the Court stated: “Criminal prosecutions are not brought for the benefit of the prosecutor or the complainant, but for the common welfare of society”. What is beneficial for the “welfare of society” is an undefined term and is often not what is beneficial for the complaint fraud victim. 

A Rogue’s Access to Mareva Frozen Funds for Their Criminal Defence Lawyers

In one of our ongoing fraud recovery cases of a bookkeeper that fraudulently obtained approximately $650,000 from her employer, we brought a motion for a Mareva injunction to freeze all of her bank accounts and other assets pending resolution of the civil recovery case. Our client has intentionally not filed a criminal complaint for the time being so as to avoid the rogue bringing a motion to have her criminal defence lawyers funded using the frozen assets. The reason for taking this approach has resulted from the Ontario Court’s decision in CIBC v. Credit Valley Institute of Business and Technology, 2003 CanLII 12916. 

The facts as summarized by the Court in CIBC v. Credit Valley tell a story of how a Nigerian-born rogue residing in Canada known as  Lawrence Mpamugo, was the operating mind of a private school known as Credit Valley, and defrauded CIBC of allegedly $13M. CIBC further alleged that $6M of its losses and the funds caught by the Mareva were proprietary – meaning the money that CIBC actually transferred to Mpamugo’s company Credit Valley.

Back in 2003, Mpamugo and the other defendants in the CIBC case conceded that CIBC had presented a prima facie case of fraud to the Court. As it turned out, in 2004 Lawrence Mpamugo was criminally convicted of multiple counts of fraud. His sentencing, however, was not published – another common shortcoming of the criminal justice system. 

In the CIBC case, Mpamugo served affidavits seeking to use some of the frozen funds to pay for the defendants’ initial legal fees. Mpamugo alleged that he possessed no assets other than those caught by the Mareva injunction, that he had no income on which to live, and that he was otherwise broke and could not pay for his continuing legal fees. In his affidavit, Mpamugo listed the expenses for which he sought payment. 

In Mpamugo’s first motion return date, the Court granted some funds for living expenses. The balance of Mpamugo’s motion for funds caught by the Mareva to use for his criminal and civil defence, and for his living expenses, was adjourned for cross examinations on his affidavit. The Court crafted a legal test which Mpamugo had to meet in order to succeed in his request for access to the funds caught by the Mareva injunction.

The test issued by the Court has four steps. First, the defendant must prove, by way of affidavit evidence, that he or she has no other assets available to pay living and legal expenses. Second, the defendant must provide affidavit evidence regarding the source of the funds that were frozen, to prove that some of the funds are not proprietary. The onus of proof at this stage is on the rogue. The third part of the test is an analysis as to what expenses may be paid for using whatever non-proprietary funds there may be (para 37). 

To the extent that living expenses may be paid using non-proprietary funds caught by a Mareva injunction, a separate account must be established by the defendant into which said non-proprietary funds will be deposited. In the CIBC case, such an account was referred to as an “Expense Account” (para 38). Monthly statement of the Expense Account are required to be forwarded by the bank to the office of the victim’s lawyers. To remove funds from the Expense Account, a defendant is required to send the victim a list of expenses for their approval for payment. If there is a disagreement on the expenses to be paid from the Expense Account, a motion is required. 

Payment of Criminal Defence Costs from A Victim’s Funds Held in a Constructive Trust

The fourth part of the legal test is whether the defendant should be granted access to use frozen funds that are identified as proprietary in nature. In the CIBC case, the funds characterized as proprietary form part of a constructive trust. As such, it would seem to be unconscionable to transfer a victim’s funds to a rogue to pay for the rogue’s legal fees in attempting to defeat or delay the plaintiff from obtaining judgment. The Court held:

It is one thing to permit payment of ordinary expenses out of money belonging to the defendant but which is frozen by a Mareva injunction.  It is another thing altogether to permit the defendant to use the plaintiff’s money for the purpose of attempting to defeat the plaintiff’s claim, or to delay the plaintiff from obtaining judgment.  (para 20)

That said, the Court did grant Mpamugo access to the frozen funds to pay for his criminal defence lawyers. The following quote demonstrates how the interests of the rogue are placed ahead of the victim in the criminal context. The Court held:

Mr. Mpamugo seeks the release of sufficient funds to cover his legal fees for the defence of the criminal charges against him.  I have already authorized payment of $20,000.00 for the transcripts of the preliminary hearing and a $50,000.00 retainer to Mr. Gold. The criminal charges are serious in nature and if Mr. Mpamugo is convicted he could be looking at a period of incarceration that is not inconsequential.  It would be difficult for Mr. Mpamugo to represent himself at trial.  The documentation is voluminous and the issues relatively complex.  I consider the ongoing cost of criminal counsel to be a high priority. 

