Report of the Canada - United States Working Group on Telemarketing Fraud

Department of Justice

3. LEGAL ISSUES AND OPTIONS

3.1 Constitutional Jurisdictions

The constitutions of Canada and the United States allocate legislative and prosecutorial powers between the federal and state/provincial governments differently. This affects the structures and coordination of strategies in each country and between the two countries. Differences in government structures and terminology must also be borne in mind when reviewing the legal tools available.

In Canada
the power to make criminal law is exclusively federal, but provinces can create offences necessary for matters over which they have jurisdiction. This includes "property and civil rights", which most provinces have used to regulate local commerce and deceptive trade practices. Fraud and other federal Criminal Code offences are prosecuted by the Provincial Attorneys General, but federal offences under other statutes (Competition Act, Income Tax Act, Customs Act, Telecommunications Act) are prosecuted federally. 1997 Criminal Code changes created a new federal jurisdiction to prosecute Criminal Code offences committed by "criminal organizations", which would include most telemarketing cases.
In the United States
both state and federal governments have authority to enact criminal, quasi-criminal, and civil statutes: the states, for conduct or effects within their borders, and the federal government, for conduct that Congress may regulate under one or more of the broad grants of power under the Constitution (e.g., the power to regulate interstate and foreign commerce). Both levels of government may act to prohibit, regulate or prosecute fraudulent telemarketing activities.

3.2 Criminal and Quasi-Criminal Powers and Offences

Telemarketing fraud, as noted, includes a range of schemes which may violate multiple criminal, quasi-criminal or civil statutes in both countries.

3.2.1 - Canada

Fraud-related Criminal Code offenses.

The Criminal Code makes basic fraud (dishonest deprivation) an offence: s.380(1) includes cases where either "...the public or any person" is defrauded, which allows for charges based on single transactions or a single "defrauding the public" charge where large numbers of victims are targeted. The offence is punishable by up to 10 years if the value exceeds C$5,000. Canada has no Criminal Code offence of using telecommunications systems to commit frauds, but does have an offence of using the mails (s.381). Expanding this to include telecommunications media would provide an additional offence which could be used in telemarketing cases, and this is presently under consideration.

34 other sections of the Criminal Code (ss.380-414) create fraud offences which apply in specific circumstances. Some deal with commodities (stocks, ss.383-84, real property, ss.385-86, minerals, s.394), and others with the means of commission (fraudulent title documents, receipts, impersonation). Offences other than fraud may also apply in some cases. For example, both fraud and gambling offenses may apply to schemes involving the sale of dubious lottery tickets. (ss.206-07).

Other federal offences.

Federal offences in statutes other than the Criminal Code are considered criminal offences in Canada, but are prosecuted by the federal Attorney- General, not the provinces. Those applicable to telemarketing fraud include the following.

