In two recent decisions of the Ontario Superior Court of Justice, City of Saskatoon v. Doe and CIBC v. Bloomforex Corp., the Court addressed fraud schemes where the fraudsters used foreign money exchanges to launder the proceeds of fraud. In one case, the money exchange was ordered to return every penny to the victim. In another, the same judge dismissed the money exchange’s motion for summary judgment, sending the matter to trial.
City of Saskatoon v. Doe
In City of Saskatoon v. Doe, 2019 ONSC 6735, Minden Gross LLP successfully represented the City of Saskatoon in recovering funds that were stolen from the City through an email scam.
In August 2019, the City of Saskatoon was the unfortunate victim of a form of “whaling” attack. These kinds of scams, where the fraudsters impersonate senior and trusted persons within an organization, are on the rise.
The fraudsters, whose identities remain unknown, impersonated the chief financial officer of a construction company that had a contract with the City. They created and registered a domain name that was virtually identical to the real domain name, and created fake email addresses under this domain name. They told the City that the construction company’s banking information had changed. The City transferred $1,038,744.74 to a bank account at TD, believing that this was a legitimate account of the contractor. The City then learned that it was duped. The TD account did not belong to the construction company, but to a numbered company in Ontario, and the funds in the TD account had been fully depleted.
Upon learning of the fraud, the City sued John Doe and all of the major Canadian chartered banks and obtained a Freeze Order to trace and freeze the proceeds of fraud.
The TD account belonged to a numbered company used to carry on a money exchange business on behalf of a number of Greater Toronto Area money exchange operations. Within days, virtually all of the funds in the TD account had been disbursed to customers or alleged customers of the money exchange businesses. As a result of the Freeze Order, over a dozen bank accounts across the country at four major banks were restrained.
Although the identities of the persons who carried out the whaling attack against the City remain unknown, the recipients of the proceeds of the fraud were identified.
Many of the recipients returned the funds voluntarily after the City began legal proceedings and the recipients learned they had received stolen money. Others refused to do so, necessitating a contested motion before the court.
The City’s motion was heard on November 5, 2019, by The Honourable Mr. Justice Penny following the exchange of affidavits and cross-examinations, and a last-minute adjournment. The remaining recipients of the proceeds of the fraud and an owner of one of the money exchange operations argued that they were bona fide purchasers for value without notice of any fraud or that they changed their position as a result of the disbursement to them of the stolen funds. However, Mr. Justice Penny found that none of the parties met that burden. Accordingly, he held that no triable issue was raised and granted the City’s motion to recover the funds.
In reaching his decision, Mr. Justice Penny considered the law of constructive trusts and money paid under mistake of fact. The law is clear that if a recipient of fraudulently-obtained money wishes to retain that money in priority to a defrauded party, they must show that they had no knowledge that the source of the funds was from a fraud and that they either paid valuable consideration for the funds or innocently changed their position as a result of the receipt of funds.
Mr. Justice Penny found that there was nothing bona fide, or in other words, genuine, about the conduct of the owner of the money exchange business. Among other things, TD was not told that the account was being used to operate a money services business; the services were offered as a workaround of the restrictions on taking money out of Iran; no inquiries were made as to the source of the funds; and the numbered company that held the TD account was not registered as a money services business with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), which is mandated to facilitate the detection, prevention, and deterrence of money laundering and the financing of terrorist activities. As Mr. Justice Penny stated, “The funds were clearly stolen from the City by fraudulent means…The funds belong to the City and must be repaid to the City.”
In the end, the City recovered all of the stolen funds and a portion of the legal costs incurred.
CIBC v. Bloomforex Corp.
CIBC v. Bloomforex Corp involved another fraud perpetrated with the assistance of a money exchange business.
In this case, fraudsters impersonated legitimate customers of CIBC and BMO. They opened foreign exchange accounts with Bloomforex to deposit Chinese yuan into a Chinese account of a relative named Ms. Du, purportedly to help her with a home renovation.
Bloomforex was a newly-opened money services business, which was registered with FINTRAC.
The fraudsters caused CIBC and BMO to wire money from their customers’ accounts to Bloomforex’s Royal Bank of Canada (RBC) account. Bloomforex accepted these Canadian dollar deposits and claimed to have, on the strength of receipt of these funds and acting on instructions from the fraudsters, arranged for third parties to deposit an equivalent amount in Chinese yuan into the account of Ms. Du in China.
After the fraud was discovered, CIBC and BMO alerted RBC, which froze the Bloomforex account. RBC paid the money into court and was released from the proceeding.
Bloomforex brought a motion for summary judgment to dismiss the banks’ claims. Once again, the matter was heard by Mr. Justice Penny.
To succeed on a motion for summary judgment, a party must establish that there is no genuine issue requiring a trial. In reaching its decision to dismiss Bloomforex’s motion, Mr. Justice Penny found that there were competing expert reports concerning compliance measures and best practices for money exchanges; a lack of evidence as to how Bloomforex carried out the transactions; and neither the director of Bloomforex nor its employees who conducted the transactions testified. Whether Bloomforex changed its position and whether it did so innocently and in good faith, were, in the Court’s opinion, disputed issues of fact. As a result, the motion was dismissed.
Mr. Justice Penny also considered Bloomforex’s argument that when there are two innocent victims of fraud, the party in a better position to avoid the fraud should bear the loss. This is known as the “two innocent parties” test. He left open the question whether this doctrine should apply in the case of a “mistake of fact”. In any event, Mr. Justice Penny held that the “two innocent parties” test requires weighing the conduct of both parties as to reasonableness, carelessness, and rigor (or lack therefore) and thus, the analytical framework should be applied on a full evidentiary record. Mr. Justice Penny was not satisfied that the full record was before the Court. For this reason as well, he declined to grant summary judgment.
Mr. Justice Penny dismissed Bloomforex’s motion for summary judgment, so the action will proceed trial. We will have to wait and see what the Court will decide and whether Bloomforex will be required to return the funds to the banks.
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