Documentation

File No. CT 2005-006 COMPETITION TRIBUNAL IN THE MATTER OF the Competition Act, R.S.C. 1985, c. C-34, as amended; IN THE MATTER OF an application by B-Filer Inc, B-Filer Inc. doing business as GP AY GuaranteedPayment and NPay Inc. for an order pursuant to section 103.1 granting leave to make application under sections 75 and 77 of the Competition Act;

AND IN THE MATTER OF an application by B-Filer Inc., B-Filer Inc. doing business as GP AY GuaranteedPayment and NPay Inc. for an interim order pursuant to section 104 of the Competition Act.

BETWEEN: B-FILER INC., B-FILER INC. doing business as GPAY GUARANTEEDPAYMENT and NPAY INC.

Applicants -and-THE BANK OF NOVA SCOTIA Respondent RESPONSE TO AMENDED NOTICE OF APPLICATION PURSUANT TO SECTION 75 OF THE COMPETITION ACT

McCarthy Tetrault LLP Barristers & Solicitors Suite 4700, Toronto Dominion Bank Tower Toronto, ON M5K 1E6

F. Paul Morrison LSUC # 17000P Tel: (416) 601-7887 Glen G. MacArthur LSUC# 13669A Tel: (416) 601-7888 Lisa M. Constantine LSUC# 35064B Tel: (416) 601-7652 Fax: (416) 868-0673 Solicitors for the Respondent, The Bank of Nova Scotia

-2-TO: THE REGISTRAR Competition Tribunal The Thomas D' Arey McGee Building 90 Sparks Street, Suite 600 Ottawa, ON KlP 5B4

Tel: (613) 957-7851 Fax: (613) 952-1123

AND TO SHERIDAN SCOTT Commissioner of Competition Competition Bureau 50 Victoria Street Gatineau, QC KlA OC9

Tel: (819) 997-3301 Fax: (819) 953-5013

AND TO: AFFLECK GREENE ORR LLP Barristers & Solicitors One First Canadian Place Suite 840, P.O. Box 489 Toronto, ON M5X 1E5

Michael Osborne LSUC# 40976K Tel: (416) 360-5919

Jennifer L. Cantwell LSUC# 49515F Tel: (416) 360-1485 Fax: (416) 360-5960

AND TO: EDY, DALTON Barristers & Solicitors

800-1015 4 Street S.W. Calgary, AB T2R 114

Sharon J. Dalton Tel: (403) 263-3200 ext. 105 Fax: ( 403) 263-3202

Solicitors for the Applicants

- 3 -I. OVERVIEW - SCOTIABANK OPPOSES THIS APPLICATION 1. The Bank of Nova Scotia ("Scotiabank") admits the grounds and material facts in paragraphs 1, 6, 7, 8 12 and 13 of the Amended Notice of Application. 2. Except as otherwise admitted, Scotiabank denies the grounds and material facts in the Amended Notice of Application. (a) The Parties 3. The Bank of Nova Scotia ("Scotiabank") is one of Canada's major Schedule I chartered banks. Scotiabank began serving customers in the Halifax area in 1832. Since that time, Scotiabank has grown to one of the largest Banks in Canada, with branches and offices in 50 countries and 50,000 employees worldwide. 4. As one of Canada's Schedule I Banks, Scotiabank is regulated by the Bank Act. Schedule I Banks, including Scotiabank, must meet strict regulatory requirements. Scotiabank's principal regulators in Canada are the Office of the Superintendent of Financial Institutions, the Financial Consumer Agency of Canada, and the Canadian Deposit Insurance Corporation. Scotiabank is also subject to laws of general application within Canada, including but not limited to the Canadian Payments Act, the Competition Act, the Criminal Code, the Personal Information Protection and Electronic Document Act, and the Proceeds ofC rime (Money Laundering) and Terrorist Financing Act. 5. One of Scotiabank' s paramount responsibilities is to keep customers' financial and personal information secure. The confidentiality of each customer's electronic signature, which includes the customer's PIN and Internet banking password, is one oft he cornerstones to protecting the electronic banking system from fraud and thereby maintaining customer confidence in the system.

