Financial Fraud: Keeping Time On Your Side

Financial fraud is no longer confined to isolated cases. Today, financial fraud involves credible, targeted tactics that exploit people's trust in the authenticity of electronic communications, streamlined internal processes, and the speed of banking transactions.

Not surprisingly, many organizations fear that misappropriated funds are irretrievably lost. However, a series of court decisions recently obtained for some of our clients¹ highlight a critical factor — a swift response can make the difference between a definite loss and a potential recovery.

Fraud Schemes Are Increasingly Credible

Recent cases before the courts clearly confirm this trend and show how fraudsters:

• impersonate vendors or executives by using email addresses that are nearly identical to legitimate ones;
• send fake payment instructions or a request to change bank account details; and/or
• exploit legitimate internal processes to divert large sums of money.

These schemes are particularly effective because they appear to be part of normal operations and don't immediately arouse suspicion.

The Determining Factor: Speed of Response

Time is a crucial factor when it comes to fraud. It directly affects the ability to trace funds, prevent dissipation, and ensure the effectiveness of available legal remedies.

If an organization acts swiftly after discovering a fraudulent payment, the funds may still be traced and frozen. However, any delay increases the risk that the diverted funds will be transferred elsewhere in Canada or abroad, or become impossible to recover.

Powerful Legal Tools Available to Victims

As established by the courts, fraud victims have access to robust legal remedies under Canadian law, particularly in urgent situations.

i. NorwichOrders

Under a Norwich order, victims can obtain essential information from an innocent third party – often a financial institution or internet service provider – to help identify the perpetrators of the fraud and trace the misappropriated funds.

Courts recognize that banks, as custodians of the accounts used in fraudulent schemes, are often the only practical source for identifying fraudsters and tracing the flow of funds.

ii. Conservatory Measures: Pre-judgment Seizures and Mareva Injunctions

In cases of fraud, courts are also willing to order extraordinary conservatory measures when there is a real risk of asset dissipation. Some examples:

• Pre-judgment seizures allow disputed funds to be safeguarded until the court issues its final decision.
• Mareva injunctions prevent fraudsters from disposing of their assets without, however, formally depriving them of ownership.

Identity theft and electronic fraud are serious indicators of a risk of asset dissipation, warranting prompt intervention by the court.

The Key Role of Financial Institutions and theBank Act

Under the Bank Act (SC 1991, c. 46), when a deposit is the subject of a third-party claim and legal proceedings are commenced, the bank may — and in some cases must — suspend payment of the deposit until a court rules otherwise.

This legal framework not only helps safeguard the funds in question but also provides for their release and restitution to the victim when warranted by the evidence.

In the recent cases we have handled, the courts relied on that framework to order full restitution of the fraudulently obtained funds, without awaiting the outcome of a trial on the merits.

Practical Lessons

These rulings all send a clear message: financial fraud doesn't necessarily result in an irreversible loss.

In such cases, the ability to react quickly, by documenting the facts, immediately notifying the relevant institutions and authorities, and taking appropriate legal action, remains the determining factor.

Conclusion

In cases of financial fraud, time is always crucial — it can either guarantee a loss or help avert it.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.