In an effort to stop securities fraud before it hurts investors, the New Brunswick Securities Commission has introduced a unique software program that searches the Internet and issues an alert when suspicious websites are found.

The NBSC began using the software last year, which is expected to be fully operational later this year — at which time, the NBSC will share it with its provincial counterparts across the country.

“There has been a lot of telephone and Internet fraud over the past few years, and much of this is based offshore,” says Rick Hancox, the NBSC’s executive director. “It’s a challenge to find the money [lost to fraud] and, if you do find it, to get a hold of it.”

So, instead of reacting when fraud is committed, the NBSC has decided to get proactive. “We developed a mechanism to identify [fraudulent] websites,” says Hancox, noting that this includes a process by which the regulator would attempt to deactivate a website.

Although specifics about the new software are well guarded, the tool searches the Internet looking for suspicious websites based on a number of confidential indicators, Hancox explains. Once a website has been identified, the NBSC will contact the company directly to ask a number of questions. These include determining which jurisdiction the firm is registered in as well as requesting a copy of the company’s prospectus.

“In most cases, we hear nothing,” Hancox says. “In some cases, the website disappears and we send out an alert through media channels.”

Although the NBSC’s introduction of this specialized software may be one of a kind, efforts to crack down on Internet fraud are commonplace across the country. However, other provincial securities commissions don’t usually use such sophisticated software; in most cases, they’ll do it the old-fashioned way: staff hunting down offenders online.

“We do patrol the Internet,” says Lang Evans, director of enforcement with the B.C. Securities Commission. “We’re looking for things that might be suspicious or risky to the public and that have a connection to British Columbia.”

The same is true in Saskat-chewan, says Ed Rodonets, deputy director of enforcement with the Saskatchewan Financial Services Commission: “We use Internet surveillance in almost every investigation we conduct.”

As well, the Nova Scotia Secu-rities Commission is “aware that frauds are being perpetrated via the Internet all over the world, and it is keenly aware of the need to protect Nova Scotians from becoming victims of such fraud,” says Bill Slattery, the NSSC’s executive director of securities.

(The Ontario Securities Com-mission, which oversees Canada’s largest base of investors, did not respond to queries about how it monitors fraudulent activity on the Internet.)

Although details of how these Internet patrols are conducted remain hush-hush, the results are very fruitful, says Rodonets: “The Internet is elusive, but most times you can find information that will lead you to the people [you’re looking for].”

In many cases, the virtual search starts with a tip from the real world. The BCSC, for example, recently issued a temporary order against an offshore high-yield investment fund after an astute bank manager in Vernon, B.C., called the regulator about two men who wanted to wire investment money to Australia.

BCSC staff identified social media websites that were being used to promote investments and a referral program. There was also advertising for the fund in online classified ads in other provinces.

The dénouement, however, began with the savvy bank manager. “We do look at the Internet, but we need this human element,” says Evans. “The Internet is too vast.”

For investors, the Internet is a double-edged sword, says David Malamed, a partner in forensic accounting with Grant Thornton LLP in Toronto: “Investors find the Internet to be the main source of information for researching a security.” However, he points out: “The individuals committing the frauds also have access to the same space.”

It is this reality that, ultimately, has most securities commissions convinced that even though enforcement is critical, education is equally essential — if not more so.

In Nova Scotia, for example, investor education and the enforcement branch work closely together to identify potential trends in frauds and use tools such as Twitter, Facebook, the NSSC’s website and a website targeted specifically to investors, www.beforeyouinvest.ca, to generate awareness.

“All of this is done to warn investors of possible scams and frauds,” says Slattery, “and, more important, to educate them of the red flags that are common among most frauds.”

@page_break@In many cases, the types of frauds found on the Internet are not new, says Evans. Rather, they’re just presented in a new medium. “This is old wine in new bottles,” he says. “We’re seeing the old-time boiler rooms being complemented by the Internet.”

But now, high-tech advances — such as the software developed by the NBSC — will play a role in helping to uncork those fraudulent schemes. IE