Victim of a Ponzi Scheme? Well, you may be a criminal yourself!

Okay, the title is a bit click baity. Unfortunately however, it’s true! In Canada, victims of certain Ponzi-Schemes may have broken the law without even knowing it. Can you imagine? Losing your life savings and getting locked up for it? Let’s read further.

I had the unfortunate opportunity of doing some pro bono work for some Ponzi-Scheme victims a few years ago. Often, victims of Ponzi-Schemes are the salt of the earth folk, who work hard but just see a ticket to fast money and an easier life. Well, turns out that taking a chance on a ticket to fast cash can burn you in more ways than one.

In some Ponzi-Schemes, the fraudster provides and gets the victim to sign a "promissory note" in return for their "investment." Instead of detailing the investment, the note is framed as a loan (which they will explain is for "confidentiality" reasons). The note will also include an exorbitantly high interest rate, which represents the promised return on investment. For example, the note could say, “In exchange for $100, Big Bad Wolf promised to pay Little Red $200 at the end of the month.” A profit of 100% in one month (interest).

Here's where the overlooked legal issue for the victim arises: Section 347(1) of the Criminal Code of Canada prohibits:

1. Entering into an agreement or arrangement to receive interest at a criminal rate (~60% or more); and/or

2. Receiving a payment or partial payment of interest at a criminal rate.

Violating this section can result criminal conviction, and include fines and/or imprisonment of up to 5 years as punishment! Therefore, if you receive/sign a promissory note with an interest rate specified or a return resulting in a criminal rate of interest being charged, you are technically guilty just for signing it! Even if you never receive payment.

The purpose of Section 347 is to protect consumers and the integrity of the financial system by criminalizing predatory interest rates. It aims to prevent exploitation through excessively high interest rates, which can lead to financial ruin for borrowers. However, the reality is that the language does not account for this type of scenario!

While we hope that law enforcement and prosecutorial discretion would shield victims from being prosecuted under Section 347, we can't always count on it. So, if an investment opportunity seems too good to be true, be cautious. Before signing anything, scrutinize the terms, especially if you're handed a promissory note. You don't want to end up in handcuffs like Ms. Red Hood for agreeing to a contract with a criminal interest rate!