VANCOUVER, B.C. (CN) - Canadian investors suffer more harm on U.S. and German stock exchanges than on Canadian ones, the Canadian government said in a report.
The Royal Canadian Mounted Police's Criminal Intelligence Division wrote "Capital Market Fraud: The Canadian Perspective," and released it internally in June 2011. It was released recently, with redactions, under Canada's Freedom of Information Law.
"This criminal intelligence brief was prepared to provide a Canadian overview of the criminal trends associated with capital market fraud and the involvement of organized crime and criminalized professionals," the report states in its opening, 1-sentence section, "Purpose."
The report is the only intelligence survey of capital market fraud in Canada since the RCMP Integrated Market Enforcement Team (or IMET) was created in 2003.
It is based on data collected from 26 law enforcement agencies, including U.S. ones.
Recent news in Canada has focused on foreign companies that list on Canadian exchanges to take advantage of Canada's capital markets. But Canadian fraudsters prefer to make and launder their ill-gotten gains on the more loosely regulated foreign exchanges, the RMCP said in its 45-page report.
In response to corporate scandals in the United States, such as Enron and WorldCom, Canada decided to enhance enforcement of serious corporate fraud offenses in 2002, the report states.
Over-the-counter markets are the ones most commonly exploited for market fraud, according to the report. This is true for the Pink Sheets and OTC markets in the United States, and more recently the Frankfurt Stock Exchange in Germany, because of their limited regulation and reporting. It is less of a risk with other junior markets such as the TSX Venture Exchange in Canada because of their tougher listing requirements.
Companies that conduct business in Canada but are incorporated in Nevada and Delaware, and to a less extent in Florida and Wyoming, are at higher risk, due to their secrecy and looser regulation, especially for shell companies.
"In instances where a public market or exchange was indicated, approximately 75 percent of occurrences contained at least one company which was registered in the state of Nevada or Delaware," the report states. "Due to less stringent registration and reporting requirements, lack of transparency, and other business advantages, corporate registration in these states can represent a red flag or potential fraud indicator in capital-market related files."
Delaware, ranks 45th among the states in population, with fewer than 910,000 residents. The state's tax revenue is principally earned through its corporation laws. Delaware give corporations and shareholders maximum flexibility in ordering their affairs, and has a bias against regulation.
Nevada models its business court system after Delaware's and offers numerous advantages for companies to incorporate there. Some of the financial benefits include no corporate income tax, no taxes on corporate shares, no franchise taxes, and nominal annual fees.
Nevada corporations also may buy, hold, sell or transfer shares of their own stock and may issue stock for capital, services, personal property or real estate, including lease and options. Corporate directors may determine the value of any of these transactions, and their decision is final.
Reverse mergers are another device that can be used for fraud, the RMCP said. In a reverse merger, a corporation buys a previously registered corporate shell, and essentially takes it over, like a hermit crab. Chinese corporations have recently come under scrutiny for using this technique in the United States.