April 10, 2018

Lawyers are gatekeepers

April 10, 2018

The Law Society takes its role in combatting money laundering and other illegal activity very seriously. A recent decision involving a member highlights the repercussions for lawyers if they allow their trust accounts to be used without making reasonable inquiries in suspicious circumstances.

LSBC v. Gurney

Between May and November 2013, Donald Franklin Gurney used his trust account to receive and disburse a total of $25,845,489.87 on behalf of a single “client.” He did so without making reasonable inquiries about the circumstances related to the funds, including the subject matter and objectives of his retainer, and without providing any substantial legal services in connection with the trust matters. Gurney was paid 0.1% ($25,845) of the funds he handled.

The Law Society identified the transactions during a routine trust account audit, conducted an investigation and issued a citation.

In its decision (2017 LSBC 15), the hearing panel noted that lawyers have an important gatekeeper function with regard to trust accounts. This function arises in part from the fact that transactions that occur through a lawyer’s trust account in the course of legal services may be protected by solicitor-client privilege. The purpose of the privilege is to allow open and candid communications between a lawyer and client. The purpose of the privilege is not to facilitate suspicious transactions.

The gatekeeper function requires a lawyer to use trust accounts for legitimate commercial purposes that are connected to the lawyer’s professional functions. Lawyers have a positive duty to make reasonable inquiries prior to becoming involved in a transaction. The hearing panel noted earlier Law Society decisions that stated that where the circumstances of a proposed transaction are such that a lawyer should reasonably be suspicious that there are illegal activities involved under Canadian law or laws of other jurisdictions, it is professional misconduct to become involved until such time as inquiries satisfy the lawyer on an objective test that the transaction is legitimate. The Law Society need not prove illegality to prove misconduct.

In this case, the hearing panel found that Gurney committed professional misconduct by failing to make reasonable inquiries in the face of “a sea of red flags” before allowing his trust account to be used.

There were a number of factors that made the transactions objectively suspicious, including:

  • Gurney had no previous dealings with any of the parties to the transactions;
  • Gurney’s practice did not involve unsecured commercial lending, as ostensibly took place in this case;
  • all of the transactions dealt with offshore lenders to a new client;
  • no legal advice was sought from Gurney;
  • the transactions involved millions of dollars and did not require the use of a lawyer’s trust account to complete;
  • Gurney’s fee was based on a percentage of the funds received and disbursed through his trust account.

The hearing panel ordered Gurney to serve a six-month suspension from the practice of law and to pay to the Law Society $25,845 as a disgorgement of the amount he was paid in order that he not benefit financially from his misconduct (2017 LSBC 32).

The Law Society’s auditors actively look for suspicious trust account activity when conducting compliance audits. If you are concerned about a proposed transaction, ensure you perform your due diligence at the outset and do not hesitate to contact a Law Society Practice Advisor for advice.