Canada: Chinese Companies Look To Canadian Courts For Help In Fight Against Financial Crimes

Last Updated: January 11 2017

British Columbia courts are seeing a spike in the number of claims brought by Chinese companies attempting to seize local assets and realise Chinese judgments. These foreign companies are looking to British Columbia courts to help give teeth to Chinese judgments, which often involve Chinese nationals who have crossed seas to Canada and invested in real estate after being found by their local courts to have committed fraud. This phenomenon has also drawn attention in the US.

These types of cases are not entirely new to British Columbia, but their increased frequency is novel and can likely be attributed to three distinct but complementary factors: China's increased intolerance for corruption; the recent willingness of the BC courts to assist in these types of cases and their mechanisms for collecting judgments; and the influx of foreign fraudulent money into the local real estate market.

China's fight against corruption

China is in the midst of strengthening its position on corruption, and has increased efforts to target Chinese immigrants unlawfully hiding funds in foreign jurisdictions. Corruption in China has become increasingly prevalent and problematic over the last decade, during a period of significant growth and government spending. According to a study run by Global Financial Integrity, between 2003 and 2012 approximately $1.6 trillion in illicit funds were transferred out of China. This trend, coupled with (what is according to the Globe and Mail) a staggering number of corrupt individuals fleeing from the country, motivated China's global anticorruption campaign (which has been coined 'Fox Hunt').

The Chinese and Canadian governments have been working toward an agreement on how to deal with the seizure of assets from parties suspected of engaging in financial crimes such as fraud. The agreement was originally announced in 2013 and was recently finalised during Premier Li Keqiang's visit to Canada in late September of this year.

This agreement is the first of its kind between the two countries, and covers the sharing and returning of forfeited assets. Under the agreement, if the courts in either nation determine the legal ownership of money improperly invested overseas by another, the assets must be returned to the rightful owner. Any funds gained through the proceeds of crime can also be partly recovered.

Mareva injunctions as a remedy

Shortly prior to signing this agreement, in a case initiated by a Chinese bank, the British Columbia Supreme Court (BCSC) exhibited a willingness to assist foreign companies in enforcing their judgments locally. The plaintiff, China Citic Bank, succeeded in seeking a Mareva injunction from the BCSC. A Mareva injunction is an exceptional remedy and is not an easy one to obtain from the courts. A Mareva injunction freezes assets so a defendant to an action cannot dissipate or deal with these assets in any way that would frustrate a potential judgment.

The BCSC granted the China Citic Bank this injunction, prohibiting the defendant from selling four local homes worth a combined total of $7.2m. The homes belong to a couple who allegedly left China with an unpaid $10m loan from the bank. This injunction is now being challenged by the defendant, Shibiao Yan, emphasising the exceptional nature of the remedy.

Granting this injunction was a landmark move by the BCSC, marking one of the first times (if not the first time) a Chinese bank has obtained this remedy in a North American court.

While it was logical for China Citic Bank to enforce its judgment in the jurisdiction where the defendants and their assets are, it also makes sense because of the comparative ease with which a party can collect judgment in North American courts, as opposed to those in China.

It is notoriously difficult to enforce judgments granted by Chinese courts in China. Though some evidence suggests this process may get easier, the North American legal systems are more effective for collecting awards. Successful plaintiffs in China often struggle to see the financial benefits of their coup for many reasons. These reasons include the lack of enforcement staff, the insufficient supervision of court employees (which can leave them susceptible to corruption), and the ease at which defendants can set up shell companies to move assets into (which are not penalised or regulated).

If foreign plaintiffs can persuade Canadian courts that the judgment and award granted in China were done so following fair and due process, that award will probably be enforced. Conversely, if defendants can successfully argue that their rights were not respected, due process was not followed, or that the judgment was obtained fraudulently, then courts will be disinclined to enforce the Chinese judgment. Canadian courts are loath to enforce any foreign judgment granted contrary to their notions of justice.

The British Columbia market

Successful plaintiffs in China, with judgment against a defendant with assets in and outside of China, may wish to look overseas to collect their award. Christine Duhaime, counsel for China Citic Bank, stated in a recent article published in The Vancouver Sun that she thinks that billions of dollars of bank fraud proceeds from China are invested in British Columbia real estate, which means various Chinese parties may be advantaged by capitalising on these local properties and pursuing matters in BC.

The success that China Citic Bank had in freezing the assets of Shibiao Yan, and the apparent prevalence of fraudulent funds tied up in British Columbia property, suggests that the growing trend of Chinese parties looking to BC courts for help in recovering these funds will only continue to grow.

This phenomenon also comes in the midst of debate in Vancouver about the role of foreign money in the city's booming real estate market. BC, and in particular Vancouver, residents have been vociferous about the impact of foreign investment on local real estate prices, urging the city to be more attentive to the source and legitimacy of those investments.

One outcome of this debate, in part, was the recent implementation of the 15 percent foreign investment tax on foreign purchasers looking to buy property in the Metro Vancouver area. On the heels of this tax, it appears some buyers have turned away from the Vancouver market, and towards Toronto and Seattle. This suggests that the complementary growth in desire of the Chinese government and parties to grab back these tainted assets, and in the public questioning of the legitimacy of foreign investment currently being experienced in BC, will likely appear in other jurisdictions.

Conclusion

China Citic Bank is just one of various plaintiffs before the BC courts asking for local enforcement of a foreign judgment. It will be important to keep watch on how the courts continue to treat these types of cases and be attentive to the impact, if any, this has on Chinese investment in British Columbia property.

North American courts will have to be alive to this trend, and prepared to hear cases from Chinese companies as the parties appreciate the possibility of recovering their losses from those who have immigrated to Canada and the US.