Competition Act.
This contains a series of offences dealing with misleading advertising and deceptive marketing practices. They are strict liability criminal offences, for which the Crown does not have to prove the intention to mislead or defraud. The law provides for unlimited fines (up to $C500,000 have been imposed) and imprisonment for up to 5 years. The Act also provides for search and seizure, compulsory production or disclosure of information and other enforcement powers.
Apart from the Criminal Code offences, telemarketing fraud generally falls within the federal Competition Act and the mandate of the Industry Canada's Competition Bureau, the agency responsible for enforcing the Act. Legislation introduced by the Industry Minister in November 1996, which was not enacted by the end of the 1996-97 session, proposed to create a specific offence of "deceptive telemarketing". This would require telemarketers to make full and fair disclosure of whatever was on offer and to criminalize misleading or material non-disclosure. The proposed amendments also included provision for injunctions against telemarketers and service-providers which could be used to disconnect or block telephone service in some cases. Similar legislation is presently under consideration, and the Minister proposes to re-introduce it during the 1997 fall session.
Income Tax Act.
This requires employers to retain and remit funds for employee taxes and benefits (e.g., pension contributions) and provides offence and recovery provisions when this is not done. Ss.238-39 of the Act also contain basic offences dealing with tax evasion and filing or providing false or misleading information.
Excise Tax Act.
Canada has a national Goods and Services Tax (GST, or HST - "harmonized sales tax", in some provinces). Those who provide goods or services in excess of C$30,000 per year are required to register with Revenue Canada and report dealings on an ongoing basis.
Customs Act and Customs Tariff.
These require the declaration (with accurate values) of goods entering Canada. Failure to comply is an offence which may apply in some cross-border merchandise frauds.
Federal proceeds of crime and money-laundering provisions.
Part XII.2 of the Criminal Code provides a comprehensive scheme for the tracing, recovery, seizure and forfeiture of proceeds. The scheme is invoked for all "enterprise crime offences", which (s.462.3) include the basic fraud offence. Actions taken to "launder" funds which are proceeds of crime are also an offence (s.462.31).
Organized crime offences and powers.
1997 Criminal Code amendments created a new offence of participating in a criminal organization and expanded powers to investigate and prosecute "criminal organization offences". This includes any fraud involving five or more offenders, which will catch most telemarketing fraud cases. Expanded powers include electronic surveillance and search and seizure provisions. Offences committed by criminal organizations can be prosecuted by either the federal government or the provinces. Court orders can be used to bar those charged or convicted from taking part in crime-related activities, and might be used to deny access to telemarketing equipment.
Provincial offences.

Canadian provinces have no power to enact criminal law, but may create offences dealing with "property and civil rights", which includes many commercial activities. Eight of the ten provinces have enacted offence and regulatory provisions dealing with unfair or deceptive trade practices. These are minor in comparison with the Criminal Code fraud offences and punishments, but are also subject to a lower procedural standard under the Canadian Charter of Rights and Freedoms, which makes them easier to prosecute. Maximum fines range from C$2,000-100,000, with imprisonment up to three years. Conduct such as inflating prices or taking advantage of particularly vulnerable consumers, not usually elements of fraud, are included in several.

3.2.2 - United States

Fraud-related federal offenses.

Federal criminal law in the United States includes a number of statutes that apply to telemarketing fraud, each of which has a basic maximum penalty of five years' imprisonment. The most frequently used are mail fraud (18 U.S.C. § 1341) and wire fraud (18 U.S.C. § 1343), which prohibit the use of the mails or wire communications in a fraudulent scheme, and the general conspiracy statute (18 U.S.C. § 371). Under established case law, everyone in a scheme (owners, managers or salespeople) is criminally liable not only for the conspiracy or personal acts of fraud, but also for all foreseeable criminal acts of coconspirators.

Other fraud-related federal offenses which have been used in telemarketing fraud prosecutions include: identification fraud (18 U.S.C. § 1028), which prohibits the misuse and unlawful transfer of identification documents such as Social Security cards; credit card fraud (18 U.S.C. § 1029), which prohibits obtaining or trafficking in credit card information with intent to defraud; transportation of property taken by fraud (US$5,000 or more) across state or national boundaries (18 U.S.C. § 2314); use of false names in mail-fraud schemes (18 U.S.C. § 1342); and financial institution fraud (18 U.S.C. § 1344), which broadly prohibits schemes to defraud financial institutions.

Other federal offences.

Like Canada, the United States has several other statutes that apply to telemarketing fraud, including the following.

Tax Offences.
Income-tax offences may apply where offenders do not report or under-report income, or where false information is given: 26 U.S.C. §§ 7201 (attempt to evade or defeat tax), 7203 (wilful failure to file return), 7206 (fraud and false statements), and 7207 (fraudulent returns, statements, or other documents).
Lottery Offences.
Two federal criminal statutes deal with foreign lottery-related material. 18 U.S.C. § 1301 contains multiple prohibitions on importing or transporting tickets and related materials, and 18 U.S.C. § 1302 deals with sending or delivering such materials (including funds to purchase tickets) by mail.
Money Laundering and Proceeds of Crime.
18 U.S.C. §§ 1956 and 1957 prohibit laundering proceeds of crime, including mail, wire and other frauds. The Department of Justice can also obtain criminal forfeiture of proceeds, if it can prove laundering and link the proceeds and the original offences.
Forfeiture.
In addition to the opportunities for criminal forfeiture noted above, the Justice Department is supporting legislation in the U.S. Senate which would extend the forfeiture powers directly to various telemarketing fraud offences, broadening federal powers to seek forfeiture in such cases.
Sentencing provisions.