-4-6. Raymond Grace is the President ofNPay Inc. ("NPay") and B-Filer Inc. ("B-Filer") and the CFO of UseMyBank. B-Filer carries on business as GPay. NPay, GPay, and UseMyBank are operating as a single business enterprise. By using customers' confidential Internet banking passwords, the Applicants effect transfers of funds from banking customers' accounts to the Applicants' accounts at Scotiabank. The Applicants then transfer the funds to off-shore Internet casinos. Approximately 98% oft he Applicants' business relates to transfers of funds from Canadian banking customers' accounts to off-shore Internet casinos or their management companies. (b) Background Summary 7. The Applicants first opened an account at Scotiabank in 1999 as a small business customer. They are operating a single business enterprise. They are no longer a small business. The volume of transactions passing through their accounts now far-exceed the small business limits of$400,000 per month in deposits, or a maximum of $5 million per year in deposits. 8. The following is a brief summary of the Applicants' banking relationship with Scotiabank: (a) Prior to April, 2004, the Applicants had opened only a single account at Scotiabank for the conduct of their combined business. (b) Between April 2004 and March 2005, the Applicants caused to be opened a further 108 small business accounts at Scotiabank. The manner in which these accounts were opened was in violation of numerous Bank policies. Further, Mr. Grace made material misrepresentations upon which Scotiabank relied in permitting the accounts to be opened. (c ) Scotiabank had undertaken preliminary investigations of GPay in its capacity as a bill payee in 2001 and 2003. Those investigating GPay had concerns about the fact that GPay was requesting customer password information. However, only a few

- 5 -Scotiabank customers were using GPay at the time. As a result, the decision was made to deal with the matter by speaking directly to the customers using GPay and warning them about the dangers of disclosing their bank password. (d ) Scotiabank was not fully aware of the true nature and extent of the Applicants' business and the manner in which it was using Scotiabank's accounts until it undertook a comprehensive investigation of the Applicants' business and accounts beginning in early 2005. (e ) As a result of this investigation, Scotiabank concluded that the Applicants' business raised serious business, legal, policy and reputational concerns for Scotiabank. Scotiabank's Security and Investigation Group learned that in the preceding 12 months, the Applicants had transferred almost $10 million through their Scotiabank accounts. The magnitude of the Applicants' business that they were transacting through their Scotiabank accounts and the number of banking customers that were using their services had significantly increased compared to the situation in 2003, when it involved a small handful of Scotiabank customers. Scotiabank was no longer willing to provide banking services to the Applicants, because: (i) the vast majority of transactions processed by the Applicants involve transfers of money to offshore Internet gambling casinos, which is most likely illegal; (ii) the business model of the Applicants requires Scotiabank's customers to disclose their confidential on-line banking password which constitutes a serious breach of Scotiabank's Internet banking security and exposes Scotiabank and its customers to serious risk of fraud;

- 6 -(iii) the Applicants' business is a "Money Services Business" as described in the Proceeds ofC rime (Money Laundering) and Terrorist Financing Act, which imposes enhanced due diligence, record keeping and reporting obligations on Scotiabank; (iv) the Applicants, who purport to be acting as "agents" for the banking customers in entering the banking customers' accounts, are transferring money out of these accounts to the Applicants' Scotiabank accounts. Scotiabank has legitimate concerns that the Applicants' Scotiabank accounts are being used "by or on behalf of third parties" as contemplated by the Regulations that are made pursuant to the Proceeds ofC rime (Money Laundering) and Terrorist Financing Act. This creates very onerous record keeping obligations for Scotiabank, which Scotiabank is not prepared to undertake. Nor is Scotiabank prepared to bear the regulatory and reputational risks that the Applicants' Scotiabank accounts could be used by unscrupulous individuals to launder money or finance terrorist activity. (v) the Applicants no longer qualify as a small business, and, based on the information gathered during the investigation by Scotiabank, would not have been accepted as a commercial customer of Scotiabank; and (vi) the rules of the Canadian Payments Association (the "CPA") and, in particular, Rule E2, prohibit Scotiabank from clearing items in circumstances where the banking customer's authentication information, such as user identification and password, have been made available to the payee, which is the case for all transactions processed by the Applicants.