Counsel for the plaintiff argues that Mr. Mpamugo should not be entitled to retain counsel of the highest calibre, but rather should be restricted to counsel with a more modest hourly rate than Mr. Gold.  I disagree.  … [I]nsofar as funds subject only to the Mareva  injunction are concerned,  there should be no fetter on how expensive a defence Mr. Mpamugo chooses to mount. To the extent the amount of the legal costs is an issue at all, it is only because the non-proprietary claim assets are limited and insufficient to cover everything requested by the defendant.  

It is understood that the full cost of the defence on the criminal charges will far exceed the amount of the retainer.  Mr. Gold shall render accounts from time to time.  Any account should be sent first to Mr. Mpamugo.  If he approves the amount of the account, it should then be sent to counsel for the plaintiff.  If the plaintiff consents, through its counsel, Mr. Gold’s account can be paid out of Expense Account.  Counsel for the plaintiff may request back-up documentation from Mr. Gold, and such shall be provided as long it can be done without compromising the defence or breaching solicitor and client privilege.

I have a discretion in respect of whether payments should be made out of the assets frozen by the proprietary injunction in the event there are insufficient funds in the Expense Account to cover them.  In exercising that discretion I must be mindful that the plaintiff has not yet proven its entitlement to the assets in question and there is an underlying unfairness to the defendant in tying up his assets prior to the plaintiff proving its case at trial.  On the other hand, there is unfairness to the plaintiff if I permit the defendant to use the funds for his own purposes, including funding his defence of this case, only to discover at the end of the action that the money belonged to the plaintiff all along.  

There is a fundamental unfairness in requiring the plaintiff to fund the civil defence of its own case against the defendant and to provide the defendant and his family with all of their living expenses for the time it takes to get this case to trial, if the defendant did in fact defraud the plaintiff of the amounts claimed.  The situation is somewhat different with respect to the defence of the criminal charges.  … [T]here is more at stake in respect of the criminal charges given the criminal record that would follow if convicted and the risk of a lengthy period of incarceration.  These factors, in my view, tip the balance slightly in favour of the defendant.  

Therefore, if there are no funds available from the Expense Account to pay Mr. Gold’s accounts when due, payment may be made from other assets, [including the victim’s own funds] subject to the same review process to ensure the accounts are reasonable.

In this context, the Court rejected Mpamugo’s claim for payment of civil litigation defence costs from proprietary funds (para 53). To the extent that civil litigation costs should be paid from funds caught by the Mareva injunction, this funding should only be taken from funds deposited in the Expense Account derived from non-proprietary funds. 

Other Cases That Have Followed CIBC v. Credit Valley

Since the CIBC decision was issued in 2003, other cases have followed it and made findings on related issues. 

In Waxman v. Waxman, 2007 ONCA 326, the Ontario Court of Appeal approved the analysis of the Court in CIBC v. Credit Valley. The Court summarized that the analysis included a determination of whether the injustice to the plaintiff in permitting the use of their proprietary funds by a defendant outweighs the possible injustice to the defendant if he or she were denied access to those funds (para 18). The Court of Appeal held that an adverse inference can be drawn from the refusal of a defendant to answer questions about the ability of the defendant to finance their living and legal funds from sources other than the funds deemed to be proprietary and caught by a Mareva (para 43).

In Trade Capital v. Peter Cook, 2015 ONSC 7776, the defendants brought a motion to vary a Mareva injunction to permit further legal and living expenses. The Court made reference to the CIBC v. Credit Valley legal test (para 19). The Court held that the burden of proof is on the moving party (para 21a). The Court also held that as the injunction is an equitable remedy, the Court has discretion to vary the order, and any motion to vary requires full disclosure of the defendant’s assets and liabilities (para 21b). It is the current assets and liabilities of the defendant that are under scrutiny at such a motion (para 21c). In Trade Capital, the defendant attempted to improperly restrict the examination of his assets and liabilities, and for this reason alone his claim for living and legal expenses was dismissed.