U.S. federal courts apply Sentencing Guidelines which authorize longer sentences for frauds that cause greater losses to victims. Total proceeds, numbers of offenders and numbers and ages of victims are all taken into consideration. The owner of a fraudulent telemarketing business, using five or more telemarketers, which took in more than US$200,000 primarily from senior citizens might be subject to imprisonment for 41-51 months, whereas the owner of a similar fraudulent telemarketing business which took in more than $1.5 million might be subject to imprisonment for 63-78 months.

A 1994 penalty enhancement statute (18 U.S.C. § 2326), provides for up to an additional five years' imprisonment in some federal telemarketing fraud cases, and up to 10 additional years if the offence targeted persons over 55 or victimized more than 10&nbsppersons over 55. The U.S. Congress is now considering legislation to increase punishments for persons conducting a scheme to defraud U.S. residents from a foreign country.

State criminal laws.

Each state has the power to make criminal laws for conduct within, or having effects within, its borders. Two general categories apply to telemarketing fraud. First, each state typically has one or more general fraud statutes. Second, 27 states have specific statutes imposing regulatory requirements (e.g., business registration, licensing of salespeople, posting bonds) on telemarketers doing business within their borders, with criminal penalties for failing to comply. Penalties differ from state to state and with the seriousness of the offences.

Although state legislatures enact these measures, city or county prosecutors frequently enforce them. In some states these prosecutors have concurrent jurisdiction with state Attorneys General to do so. In 23 states, the Attorneys General have no statutory power to prosecute criminal telemarketing, but city or county prosecutors may designate or deputize state Attorneys General to do so, an approach used in Iowa. Under any of these approaches, the states have criminal authority to prosecute telemarketing fraud that can operate concurrently with federal authority.

3.3 Evidence Laws and Procedures

The Working Group did not consider or identify any specific shortcomings in the evidence laws of either country, but it is concerned that substantial distances between investigators, victims and courts and the reduced ability of some older victims to travel can create obstacles and add costs to successful prosecutions. One partial solution considered was allowing victims or other witnesses to testify by live video teleconferencing or videotape in appropriate cases. There do not appear to be any insurmountable legal or constitutional obstacles to live videoconferencing in either Canada or the United States, provided that the basic rights of accused persons are protected. The Working Group recommends that both governments explore legal and technical avenues towards the use of remote testimony in criminal proceedings, by video-teleconferencing or similar means.

In Canada, amendments to the Canada Evidence Act and Criminal Code dealing with video-link evidence are presently under consideration. To make such testimony feasible, video facilities close to victims will be needed, and may already exist in various government agencies and regional offices. The U.S. Department of Justice and Royal Canadian Mounted Police are compiling lists of suitable video conference facilities operated by law enforcement agencies which would be suitable for taking testimony or conducting interviews.

3.4 Regulatory Enforcement

In both Canada and the United States, administrative agencies at the federal and provincial/state levels have powers to regulate general trade and commerce which can be used to control telemarketing and prohibit unfair or deceptive practices. As noted above, the organization of agencies and legislation differs due to constitutional and governmental factors, although the types of conduct regulated or prohibited are similar in both countries. In Canada, regulatory provisions can fall within the federal criminal law power, and the federal Competition Act is regulatory legislation enforced by a combination of administrative and criminal powers. U.S. agencies such as the Federal Trade Commission (FTC) use administrative or civil proceedings to enforce their regulations directly, and refer criminal allegations to the Department of Justice. The Canadian provinces have the primary responsibility for enforcing and prosecuting the federal Criminal Code, and can apply a combination of quasi-criminal, regulatory and administrative powers to their own provincial offences. State powers are similar, combining criminal and non-criminal measures.