- 7 -Thus, Scotiabank terminated the accounts of the Applicants for valid and legitimate business, regulatory policy and legal reasons. (c) Applicants' Money Transfer Methods Breach Bank Security 9. Prior to the termination of the Applicants' banking services by Scotiabank, the Applicants effected the transfer of money from bank customers' accounts in two ways. The first was through Scotiabank' s Bill Payment system. The second was through the use of e-mail money transfers ("EMTs"). For both methods, banking customers are required to breach their Cardholder Agreement with Scotiabank by disclosing their confidential bank card number and Internet banking password. Through both methods, the banking customer is able to remain anonymous with respect to the fact that they are transferring money to an off-shore on-line casino. Their bank statement would simply show that they had transferred money to "GPay" either by way of the Bill Payment system or through an EMT. (i) The Bill Payment Method of Transfer 10. Using the first method, Scotiabank customers are required to provide their confidential bankcard number and on-line banking password to UseMyBank. The Applicants then enter into the customer's Scotiabank account as ift hey were the customer and cause money to be transferred from the customer's Scotiabank account to GPay as a bill payee. 11. The Applicants then notify the "merchant", most often an offshore Internet casino, or the casino's management company, that the money has been transferred from the banking customer's account, which in turn allows the banking customer to gamble online almost immediately. All of this occurs before the Applicants have actually received the money through the bill payee system. Because they themselves have actually effected the transaction, the Applicants have certainty that

- 8 ­the money is on its way, and they can therefore notify the on-line casino to permit the banking customer to gambling. 12. As with all bill payees, money that is directed to the bill payee on a given day is held in a Scotiabank suspension account until 8:30 p.m. each evening. The money is then released from the Scotiabank suspension account and directed to the bill payees' bank accounts. 13. In the case of GPay, the money was directed to the Applicants' accounts at Scotiabank (that had been designated to receive bill payments) or to GPay's account at another Financial Institution. The Applicants later transfer the money to the off-shore Internet casino or the casino's management company, after deducting a fee for the service that they have provided in acting as the transferor of money between the banking customers' bank accounts and the Internet casino. (ii) The EMT Method of Transfer 14. The second method by which money is transferred involves customers who bank at Banks other than Scotiabank. Here too, the banking customers are required by the Applicants to divulge their confidential bank card number and Internet banking password. 15. The Applicants then enter the customer's Internet banking site and cause money to be e-mailed to one of the Scotiabank MoneyM aster accounts held by the Applicants. 16. Once the Applicants know that the money has been emailed from the banking customers' accounts, they notify the Internet casino (or the casino's management company) that the transfer has been made, so that the banking customers can then gamble online. 17. At some later point, the Applicants would accept the email money transfers into one of their 100+ Scotiabank accounts. Thereafter, at certain intervals, they would withdraw monies from their Scotiabank accounts and deposit these monies in their account at another Canadian financial

- 9 -institution. From these accounts, the Applicants would transfer money to the off-shore casinos or their management companies, after taking a deduction for the service that the Applicants provided in acting as the transferor of monies between the banking customer and the off-shore Internet casino. (d) Termination of Banking Relationship with Applicants 18. The business enterprise of the Applicants is one for which Scotiabank is not prepared to allow its accounts and services to be used. Scotiabank terminated its services to the Applicants due to legitimate legal, regulatory, business and reputational concerns, which have nothing to do with competition. Most importantly, as noted in Justice Simpson's Reasons for Previous Order, dated November 14, 2005 granting leave to apply under section 75 of the Competition Act, at para. 34: "34. There is no doubt that the vast majority ofP urchasers who use the Applicants' Business are paving amounts owed to offshore internet casinos. I have reviewed sections 202 and 207 oft he Criminal Code, R.S. 1985, c. C-46, and have concluded that paragraph 202(1 )(e) could make it an otfence for a person in Canada to make an agreement on the internet as a prelude to gambling at an offshore internet casino ... " [emphasis added]

19. Scotiabank has serious and valid concerns about the legality of the activities of the "vast majority" oft he users of the service provided by the Applicants. It is not willing to allow its facilities to be used for activities that could be illegal. The association of the Scotiabank brand with the activities of the Applicants could be interpreted by Scotiabank customers as an endorsement of the Applicants' service or suggest legitimization offshore on-line gambling. 20. Moreover, Scotiabank is concerned that banking customers who use the Applicants' services are disclosing their confidential Internet bank password to the Applicants. This poses security risks for the banking customers, and the banking system, in that either a rogue employee or a computer hacker could gain access to the Applicants' computer files and therefore access to the banking

