April 2, 2019

Private lending

April 2, 2019

While most private loans are legitimate, there is an increased risk of illegal activity with them. Private lending transactions are one means by which proceeds of crime can be laundered. Lawyers who are retained to draft loan or security documents, to register the same, or to assist with the advance or recovery of funds should take additional steps to protect themselves and maintain public trust in the profession. These steps include asking some additional questions that must answered satisfactorily, ensuring that they know their clients, and knowing the subject matter of their retainers.

Lawyers should be on the lookout for some or all of the following factors before they act or continue to provide services:

  • There is no clear or plausible reason why the borrower is not borrowing from a commercial lender.
  • The amount or fact of the loan seems inconsistent with the client’s circumstances.
  • Third parties are involved without apparent good reason.
  • The funds advanced are in cash and the parties are unwilling or unable to provide basic details or documentation concerning the loan, including its source.
  • The funds come from, go to, or are to be repaid offshore or to a jurisdiction that is known to be secretive or restrictive.
  • There is no security for a large loan or the security is a subsequent mortgage or charge on a fully or near-fully encumbered property.
  • The actual or agreed-to repayment period is unusually short.
  • The interest rate exceeds the criminal rate or is above market.
  • The lawyer is retained after the funds have been advanced.
  • The lawyer is not experienced in the relevant area of law, or the client has been refused counsel or changed counsel recently or several times without apparent good reason.
  • Any party to the transaction has an alleged or known history of drug trafficking, money laundering, civil forfeiture, loansharking, fraud, high-stakes gambling or similar activity.
  • The client is unusually familiar with or resistant to client identification and verification requirements.

The Law Society Rules (including Part 3, Division 11 – Client Identification and Verification) and the Code of Professional Conduct for British Columbia (including rule 3.2-7 and commentary) establish lawyers’ obligations when dealing with private loans.

Case decisions, including Law Society of BC v. Elias, (1996) 26 B.C.L.R. (3d) 359 (C.A.), Re McCandless, 2010 LSBC 3, Re Gurney, 2017 LSBC 15, have applied the principle that, where the circumstances of a transaction are such that a lawyer should reasonably be suspicious that the matter involves illegal activity under the laws of Canada or another country, it is professional misconduct to become involved until inquiries have been made to satisfy the lawyer on an objective test that the transaction is legitimate.

If you are concerned about a proposed transaction, ensure you perform your due diligence at the outset and do not hesitate to contact a Practice Advisor for advice.