Ross McGowan, Borden Ladner Gervais 604.640.4173

Robert Dawkins, Borden Ladner Gervais 604.640.4027

INVESTIGATION REPORTS:

Why Words Matter

Overview

• Issues in Investigation

• Key Strategies to build an accurate and proper record for

Compliance and Litigation

• Back to Basics

• Reminder on the fundamentals of the compliance function

• Case Studies and Examples

• Litigation Impact – Case Study

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Issues In Investigation

1. Casework may be obtained by external parties—

regulators, litigation adversaries, law enforcement—and

construed selectively or adversely, raising legal risk for Your

Organization

2. Recognise terms and phrases that signal or imply legal

judgments and conclusions; and that indicate that a legal

judgment is supported by conclusive proof

3. Consider alternative drafting approaches designed to

minimize legal risk

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Investigation Issues - Risks

In the hands of external parties, Audit and Investigation work may be construed (or misconstrued) in a way that is adverse to Your Organization's interests, creating legal risk:

• To show that Your Organization saw but failed to respond appropriately to a financial-crime risk

• To show that Your Organization considered an issue but wrongly concluded that it posed no financial-crime risk

• To show that Your Organization failed to consider evidence of a financial-crime risk

• Imagine that your work is being read by a third party whose interests are not aligned with Your Organization’s.

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Investigation Issues – General Guideline

• Write in a way that minimises legal risk for Your Organization.

• Do not censor yourself or bury the point.

• Concise, nuanced, and informed assessments, grounded in context and analysis, help protect Your Organization from financial-crime risk and litigation risk.

• Conclusions should be factual, not based on hunches or inferences or “deemed” from facts. Reasonable inferences give rise to “reasonable grounds to suspect”.

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Back to Basics – The Compliance

Function • Core Requirements:

• Duty to Protect Interests of Your Organization

• Compliance and legal obligations – Your Organization and staff

• Culture Committed to Compliance – Going Beyond

• Documenting the Investigation

• Purpose

• Facts and Action Plans vs. Opinion and Editorial Comment

• Conclusions Informed by Purpose

• Legal Advice Privilege

• Triggering it, its purpose and what its not there to do

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Drafting Guidelines

Use caution with terms that signal or imply legal

conclusions • Abet or conspire

• Breach

• Corrupt, Defraud, or Embezzle

• Evade

• Intentional or Knowingly

• Launder

• Layer

• Negligent

• Structure

• Violate

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Drafting Guidelines

• Focus on the conduct or flows of funds rather than the

legal conclusion.

• Attribute.

• Use appropriate qualifiers such as “potential”, “likely” or

“appears consistent with”

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Drafting Guidelines

Framing the Issues - Example

“The client engaged in criminal conduct, including operating a Ponzi Scheme and a subsequent money laundering of proceeds of that scheme.”

vs.

“Recently identified media reports, referenced below, state that the client operated a large scale Ponzi Scheme and related money laundering operation. This resulted in a review of the entire relationship with the client to identify reportable transactions in light of this newly identified information.”

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Drafting Guidelines

Framing the Issues - Example

“Based upon my review our Organization has violated the Access to Funds Regulations under the Bank Act and must self report to the FCAC.”

vs.

“The forgoing findings have been documented for purposes of legal advice and are being referred to our Organization’s Compliance Guide for assessment of compliance with the Access to Funds Regulations under the Bank Act and advice with respect to FCAC self-reporting obligations.”

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Litigation Impact – Case Study

Review and Discussion of Rashida Ponzi Scheme Case

• Overview Civil Litigation Process

• Risks – negligence, conversion, knowing assistance, knowing

receipt , negligent failure to supervise

• Aim to show knowing bad behaviour or recklessness to risk

• Documentary Production Obligations

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Litigation Impact – Case Study

• Review and Discussion of Rashida Ponzi Scheme

Case

• Regulatory Issues

• The Society of Notaries of BC

• AML – UTR v. STR

• Scope of anti-tipping provisions

• Impact of Investigation File

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Ponzi Schemes –

Civil Legal Liability Concepts

• Primary Liability:

Directed at Perpetrator(s)

• To disgorge profits, make restitution, and to punish

• Accessory Liability:

Directed at usual unwitting facilitators

• Applies to those who assisted, facilitated or benefited

from the scheme; or

• may apply to those that had suspicions but failed to

prevent the continuation of the scheme; or

• Vicarious liability for employee acts/omissions

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Litigation Risk Management

• The trouble with trust accounts

• Professionals – Ask “Why?” and be wary

• Financial Institutions: - Exception analysis

and the “3 V’s” – Velocity, Volume and Value

(Solution: Develop and apply AML

verification and source of funds protocols as

appropriate. Inquire, Document, Consider

and Divest)

Litigation Risk Management

• Employee investment guidelines, prohibitions and awareness

(Solution: Develop and ensure compliance with organizational investment guidelines. Encourage reporting of investment solicitations directed at employees and unusual solicitation as directed at customers. Investigate and document as necessary.)