3.4.1 Canada

Several agencies have administrative or regulatory powers which can be used against improper telemarketing activities.

The federal Competition Bureau
is an agency within Industry Canada with both civil and criminal enforcement powers under the Competition Act. It is independent, reporting to the Director of Investigation and Research, who is appointed under the Act. The Bureau's Fair Business Practices Branch promotes a fair and competitive marketplace by preventing misleading advertising and other deceptive marketing practices. It administers the regulatory criminal law provisions of ss.52-60 of the Act, and conducts investigations using the powers provided. Investigating deceptive telemarketing practices is presently an enforcement priority. This now falls under s.52(1)(a) (false or misleading representations in promoting products, services or business interests). Amendments to deal specifically with telemarketing are now being proposed, as noted above. The Branch is also actively involved in cooperative cross- border enforcement and in education and prevention programs in this area.
Revenue Canada,
the agency responsible for enforcing the Income Tax Act, the Excise Tax Act, the Customs Act and the Customs Tariff has units responsible for all of these areas. Generally they may inspect, compel disclosure of business tax, payroll or other records, freeze accounts or transactions, and in the case of Canada Customs, inspect international shipments and related documents. Offences relating to obstruction, non-compliance with demands, non-payment, or providing false or misleading information could be prosecuted as federal criminal offences by the Attorney General of Canada or dealt with by civil means. Information provided by taxpayers cannot be shared with other agencies except as expressly provided by law. However, Revenue Canada can, and does, cooperate with law enforcement agencies in both countries and the U.S. Internal Revenue Service where possible to control telemarketing fraud and other crime problems.
Provincial regulatory agencies.
The primary jurisdiction over commercial activities ("property and civil rights") in Canada is with the provinces. All 10 provinces and both territories have consumer-protection legislation in some form, and most contain provisions similar to those of their U.S. counterparts. They place restrictions on various direct-marketing techniques, impose requirements for disclosure, bar misleading practices and in some cases, provide "cooling-off" periods before contracts become binding. Remedies include civil litigation (individual or class-actions), restitution, rescission of contracts, damages, and a series of offences and penalties. In Canada, the trading in stocks, bonds and other securities is exclusively regulated by the provinces, which impose prospectus or disclosure requirements to prevent deception.

3.4.2 United States

The Federal Trade Commission (FTC),
has general federal jurisdiction over consumer protection, including extensive civil and administrative powers to deal with fraud. Under the Federal Trade Commission Act, the FTC can prevent unfair or deceptive acts or practices, seek redress, regulate trade practices, investigate and file civil actions for violations of the Act, and make reports and recommendations to Congress. Historically, the FTC has brought most actions against fraudulent telemarketers under §&nbsp5 of the FTC Act, which deals with unfair or deceptive practices affecting commerce. § 13(b) provides for federal court injunctions, which may be used before or after violations occur to stop violations and protect victims by freezing assets and appointing receivers.
The Telemarketing and Consumer Fraud and Abuse Prevention Act (15 U.S.C. § 6101) also gives the FTC powers to regulate telemarketing and prohibit abuses. It also empowers the FTC and state Attorneys General to bring federal civil actions for regulatory violations. The 1995 Telemarketing Sales Rule (TSR), implementing the Act, requires telemarketers to identify themselves, accurately describe goods or services offered, and tell consumers that "prize promotions" cannot require any purchase or payment. Disclosure must be given before payment, and must include such things as accurate contest odds, refund policies and any other material restrictions, limitations, or conditions. The TSR also prohibits credit card laundering through unauthorized merchant accounts, accepting payment before some types of services are rendered, and abusive practices, including threats, profane language, repeated calls or harassment, calls to consumers who have asked not to be called, and calling before 8:00 a.m. or after 9:00 p.m.
Other FTC powers include: the Franchise Rule (disclosure about business opportunities to investors); the Mail or Telephone Order Rule (notice that goods will not arrive in a promised or prescribed time); the Electronic Fund Transfer Act (barring unauthorized bank debits by EFT); the "900 Number" Rule (regulating the pay-per-call industry), and the Fair Debt Collection Practices Act (prohibiting deceptive or abusive conduct).
Other federal agencies.
The Commodity Futures Trading Commission and the Securities and Exchange Commission can investigate and conduct litigation against misleading telemarketing schemes involving commodities and securities, respectively. The Postal Inspection Service has similar powers for mail fraud and other abuses of the mails.
State Authority.
All 50 states have the power to regulate general trade and commerce, and every state and the District of Columbia has statutes which apply to most consumer transactions, aimed at preventing deception and abuse in the marketplace. Many are patterned after the FTC Act's "unfair or deceptive practices" prohibitions, allowing widespread redress to protect consumers. 45 states also have specific legislation regulating telemarketing. Generally, these require telemarketers to register, post bonds, or make certain disclosures to prospective customers. Some also put restrictions on specific transactions, especially those involving gifts or prizes. As noted above, state Attorneys General also enforce the federal FTC Telemarketing Rule, and some states have adopted rules of their own.