International Offtake Corporation v. Incryptex Ltd., 2017 ONSC 7537, involved a fraud where the plaintiff alleged that the defendant did not disclose a criminal record or OSC litigation in the context of a fiduciary relationship, and that this conduct was what allowed the defendant to obtain a fiduciary position and defraud the plaintiff. The defendant moving for legal and living expenses suggested that he could not earn income to pay his legal and living expenses. An issue was whether the living expenses of a spouse, who was a co-defendant, should be paid from funds caught by a Mareva injunction. The Court held that the defendant had not adequately explained or accounted for what he did with all of the plaintiff’s funds (para 40), and that “the Courts expect parties to be candid about their ability to obtain funds from various sources, and that a failure to do so can lead to a finding that the onus has not been met” (para 45). The Court ultimately held that the moving defendant had not proved that he couldn’t obtain funds from other sources, and therefore dismissed the motion (paras 46 to 49). The Court further noted that even if it had found that the moving defendant met this onus, the amounts sought would not be ordered as they would effectively wipe out what is left of the frozen assets (para 52).  

Mining Technologies International, Inc. v. Krako Inc., 2013 ONSC 7280, is one of our firm’s cases. The defendants brought a motion to vary a Mareva injunction. The Court held that the onus is on a defendant seeking to vary a Mareva injunction to prove proprietary versus non-proprietary funds when funds are commingled in an account (paras 217 to 218). 

Do the Police Care if Fraud is Not Reported? 

If any of our readers are alarmed that we proactively educate fraud victims on the unreliable nature of Canada’s criminal justice system, the police are unlikely to be offended. As commented by the Toronto Police in the July 10, 2019, National Post article Toronto Hospital Fires Around 150 Employees after Uncovering Multi-Million Dollar Fraud

The hospital administration undertook to investigate this on their own. Police meetings with hospital administration were advisory. Baycrest has not formally engaged the police to investigate. If it involved public safety, we would take that decision out of their hands. But as it stands, there is nothing that demands police intervention, so the ball was left in their court.

This positon of police sums reflects “welfare of society” as stated by the Courts to criminal justice. Property offences such as fraud are deemed secondary to violent crime in the scarce use of police and court resources. The resolution of frauds amongst victims and rogues is not an issue that has such a societal interest that it demands police intervention if a complaint is not filed. 

The Bottom Line

This blog and its predecessor is not intended to be read as a condemnation of the criminal justice system. These blogs are published to underline to fraud victims that the criminal justice system is not a reliable justice system to seek recovery of their losses. If fraud victims prioritize recovery of their lost funds over seeking punishment of the rogue, they should be at a minimum be filing a claim within two years of discovering their loss as required by the Limitations Act, SO 2002, c.24.

In our view, fraud victims are well advised to not file criminal fraud complaints until after judgment and recovery is obtained through the civil courts if the priority of the victim is recovery over that of seeking retribution being punishment through the criminal system. There is no limitation period on the filing of criminal complaints. The filing of criminal complaints is best left until after everything that can be recovered from a rogue and his or her co-defendants is obtained. 

To state otherwise, it is when recovery has been completed that it is worthwhile for fraud victims to consider punishment by way of filing a criminal complaint. If recovery is complete and the rogue still has assets, consideration should be given to seeking civil punitive damages, as fraud victims will find that the criminal justice system puts the “welfare of society” (which includes the welfare of rogues and punishing police through Charter cases) ahead of them.  

In our view, criminal complaints should be relegated to “lost cause frauds” – that is frauds which either cannot be funded by a victim or frauds for which there is no reasonable prospect of recovery. If rehabilitation of offenders and the safety of the public is secondary to Charter rights and other social welfare objectives of the criminal law, why should fraud victims support it other than for the purpose of retribution?


At Investigation Counsel PC, we investigate and litigate fraud recovery cases. If you discover you are a victim of fraud, contact us to have your case assessed and a strategy for recovery mapped out before contacting police or alerting the fraudster. We also promote victim advocacy and academic discussion through various private and public professional associations and organizations. If you have an interest in the topics discussed herein, we welcome your inquiries.

Norman Groot
Investigation Counsel PC
July 15, 2019