Litigation Risk Management

• Identify mandatory internal

investigation triggers

(Solution: Develop and implement list of

investigation triggers such as: specific third party

fund enquiries re: your client/customer;

regulatory inquiries; receipt of document

production orders; search warrants, attachment

orders; or when AML reporting obligations arise.

STR may be the end of the initial investigation,

but is the START OF CIVIL CLAIMS EXPOSURE.)

Litigation Risk Management

• Develop/Implement funds “Hold” policy during all substantive investigations

(Solution: Document all investigations, whether it is a simple customer inquiry and their response or internet searches for early warning blogs and social media. Record both positive and negative searches.

Escalate investigations to legal for privacy concerns, privilege on investigation and loss avoidance.)

Litigation Risk Management

• The problem of discovery while in

funds, before identification of victims

(Solution: Develop account agreements with

rights of investigatory holds. Consider

invitation for regulatory freeze orders,

payment into court, and rights of return of

deposits to depositors.)

Poking at the Entrails:

What happens after – Wrath – the 7th sin

• ‘Investor’ Claims/Class Actions

• Insurance Investigation and Claims

• Criminal Investigation and Prosecution

• Regulatory Investigations

• Secondary Internal Investigations

• Recriminations, gnashing of teeth, etc.

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Litigation Risk Management

• Worst Case Scenario & Survival: Class Actions, Media Scrutiny, Regulatory and Criminal Investigations, Reputational Damage, Cataclysmic Financial Loss (Solution: Engage legal. Anticipate Litigation from outset to invoke litigation privilege. Pre-litigation witness/victim identification, conduct early interviews, initiate early internal and third party document compilation, invoke document retention policy.)

Post-Discovery triage:

The First Few Minutes

• Engage legal to direct investigation.

• Identify individuals tainted by scheme. Isolate and

interview.

• Seek assistance and information through BCPIO,

regulatory or criminal process, or civil litigation

process. Trace and hold funds.

• Secure suspect computers and files. Preserve

evidence.

• Engage key internal or external audit personnel.

• Determine ability to trace and secure.

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Post-Discovery triage:

The First Few Minutes

• Review Insurance Policies and give written notice to all insurers of potential loss and claims.

• Consider risks and timing for possible confrontation of suspect employee/former employee(s), customers, external suspects. Consider timing of disengagements for cooperation; insurance; reputation.

• Work together to the extent possible to hold the perpetrator accountable.

• Consider defamation and privacy implications for both internal and external communications.

• Manage the message to the public.

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Summary

• Purpose of Investigations • Identify facts

• Identify risk

• Not to make legal conclusions

• Obligations to Regulators – full, fair and forthright

compliance

• Protect the interests of Your Organization

• Engage Legal to Engage Privilege

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Final Caution: Privilege is not a Panacea

• In Alberta v. Suncor, the Alberta Court of Appeal held

the application judge erred in holding that litigation

privilege applied to the entire content of an internal

investigation file. The case involved a workplace

accident at a Suncor facility in Fort McMurray and

the subsequent investigation by the Alberta

Occupational Health and Safety agency ("OHS"). In

the course of its investigation, OHS sought

production, pursuant to its statutory mandate, of

Suncor's internal investigation file. Suncor refused

production on the basis of privilege, and the

application judge upheld this refusal.

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Final Caution: Privilege is not a Panacea

• The Court of Appeal reversed the application judge.

• Privilege could only be asserted over a particular document, or bundle of like documents, not over the whole file.

• Only those documents that were created for the dominant purpose of litigation were privileged.

• Documents that were merely collected in the course of the investigation, that were created prior to the accident, or in the normal course of business and not for the dominant purpose of litigation, were not privileged, and did not become privileged merely by their inclusion in the internal investigation file.

• The Court also noted that the purpose behind the creation of a document or record does not change simply because it is forwarded to, or through, in-house counsel, or because in-house counsel directs that all further investigation should come to him or her.

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Questions?

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