OSC | News & Events - Speeches & Events - 2006 - "Protecting People, Not Turf: Working Together to Fight Economic Crime " - Joint Securities Intelligence Unit Conference

Remarks by David Wilson
Chair, Ontario Securities Commission

“Protecting People, Not Turf: Working Together to Fight Economic Crime”

Joint Securities Intelligence Unit Conference

Toronto
September 25, 2006

Welcome to the Joint Securities Intelligence Unit Conference – an opportunity for people who are responsible for keeping our capital markets honest to share ideas and learn from each other. The crooks and fraud artists are coming up with new ways of pulling off scams all the time – and we have to stay at least one step ahead of them.

Your participation in this conference is welcome and encouraging. We have 140 participants here, from 14 countries. Concern about economic crime does not stop at any border. It’s a global problem, demanding global solutions.

Mostly, it demands cooperation. Today, I’d like to talk about:

Before I get to those three points, let me say a few words about our shared overall priority – enforcement.

I don’t need to tell anyone here that enforcement is crucial to the effectiveness of securities regulation. A former Chair of the SEC, Richard Breeden, told me a few months ago: You can have the best regulations in the world, but if you don’t enforce them effectively, they don’t mean a damn thing.

And he couldn’t be more right. You and I know that even as we are sitting here, somebody, somewhere is hatching up a scam to rip off innocent investors and rob them of their hard-earned savings.

You are the people who understand this best – dealing with the problems on the front lines.

It’s your job to give meaning and credibility to the two words “effective regulation.”

To do that, we have to take a proactive approach. I like to look at it this way: we have to prevent, detect and deter. The Holy Three. As criminals become more sophisticated, aggressive and nimble, enforcement becomes even more important.

One of the tools we have created to do this is the Joint Securities Intelligence Unit, or the JSIU. The OSC’s partners in the JSIU are represented here on stage with me by RCMP Commissioner Giuliano Zaccardelli and Investment Dealers Association President Joe Oliver.

The JSIU sets out to detect criminal activity – and to disrupt it – before investors are harmed. It’s a big difference from the traditional mandate of cops and regulators, who typically wait until a fraud has been committed before going into action.

A good example of the JSIU’s work is a case that will be discussed in more detail this afternoon – a case dealing with a firm that we’ll refer to as ABC Income Trust. This case illustrates how a potentially huge scam was nipped in the bud by the JSIU – sparing investors from being snared in a $150-million fraud.

This JSIU prevention initiative demonstrates the value of being proactive. With relatively little time, effort and expense we were able to save a lot of money for investors – and avoid a long, drawn-out and costly investigation.

The success of the initiative illustrates something else as well: We need to work together.

That brings me to point number one in my remarks this morning − let’s look at some of the challenges we face in cooperating to fight economic crime.

We face the challenge in many countries, including Canada, of legal systems that impact how enforcement agencies and regulators work together. Every country has a constitution that sets limits on the sharing of information. In Canada, our Charter of Rights and Freedoms has earned respect for the constitutional protections it provides to its citizens. But the Charter also puts some limits on sharing of information between police agencies and regulators.

That said, let’s cooperate to the fullest extent possible to facilitate information sharing under the rules of the Charter.

We must also continue to enhance the exchange of information between regulators in different countries. In cases of alleged economic crime, regulators must not let individuals or firms use ‘jurisdictional arbitrage’ to evade laws or escape prosecution for violations.

We also need to break down the barrier of indifference. One of the biggest challenges is that many people – including some in the judicial system – do not seem to take seriously enough the kind of crimes we are trying to combat. Because no one is physically harmed, economic crime is sometimes regarded as a ‘victimless crime.’

But, truth be told, economic crime has many victims.

Some market scams have taken in thousands of people – many of whom lose their savings and also lose hope of recovering a nickel. And the cost is more than financial. As a recent study commissioned by the B.C. Securities Commission pointed out, market fraud harms its victims at many levels − “…their retirement security, their emotional well-being, their physical health, their friendships and their marital relationships.”

A disproportionate number of victims of market scams are senior citizens – bilked of their savings at a point in their lives when they have little time to rebuild them.

It’s not just individuals. All of us are victims. Economic crimes diminish respect for our capital markets – and make it more expensive to raise capital and maintain a robust economy. In other words – the costs are borne, directly or indirectly, by every single one of us. These are the silent costs of economic crime.

These are not crimes without victims, they are crimes with far too many victims – many of whom are unaware that they are being victimized.

The B.C. Securities Commission study expressed it well. It said: “Securities fraud produces harms that are not fundamentally different from the harms produced by violent victimization … It is critical that the public, our courts, and our law and policy markers understand the consequences of securities fraud … it is appropriate to ask whether the current penalties adequately reflect the harms created by such activity.”

This is the first barrier we must break down. We must change the mindset. Economic crime is not − I repeat, not − victimless.

I use the phrase “economic crime” deliberately. It is not just white-collar crime, which gives the impression of harmlessness. It is not just market fraud, which sounds like it only affects investors. It is a threat to our economies, and to all who participate in them.

To deal with that, we must break down the barriers that too often stands between jurisdictions.

That leads me to my second point – some of the ways we’re increasing international cooperation.

When it comes to gathering and sharing intelligence, and using it to prosecute offenders and freeze and repatriate ill-gotten gains across international borders, the most valuable ingredient is clear – it’s cooperation.

But a number of factors undermine cooperation among some international jurisdictions. That includes local secrecy laws and a traditional unwillingness to cooperate – often stemming from a parochial concern about the negative impact on the local economy.

We need to turn non-cooperative jurisdictions into cooperative ones. Those who commit economic crimes rarely restrict themselves to one market. Money illegally obtained in one jurisdiction is often laundered in another and then put to use to garner more illicit gains in yet another jurisdiction.

