Due diligence a sound strategy against fraud


Marlin Horst head shot

A defrauded corporate lender who unsuccessfully tried to sue the government to cover $1.8 million in losses was always facing an uphill struggle, Toronto corporate lawyer Marlin Horst tells

A better strategy for the lender would have been to conduct more stringent due diligence at the outset rather than suing the Crown after the fact, says Horst, partner with Shibley Righton LLP.

The Ontario Court of Appeal matter involved a lender who advanced $1.8 million in mortgages to a man on the grounds he was the sole owner and officer of a company. The loans were advanced after the lender checked the Ministry of Government and Consumer Services' corporate registry and found the man was listed as a director and officer.

However, it transpired that this was a complete fabrication and the man had merely filed a change order to the registration with no authority whatsoever.

The appellant argued that the ministry owed a duty of care to reasonably ensure the accuracy and reliability of the information it collected, maintained and disseminated for a fee when it knew or ought to have known that the appellant would rely upon such information.

“I would advise clients to rely on more than the corporate profiles, which are incorrect a quarter of the time,” says Horst, who was not involved in the matter and comments generally. “This is not because of anything the government has done, it’s simply because corporations don’t always update their profiles.”

This is why due diligence must rely on multiple sources, he says, including the old-fashioned method of picking up the telephone and making a call.

“In this day and age, everyone has an email or a website,” Horst says, adding the registrations branch doesn’t make judgment calls on whatever information they are given and just assumes what is being filed online is correct.

“This is different from getting a certificate under Personal Property Security Act, which is certified by the government and you could litigate if the information was incorrect,” he says of the mechanism by which property and financial instruments are registered to a specific owner.

Horst says the takeaway lesson is that there’s no substitute for multiple layers of due diligence and checking bona fides.

“It’s important to dig deeper and have several sources confirm what you have been told,” he says.

Name and Title