- 10 -customers' accounts. Not only does this pose a risk for Scotiabank's customers, it also poses an unacceptable reputational risk for Scotiabank. 21. By letters dated May 11, 2005 Scotiabank exercised its contractual right to terminate its banking relationship with the Applicants on 30 days notice. 22. Because of outstanding proceedings in Alberta in which the Applicants sought an injunction against Scotiabank, the Applicants' accounts were not closed until September, 2005 when the Alberta Court of Queen's Bench dismissed the Applicants' injunction motion. 23. As a result of the investigations undertaken in 2005, Scotiabank's decision to terminate related solely to the manner in which the Applicants were conducting their business as discussed in the preceding paragraphs. 24. Scotiabank categorically denies that its decision to terminate the Applicants' banking services was intended to eliminate GP A Y as a competitor oflnterac Online as alleged in paragraph 31 of the Amended Notice of Application. 25. Scotiabank denies that there has been a refusal to supply a product within the meaning of section 75 of the Competition Act. Rather, Scotiabank submits that termination of the Applicants' accounts was based solely on legitimate business, regulatory and legal concerns, and wholly unrelated to any matters relating to competition. II. THEFACTS (a) The Opening of Accounts by the Applicants 26. In August 1999, Raymond Grace approached the Scotiabank branch located in Sherwood Park, Alberta to establish a small business banking relationship with respect to his company B-Filer Inc., carrying on business as GPay. In the Application for Business Banking Services signed by Mr.

- 11 -Grace dated August 6, 1999, he described GPay as a "financial collection" business, with annual sales/revenue of $240,000 per year. The company was identified as having three employees. 27. After opening the single account for GPay in August 1999, no further accounts were opened until April 2004. Between April 2004 and March, 2005, Mr. Grace caused 108 accounts to be opened in the name of GPay, NPay, and B-Filer. 28. Most of the bank accounts were opened by Mr. Grace through utilization of Scotiabank' s telephone banking system during a two week period in February and March 2005, after the small business manager at the branch told Mr. Grace that his business exceeded the small business criteria and that no further accounts could be opened at the branch for the Applicants. 29. Whenever someone opens an account through telephone banking, the customer is asked: "Will this account be used to conduct business by, or on behalf of, someone other than the named account holder(s)?" Mr. Grace answered these questions in the negative. Scotiabank now knows that these answers were untrue, as described more fully below. 30. The opening of accounts by the Applicants violates Scotiabank policies in a number of respects. 31. It is Scotiabank policy that a single small business owner shall be granted only one primary profile at the Bank regardless of how many corporations he has incorporated to run the same business. The $35 million in anticipated deposits for the 12 months beginning June 1, 2005 far exceed the usual trade terms for small business accounts. 32. Mr. Grace never disclosed to Scotiabank that the true and dominant business of the Applicants is to facilitate on-line gambling transactions with off-shore Internet casinos by Canadians wishing to place bets on-line with off-shore internet casinos. As a matter ofp olicy, Scotiabank does

- 12 ­not knowingly permit its accounts to be used for purposes which Scotiabank considers to be illegal or which expose Scotiabank to unacceptable regulatory or reputational risk. (b) Applicants' Operation Causes Bank Customers to Breach their Agreement with the Bank and Exposes Customers to Fraud

33. One of Scotiabank's paramount obligations is the maintenance of a secure banking system that minimizes the risk of fraud and maintains confidentiality of customer information. High security standards are essential in order to maintain the integrity of the Canadian banking system. Any process which undermines security for Canada's banking customers, undermines the integrity of the Canadian banking system. 34. To require Canadian banking customers to divulge their confidential Internet banking password to UseMyBank, and to allow NPay and GPay to enter into customers' secure Internet banking sites and undertake and perform account transactions as if they were the customer, undermines the security of the customer's account not only with respect to Scotiabank, but with respect to all Banks whose customers are using these services. 35. The Cardholder Agreement between Scotiabank and its customers prohibits customers from disclosing their PINs and passwords. By requiring bank customers to divulge their confidential bankcard numbers and on-line banking passwords, the Applicants are inducing breach of contract between Scotiabank and its banking customers. They are exposing Scotiabank's customers to the possibility of fraud. 36. The Applicants allege that they act as legal agents of Scotiabank customers. Scotiabank is required to know who is conducting transactions through each customer's account. Individuals or entities who have been granted a valid and legally binding Power of Attorney, which has been reviewed and approved by Scotiabank, must meet Scotiabank's "know your customer" guidelines. The person holding the Power of Attorney is able to access the grantor's account(s) by way of a

- 13 -ScotiaCard and a electronic signature assigned to the Attorney. The Attorney may not use the grantor's card and electronic signature. (c) GPay Cannot meet Scotiabank's "Usual Trade Terms" with respect to Business Accounts

