Commercial Litigation

Fraud frequently perpetrated by corporate insiders: Gaytan

By AdvocateDaily.com Staff

Complex economic crimes carried out by insiders are a growing concern for many global businesses — but when fraud has been identified, it is crucial for counsel to act quickly and connect with their counterparts in other jurisdictions, says Toronto commercial litigator Christopher Gaytan.

According to PwC’s 2018 Global Economic Crime and Fraud Survey, 49 per cent of global organizations indicate they have experienced economic crime in the past two years — with just over half of all frauds perpetrated by people working inside the organization.

Gaytan, an associate with Shibley Righton LLP’s Toronto office, says in corporate fraud cases, there are generally three elements, or a ‘fraud triangle’ in place that can explain the reasoning behind the fraud — pressure, opportunity and rationalization.

“Pressure is usually the financial aspect — a person wants to obtain a financial benefit or maintain a lifestyle that they previously had,” he tells AdvocateDaily.com.

“Opportunity is usually when they are in a position where they can take advantage, such as an insider,” Gaytan says. “If you have the information, you know how the business works, putting you in a privileged position where you have the access and ability to act in secret.

“The third element is the rationalization that most fraudsters don’t see themselves as criminals. They usually believe they are victims of circumstances, or they say, for example, ‘I just did what I was asked to do,’ or they tend to minimize the harm done by the crime,” he adds.

Ultimately, Gaytan says many organizations may not be aware that they have fallen victim to fraud until they implement a significant change to their corporate structure or they go through an audit.

An example of this trend — and of the complexity of fraud cases in general — was recently seen in a global case that spanned a number of jurisdictions, including Ontario, involving a South American pension fund, in which Gaytan recently acted as co-counsel for the plaintiff.

In this case, he says, a number of fraudulent investments in Ontario were in place for years, and a few members of the then board of directors were aware of the fraudulent scheme. These insiders were working together with outsiders to perpetrate the fraud. It wasn’t until the full board underwent a complete changeover and contemplated an audit that the significant problem was discovered and external legal counsel was retained.

“The court, in this case, found that the fraud was committed with the knowledge of the insiders — members of the board of directors. These insiders helped parties to channel investments and divest funds to offshore accounts. Of course, most of these investments were misleading and fraudulent, and they were facilitated by unregulated intermediaries who were here in Ontario, and they paid secret kickbacks to the insiders in South America,” says Gaytan.

“This case clearly shows that there is an opportunity for insiders to commit fraud, and then they find the proper parties elsewhere to commit these fraudulent activities.”

The 2018 Ontario Superior Court decision in the case is currently under appeal.

Gaytan says this type of corporate fraud is complex as it often involves an international network of individuals whose goal is to make it as challenging as possible to detect.

“Once the lawyers come into place, it is really hard to follow the path of these funds and to find out who was involved,” he says.

As such, one of the best ways to tackle this type of fraud case is to have local representation in each applicable jurisdiction, Gaytan says.

“In our case, we had lawyers in Ontario, but we worked together with lawyers in South America, which is where this pension fund is located. We also have lawyers in the United States, Europe and Central America. We know there was some activity in those jurisdictions. So, we basically have lawyers in every country where we know the funds went through,” he says.

While increasing employee awareness of the growing problem of fraud is one key to prevention, Gaytan says companies also need to implement more structure within the organization, boost compliance, ethics, and make legal improvements.

However, once a fraud has been identified, lawyers need to be brought in quickly, he says.

“One of the first things that a lawyer should do is consider putting Mareva injunctions in place, which is to try to freeze all the accounts and assets of the firm and/or individuals that are involved, and also try to consider Anton Piller orders, which basically give you the right to search the premises,” says Gaytan.

“It’s vital to act fast before any potential evidence can be destroyed, and to put all of these orders in place,” he says.

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