The long arm of the law and extra-territorial recovery from fraud

  • April 23, 2018
  • Grace Hession David

The fraud

In February of 2010 a federal jury in the Eastern District of Pennsylvania convicted Canadian George Georgiou of fraud for his role in an international stock conspiracy that resulted in just over $55 million US in actual losses and approximately $100 million US in potential loss. The jury affirmed the prosecutors’ theory that Mr. Georgiou and his co-conspirators manipulated the markets of four bogus stocks publicly traded on the Pink OTC2 Markets Inc. and the OTC Bulletin Board. The four stocks were Neutron Inc., Avicena Group Inc., Hydrogen Hybrid Technologies Inc. and Northern Ethanol Inc. By controlling and falsely manipulating the trading of these stocks through brokerage offices that he had opened in Canada, Bahamas, and Turks and Caicos, Mr. Georgiou and his co-conspirators fabricated an active market for these securities when there was none. In so doing, they sold the stocks at artificially inflated prices to unwitting investors. He also used the artificially inflated stocks as collateral to obtain “margin” in his investment accounts and obtained loans amounting to millions of dollars from three Bahamian brokerage firms with the worthless stocks posted as collateral. One of the Bahamian firms was left with $22 million in losses which the client investors of that firm had to personally absorb. Many innocent victims lost their retirement funds. In November of 2010 Mr. Georgiou was sentenced to a term of imprisonment of 30 years and dual orders of restitution and forfeiture were ordered in the amount of $26 million US – his personal share of the fraud.

The American order

In 2012 American authorities discovered an account holding $9.2 million CDN at a Milton, Ont., branch of the Royal Bank of Canada which they linked to Mr. Georgiou. On Sept. 21, 2012, Justice Kelly of the U.S. District Court for the Eastern District of Pennsylvania issued an order restraining the funds as substitute assets. In the U.S., a forfeiture order may be extended to include “substitute property” if the proceeds of the offence cannot be located, which was the case in this matter. American authorities then obtained Canadian assistance in enforcing the “Kelly Order.” The order was filed as a judgment of the Ontario Superior Court of Justice pursuant to sections 9.3(1) and (2) of the Mutual Legal Assistance in Criminal Matters Act, R.S.C. 1985, c. 30 (4th Supp.) (the Act) by Justice Maureen Forestell on Sept, 24, 2012. Justice Forestell ordered that the Kelly Order could be enforced as if it were an order made under s. 490.8(3) of the Criminal Code which is the provision providing for a restraint order preventing the disposition of property that is believed to be offence-related property. Mr. Georgiou moved to have this order vacated on the grounds that the funds in the Canadian account could not be considered offence-related property or proceeds of crime. The federal Attorney General countered with the argument that this motion was frivolous and vexatious.

Justice Molloy’s order

Justice Anne Molloy of the Ontario Superior Court summarily dismissed Mr. Georgiou’s application. Justice Molloy ordered that the phrase “proceeds of crime” as defined in s.9.3(4)(b) of the Act was broad enough to encompass the Kelly Order. She also viewed the RBC funds as “proceeds of crime” because they fell under the substituted provision of the foreign state legislation. Therefore, Justice Molloy relied upon s.9.3(4)(b) of the Act which references the restraint of the proceeds of crime and which further imports s. 462.33(3) of the Criminal Code (which is an application for a restraint order under Part XII.2 – Proceeds of Crime) as the appropriate jurisdiction in this case rather than s. 9.3(4)(d) of the Act, which references restraint of offence-related property and s. 490.8(3) of the Criminal Code (an application for a restraint order under Part XV – Special Procedure and Powers, i.e. offence-related property).

The appeal

The appeal of this issue was parsed as follows:

Does an Order under the US Federal Rules of Criminal Procedure to restrain “substitute assets” for satisfaction of a forfeiture order constitute an “order for the restraint or seizure of property situated in Canada” within the meaning of s. 9.3(1) of the Act and for an order to restrain the proceeds of crime or offence-related property within the meaning of ss. 9.3(4)(b) and (d) of the Act?