3.5 Other Sources of Authority

3.5.1 Investigative powers

Canada and the United States both have a range of powers and procedures for investigating telemarketing fraud. A technique used in both countries, electronic surveillance, is of major importance because telephones are the primary instrument for offenders. The tapping, monitoring and recording of telephone conversations require some form of court order or permission as a safeguard of constitutional rights. In the United States, calls can be monitored under federal law without a court order if one of the parties consents. In Canada the situation is more limited. The monitoring of cross-border calls can raise other legal issues as well. The importance of electronic surveillance methods for investigating this offence is clear, and better information about how they can be used in the various jurisdictions would be useful in coordinating investigations. The Working Group recommends that the legal and technical potential and limits of electronic surveillance as a tool against telemarketing fraud in both countries be explored further.

3.5.2 Bail statutes

Bail statutes in both countries provide a means to suppress telemarketing operations where the participants are already facing criminal charges. They allow courts to impose conditions for release which could be used to bar offenders from using telephone services for telemarketing or prevent them from associating with other offenders. These conditions may also apply to release pending extradition. Breach of such conditions or the commission of further offences while on bail can result in offenders being held in custody until they are tried or extradited.

3.5.3 Blocking or terminating telephone service.

The fact that telemarketing fraud requires the use of telephone services led the Working Group to consider ways in which known offenders could be deprived of those services. Services could be terminated completely, limited so as to make telemarketing activities impossible, or calls to or from specific numbers blocked. At present, neither country has specific statutory powers to do this. In the United States, only one federal statute, 18 U.S.C. § 1084(d), authorizes a common carrier to terminate service based on criminal use of the telephones. It requires that the carrier be given written notice by a law-enforcement agency that the service is being used or will likely be used to transmit gambling information. Customers must be given reasonable notice, and can challenge the disconnection in court. Both countries have provisions, such as the bail statutes discussed above, which may be used as the basis for court orders denying known offenders access to services for telemarketing under specific circumstances.

Common carriers and service providers in both countries can block or terminate service where customers are in breach of contract. Indeed, this is not uncommon where customers do not pay telephone bills or are caught defrauding the companies themselves. In Canada, regulations impose some conditions on service contracts, and it is possible that telecommunications regulators could take steps to ensure that contracts require customers to agree not to use the telephones for telemarketing fraud or to engage in specified deceptive business practices. Contracts could also make formal notification by law- enforcement or administrative officials that service was being used for deceptive practices, or the order of a court or tribunal, grounds for terminating service. This could be an important tool for controlling telemarketing fraud, since the offences cannot be committed without telephone service.

Any expansion of powers to terminate telephone services would need to identify offenders and lines quickly and accurately. It would also have to allow whatever legal proceedings were needed to be finished quickly and expeditiously. It is important to ensure that only offenders are targeted, but that the system can react quickly to those who move or hide their identities to avoid disconnection. The two major alternatives discussed were:

  • the use of orders from a court or tribunal directing telephone companies to disconnect those against whom a finding was made, or

  • the use of contract terms (i.e., that the customer not use the telephone to commit offences) to permit the provider to disconnect summarily, forcing the customer to initiate proceedings, if any, for breach of contract.