(i) EMTs 37. Contrary to the Applicants' allegations at paragraph 15.10 of the Amended Notice of Application, the Applicants were and remain unable to meet Scotiabanks' usual trade terms for the provision of the services sought in this Application. 38. Mr. Grace is operating his companies using Scotiabank small businesses accounts in a manner which is contrary to Scotiabank policies for businesses which have grown as large as the Applicants'. In particular, electronic banking for business is designed for small business customers with low transaction and deposit volumes, whose annual sales do not exceed $5 million. The total permitted deposit volume for small business accounts is $400,000 per month, or a maximum of $5 million per year. 39. According to the Applicants, only Scotiabank and the Royal Bank permit e-mail transfer for small business customers. Both banks impose maximum deposit limits on EMTs for business customers. 40. The Applicants' volume of business takes them well-beyond Scotiabank's criteria for qualification as a small business. If the Applicants were to qualify at all, it would have to be as a commercial banking customer of Scotiabank. None of the banks, including Scotiabank and Royal Bank, permit commercial banking customers to deposit EMTs into their commercial banking accounts. This is a necessary business decision made because of the enhanced risks associated with dealing with the larger volumes and numbers oft ransactions associated with commercial (rather than small business) banking customers.

- 14 -41. Because of the manner in which the Applicants conduct their business, as fully realized during the investigations undertaken in early 2005, the Applicants would never have qualified as commercial banking customers of Scotiabank. Businesses applying for commercial banking status at Scotiabank are subjected to rigorous due diligence. The Applicants would have been classified as a "restricted business" because of the manner in which they conduct business (including the fact that they act as transferors of money), and their application for commercial banking services would have been denied. 42. Businesses that qualify as "small businesses", as defined above, are permitted to accept email money transfers into their Scotiabank accounts. Small businesses can only accept a maximum of $300,000 in email money transfer deposits per month. This limit is set by Certapay, a division of Acxsys Corporation, to reduce the possibility of fraud. Hence, the e-mail money transfers into the Applicants' Scotiabank accounts were limited to a total monthly annual maximum of $300,000. Based on the Applicants' growth, their anticipated EMT transfers into their Scotiabank accounts far exceeds the $300,000.00 monthly limits set by Acxsys Corporation. 43. Mr. Grace asserts that he deposited almost $10 million in his Scotiabank accounts between June 1, 2004 and May 31, 2005. He also asserts that there will be a 341 % increase in the volume of deposits in the next 12 month period. This amounts to an anticipated flow of funds through the Scotiabank accounts of almost $35 million. 44. Mr. Grace admits that he is running a single business enterprise under the names of GPay, B-Filer, and NPay. Customers cannot circumvent the Small Business Banking Terms by using multiple corporations that in reality are engaged in the same business. 45. As admitted by the Applicants at paragraph 8.14 of the Amended Notice of Application, GP AY 's volume significantly exceeds the deposit limits described above.

- 15 -(ii) Bill Payment System 46. Scotiabank's Bill Payment system is intended to facilitate the ease with which Scotiabank customers can pay invoices rendered, by companies that have provided goods or services to the public. The Applicants are not selling a good or service, but are acting as a conduit for money which is transferred from customers' accounts to the Applicants' accounts, with the end recipient almost always being an on-line casino or its management company. 4 7. As admitted in paragraphs 8.21 and 8.22 of the Amended Notice of Application, well before Scotiabank terminated GPay's biller services, each of the Canadian Imperial Bank of Commerce ("CIBC") the Toronto Dominion Bank ("TD"), and the Alberta Treasury Branches stopped providing GPay with biller services in 2003 because of security concerns about the manner in which the Applicants conduct their business. 48. As a result of the termination by CIBC, TD, and Alberta Treasury, the Applicants complained to the Competition Bureau and alleged a breach of Sections 75 and 79 of the Competition Act. The Bureau investigated and determined that there was no refusal to deal on the part of any of these banks. Instead, the Bureau concluded that each of the banks had legitimate business reasons for terminating GPay's biller services. 49. The Applicants' inability to obtain the products claimed in these proceedings, namely, Bill Payment services and EMTs, is not due to lack of competition as alleged in paragraph 8.2 of the Amended Notice of Application. Rather, it is due to the nature of the Applicants' business (i.e., the provision of services to customers engaging in illegal gambling that require disclosure of banking customers' passwords) and the violation of many valid and legitimate policies of Scotiabank.