Appeals Court Justices Hourigan, Strathy and Simmons released a definitive decision on Feb. 26 of this year which makes it clear how the Act is to be applied in situations where a forfeiture order has been obtained in a foreign jurisdiction and where funds have later been located in Canada. Section 9.3 of the Act allows a foreign state to formally request enforcement of an order for the restraint or seizure of property issued by a court of criminal jurisdiction of that foreign state in Canada. If this is done, the Minister may then authorize the federal Attorney General to make arrangements for the enforcement of the order. Section 9.3 of the Act also provides that either the federal Attorney General or the Attorney General of a province may then file a copy of the foreign court order with the superior court of criminal jurisdiction of the province in which the property is believed to be located. Once filed, the section provides that the foreign order shall be entered as a judgment of that court and may be executed anywhere in Canada.

Mr. Georgiou complained that by interpreting s.9.3 of the Act as the proceeds of crime, the definition of the proceeds of crime should be also used as per s. 462.3(1) of the Criminal Code which would mean that the funds in Milton were excluded in that they were not tainted by a designated offence.



s.462.3 “proceeds of crime” means any property, benefit or advantage within or outside Canada, obtained or derived directly or indirectly as a result of

  1. the commission in Canada of a designated offence, or
  2. <li "="">an act or omission anywhere that, if it had occurred in Canada, would have constituted a designated offence.

He further argued that to cast the funds in Milton as the “proceeds of crime” and subject to restraint is to effectively allow a foreign state greater seizure power than a court in Canada.

The Ontario Court of Appeal did not agree. It found that domestic legislation that has been enacted to implement Canada’s international obligations should be interpreted broadly and purposively with an aim to fulfilling the obligations. Where a court is faced with two possible interpretations of a statute implementing Canada’s international obligations, the interpretation that allows Canada to fulfill those obligations should be preferred. Secondly, in a transnational law context, due regard must be had to differences in foreign legal concepts. A strictly Canadian interpretation of the concept is not always to be pursued. In this case, the Court of Appeal was clear that the phrase “proceeds of crime” should be interpreted in a manner that respects the differences in the two legal systems. In the United States, the law allows the American government to seek the forfeiture of any assets belonging to a defendant in satisfaction of a forfeiture judgement. Of course, this is not the law in Canada – forfeiture can only be made of assets that are proven to be the “property” of an offender pursuant to s. 462.37(3) of the Criminal Code which requires proof that the property was the proceeds of a designated offence (such as fraud) and within the context of the fraud, the property or proceeds then came into the possession and control of the offender3.

The adoption of a broad definition of the proceeds of crime in this case accords with the purposes of the Act because it has a dual purpose of providing for assistance to other states in furtherance of Canada’s treaty obligations and it ensures that those states will in turn provide Canada with assistance when necessary to investigate crimes in which Canada has an interest.

This case is important for defence lawyers who represent individuals charged with fraud in the United States and where those clients still have substantial assets in Canada. It is essential to remember that a restrictive interpretation of “proceeds of crime” will not be afforded by our courts.

Grace Hession David is Assistant Crown Attorney, Guns and Gangs Initiative, Toronto, Ontario. Grace is the co-author of Prosecuting and Defending Fraud Cases: A Practitioner’s Handbook by Emond Publishing. This practical guide examines how to handle allegations of fraud and related offences, compiling comprehensive analysis and practical resources into one complete, concise and balanced volume. The views shared in this article are those of the author alone and do not bind the Ontario Ministry of the Attorney General in any way.

End notes

1. “OTC” is securities industry terminology for “over the counter” securities trading which is the trade of securities through a dealer network as opposed to the trade of securities on an established and centralized stock exchange.

2. R. v. Khatchatourov, 2014 ONCA 464 at paragraphs [50] to [53]