The potential benefits to enforcement from cross-border cooperation are enormous. For example, among all non-U.S. regulators, the OSC is the SEC’s biggest source of information outside the U.S. Think about that – and what it says about how closely our work crosses each other’s paths − how important cooperation is for regulators.

To increase global cooperation among regulators and enforcement agencies, the International Organization of Securities Commissions – IOSCO – has created a technical assistance program for those jurisdictions that need help and encouragement to meet best global practices for cooperation.

IOSCO has been working hard on this. Every non-cooperating jurisdiction in the world has been assigned to a SWAT team, to gently encourage them to become a cooperating jurisdiction.

Let me give you an example of how we at the OSC are using IOSCO as a lever. In a recent OSC investigation, we had been trying for some time to get information from a non-cooperative jurisdiction – but to no avail. OSC staff recently placed a call to them, and in the course of the conversation indicated that we were preparing reports to IOSCO about our progress with that jurisdiction. Within minutes, the request – which had taken months to consider – was given high priority. And it was satisfied within a few days.

This is exactly the type of international cooperation we seek. It provides an example of how IOSCO can act as a spur to encourage cooperation. In instances where you feel you are experiencing a lack of cooperation, tell us about them. We will be glad to assist you – and refer it to the full IOSCO committee if necessary.

The other area where we must break down barriers is within countries. That leads to my third point: some of the ways we can achieve greater cooperation right here in Canada.

The data make it clear just how important inter-jurisdictional cooperation is in protecting investors and maintaining the integrity of our capital markets. About 72 percent of open-case OSC investigations have components that go beyond Ontario’s borders. In 21 percent of the cases we are engaged in, we are providing assistance to other regulators or enforcement agencies.

To paraphrase a classic line from the movie All The President’s Men, how well we enforce our securities laws and regulations comes down to how well we “follow the money.” To be specific, how well we follow the transactions. In a globalized economy where financial flows don’t respect borders, following the transactions demands cooperation – in such areas as getting access to bank records and brokerage records, establishing ownership of offshore accounts, and interviewing witnesses.

It’s a daunting challenge, and enforcement officials are working hard to meet it.

But we all have to do better.

We have to improve detection and investigation of securities fraud. Here in Canada, the federal government has taken a positive step by committing resources to the RCMP’s highly-specialized IMETs program − up to $120 million. But more needs to be done in improving investigative and enforcement capacity. It’s especially important to attract, train and retain professionals who have the right skills, experience and motivation to do the job.

We have to work to make securities cases a higher priority for prosecutors. Governments should consider ways of making more resources available for securities-related prosecutions – given their highly specialized nature and complexity. And regulators and prosecutors must also work closely together – to learn more about each other’s requirements.

We have to work together to make the court processes more responsive in dealing with economic crime. Our Canadian judges do not see all that many cases of this nature. Consequently, they develop little experience in handling them. I realize this problem is not unique to Canada.

The recent U.K. Fraud Review, for example, found that in cases brought by the Serious Fraud Office, which deals with fraud involving at least one million pounds, the average sentence is a lowly three years. That’s far less than a sentence for a non-economic crime of similar value. As the review pointed out: “Low sentences are insulting to victims and send out a message that stealing money through deception is somehow more acceptable than stealing in other ways.”

Here in Canada, more prosecutions would help alleviate the sentencing problem, as the judiciary would become more familiar with the impact of the crime. Providing educational support to the judiciary would help.

We also need to work together to improve deterrence through sentencing. Again, we have to address the mindset that economic crimes are minor crimes. We have to counter the notion that only relatively few people are hurt by economic crime.

We need to send a strong message: These crimes are major crimes and all of us – every single one of us – are harmed by them.

More than anything else, we have to cooperate. It’s all about the C-word cooperation. Regulators, enforcement agencies, and provincial attorneys-general have to form a common line against economic crime. As the Governor of the Bank of Canada, David Dodge, has pointed out: “No one policing agency can fight alone against … financial market fraud.”

In my first year as Chair of the OSC, this truism, perhaps more than any other, has come through loud and clear to me.

And we have to get the word throughout our organizations – all the way down the line –we’re at war with criminals, not with each other.

It’s easy to see why different agencies have difficulty working together. Different people in different organizations have different bosses to report to, different constituencies to please, different priorities to satisfy. Each piece of the mosaic has its own particular focus.

But we must bring it all together. And that starts at the top. Senior people have to set the tone. We have to work together – and keep building the commitment to cooperation into the culture of each of our respective organizations. For example, we who believe in cooperation can build into our organizations some performance metrics that recognize and reward staff for cooperating with other agencies. That can help bolster inter-organizational cooperation all the way down the line.

In that respect, I’m especially pleased to be sharing the stage today with Joe Oliver of the IDA and Giuliano Zaccardelli of the RCMP.

We have to make it clear to all enforcement agencies: Our job is not to protect turf – it’s to protect people. Unless we get this right, confidence in our capital markets is at risk.

As I say, first, we must recognize the challenges. Second, we must increase international cooperation. Third, we must work together to achieve greater cooperation here in Canada.

Our capital markets do much to advance our economy and our society. They create wealth and opportunity, and a more robust economy from which everyone can benefit. To do that, they need a framework of laws and regulations that ensure fairness – and thereby invite investment. It’s a great formula. To ensure it continues to work, we must see that the laws and regulations are observed – and prevent, detect, and deter those who would violate them. As I said just a moment ago, our job is not to protect turf, it’s to protect people.

This conference will help all of us do that, in all of our jurisdictions. Thank you for participating. And now I look forward to hearing from my colleagues.

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