While law-abiding individuals have a right to telephone services, professional criminals who abuse the service for fraudulent activities should not. The Working Group recommends that both countries examine the regulation of telephone services and consider options which would permit the denial of telephone services to telemarketing offenders.

3.6 Mutual Legal Assistance

Law enforcement agencies informally share investigative information across the border within the legal limits of both countries, and much information can be handled in this way. The legal limits include the constitutional, privacy and security safeguards in place in both countries. The Mutual Legal Assistance Treaty (MLAT) between the United States and Canada and domestic legislation in both countries provide a framework for each country to obtain information for the other on formal request. MLAT requests, for example, form the basis for search warrants allowing the recipient to obtain the evidence requested.

Formal MLAT proceedings can consume valuable time and resources for those at both ends of the process. Offenders can sometimes delay proceedings or get information about the evidence being gathered against them by challenging MLAT requests. Some forms of assistance are not presently available under the MLAT and domestic legislation. The Working Group recommends that the scope of the existing Canada-U.S. mutual legal assistance arrangements be considered to determine whether these might be expanded to deal more effectively with telemarketing-fraud cases.

There appears to be uncertainty in the law-enforcement community about when MLAT requests are necessary and when they are not, which can result in using them when they are not needed. The Working Group recommends that the circumstances under which formal mutual legal assistance requests are needed be clarified by providing legal information and advice to the agencies involved.

3.7 Extradition

The Working Group views effective extradition provisions as a major element of the overall strategy against telemarketing fraud. Extraditing offenders for trial in the jurisdictions where most of the witnesses and victims live serves justice and is cost- effective, particularly given the long distances involved in many telemarketing frauds. The fact that victims in these cases are often elderly argues both for and against extradition: extraditing offenders limits travel for frail witnesses, but the delays which occur often mean that elderly witnesses die or become incapacitated before a criminal trial can be held. The Working Group is concerned that the costs and procedural delays for extradition are often so great that agencies reported abandonment of prosecutions or agreement to unfavourable pleas in extreme cases.

The Working Group noted two differences between the extradition procedures of Canada and the United States. Extradition from Canada currently requires requesting states to provide the quality and quantity of evidence typically sought at a full trial: first- party witness affidavits establishing a prima facie case. This is a higher standard than that required by the United States and most European countries, which allow a single sworn summary of the prosecution's evidence. This situation is presently under review by the Government of Canada. The United States also normally holds those facing extradition proceedings in custody, whereas in Canada, they are subject to the same bail-release conditions as persons charged with Canadian criminal offences. This is unlikely to change, but it was noted that bail can be denied or revoked if offences are committed while on release, and that conditions intended to prevent this can be imposed. The Working Group also considered the concerns of some participants that the judgment of the Supreme Court of Canada in U.S.A. v. Cotroni might require the trial in Canada of telemarketers who are Canadian citizens. A review of the case suggests that it sets guidelines for reviewing the extradition of Canadian citizens who could be prosecuted in Canada, but does not create a general prohibition. The Working Group recommends that the Canada-U.S. extradition arrangements be examined, and if possible modified, to facilitate and accelerate extradition in telemarketing fraud cases.

3.8 Deportation

Deportation cannot be used as a substitute for extradition, nor can either country deport one of its citizens. A key characteristic of telemarketing fraud is the mobility of offenders, however, which makes it possible that offenders in some cases may have moved from one country to another. In both Canada and the United States, persons can be deported because they have committed crimes, because they have misled immigration authorities about previous criminality, or simply because they are working without permission. This may be the case in some telemarketing situations, and if so, offenders could be deported. The Working Group recommends that the provisions of the federal laws of both countries which might allow for the deportation of foreign nationals caught engaging in telemarketing fraud be reviewed, and that enforcement agencies be provided with information about the circumstances under which deportation may be an option in such cases.

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