Lawyers to report transactions over $10,000 once Bill C-22 takes effect
Your Practice Advisor
Felicia S. Folk, the Law Society's Practice Advisor, is available to discuss your practice concerns. All communications between Ms. Folk and lawyers are strictly confidential, except in cases of trust funds shortages.
You are invited to call her at (604) 669-2533 or toll-free in B.C. 1-800-903-
5300 at any time, or write to her at the Law Society office.
Lawyers handling large cash, international or "suspicious" transactions for clients will soon be required to make detailed reports to the federal government or face criminal charges. The new Proceeds of Crime (Money Laundering) Act, Bill C-22, will have a significant impact on the practice of law.
Money laundering is the process by which "dirty money" generated by criminal activities is converted into assets that cannot be easily traced to their illegal origins. Any access point to place cash into the financial system is a risk point for laundering purposes.
Lawyers, among others such as accountants, insurance companies, casinos, securities dealers, realtors, banks and other institutions taking deposits, will be required to report, not merely record, any transactions that exceed $10,000 in cash or are "suspicious" to FINTRAC, the new Financial Transactions and Reports Analysis Centre of Canada. International electronic transfers above $10,000 must also be reported.
Bill C-22 was given Royal Assent in June of 2000, but only part of the new legislation is in force. Proclamation of the balance of the legislation is expected in the fall of 2001, once new regulations take effect. Until then, the 1991 Money Laundering Act and its regulations continue in force.
The 1991 Act requires lawyers to keep records of any cash deposit of $10,000 or more from one source, unless the money is for fees or bail. The legislation, which applies to various businesses and professions where cash is received for payment or transfer to a third party, requires these businesses and persons to keep a "large cash transaction record" and to retain the records for five years, as well as take specific steps to verify the identity of clients in certain situations. Failure to comply with the Act or regulations is punishable by fines or imprisonment.
The new legislation will require much more from lawyers than recording such transactions. There are two circumstances of which to beware.
First, where the cash amount received exceeds $10,000, a lawyer will be required to make a detailed report to FINTRAC, providing the client's name, address and occupation, a description of the currency, and information about the source of the funds.
Second, a lawyer will be required to report to FINTRAC "every financial transaction . . . in respect of which there are reasonable grounds to suspect that the transaction is related to the commission of a money laundering offence." This obligation does not depend on a monetary threshold. Nor is there an exception for money intended for the payment of fees or bail.
What are suspicious circumstances?
Lawyers may find it difficult to determine what should be defined as suspicious. On February 17, 2001 FINTRAC published draft guidelines to assist in defining "suspicious transactions." The guidelines include the statement that "while the suspicion standard does not require certainty, there should be some reasonable basis to believe that the transaction is related to money laundering." The guidelines also say that a suspicious transaction may involve several factors that may seem insignificant when taken individually, but when taken together may raise suspicion that the transaction is related to the commission of a money laundering offence.
The list of suspicious circumstances includes: client appears to have accounts with several financial institutions in one area; client presents confusing details; client over- justifies or explains the transaction; client makes inquiries that would indicate a desire to avoid reporting; client seems to be wilfully blind to being involved in money laundering activities; client has unusual knowledge of the law in relation to suspicious transaction reporting; client provides vague information; client uses a post office box instead of a home address; the foreign recipient is in an area popular with money launderers.
As well as general indicators, the guidelines include "Industry-Specific Indicators of Suspicious Transactions," For legal counsel, the list of suspicious circumstances, includes: client appears to be living beyond his or her means; client is reluctant to discuss his or her financial affairs; client requests anonymity; client is conducting normal business transactions, but the transactions are not consistent with the nature of his or her employment, profession or business; client seems unconcerned about legal fees on an aborted transaction; client asks you to establish a nominee company or trust for deposits of funds; client offers to pay unusually large fees to get assistance on a transaction involving large sums.
What are the lawyer's ethical duties?
Bill C-22 includes a provision that a lawyer is not required to disclose any communication that is subject to solicitor-client privilege. However, a lawyer may find it difficult to determine whether information received is privileged, or only confidential. The lawyer may have to make a determination on whether privilege has been lost or waived.
A major feature of the new legislation is that, not only will a lawyer be required to report, but will also be prohibited from disclosing the fact of the report to the client. Section 8 of Bill C-22 reads: "No person or entity shall disclose that they have made a report under section 7, or disclose the contents of such a report, with the intent to prejudice a criminal investigation, whether or not a criminal investigation has begun."
Failure to report suspicious transactions is a criminal offence, punishable by imprisonment of up to five years and a fine of up to $2,000,000. Disclosure of having made a report with the intent to prejudice a criminal investigation is punishable by imprisonment of up to two years.
It should also be noted that the legislation allows a lawyer's office to be searched without a warrant.
It appears that some banks have already put into place procedures anticipating the new regulations. Lawyers have informed the Law Society's Practice Advisor that some financial institutions receiving deposits from or on behalf of clients have requested statements of information, including the client's name, address and source of funds. When the new legislation comes into force, lawyers - as depositors - may be required by their banks either to provide such information or sign a statement that a "prescribed financial transaction" is not carried out on behalf of a third party. However, while the old regulations remain in force, lawyers are not yet required to provide this information.
What is the lawyer's ethical duty? Chapter 5, Rule 1 of the Professional Conduct Handbook confirms that a lawyer's duty to hold in strict confidence all information concerning the business and affairs of the client acquired in the course of the professional relationship is subject to the requirements of law. The new legislation means that clients will no longer be able to rely on the lawyer's ethical duty of confidentiality.
Under the old legislation, if a lawyer becomes suspicious about a transaction, he or she would withdraw and maintain the client's confidentiality. Under the new legislation, however, the lawyer would commit a criminal offence if, after declining to act because of concerns that a transaction is suspicious, he or she maintained the client's confidentiality by failing to report.
If you determine that you must report a transaction, you may be in a conflict of interest with the client because you will not only be required to report but will be prohibited from disclosing the fact of the report to the client. The conflict of a lawyer's confidentiality obligation with the Proceeds of Crime (Money Laundering ) Act is apparent, as is the conflict with the duty to disclose to the client all the circumstances that might influence whether the client continues to retain the lawyer (Chapter 1, Rule 3(2) of the Canons in the Professional Conduct Handbook).
It may well be that, as financial institutions, securities dealers and other parts of the financial industry put into place new reporting procedures, lawyers will be asked more frequently to participate in questionable transactions. A surprising number of young lawyers - who fortunately called the Practice Advisor to request advice - have recently received instructions to provide the equivalent of banking services for clients with no apparent accompanying legal services.
There are, however, many legitimate commercial transactions, such as conveyancing, structuring of companies, and purchases and sales of assets and securities, that may be disrupted by this legislation. For example, a lawyer may be in a difficult ethical position if money about which the lawyer becomes suspicious is money that the lawyer has undertaken to pay out. Lawyers will be well advised to warn every potential client with a financial transaction of the obligations under the Money Laundering Act prior to accepting instructions, and to be vigilant about those obligations as early as possible in the retainer.
In order to comply with the legislation, law firms will have to put in place a process to keep necessary records and submit reports. Clients will also be impacted - banks, credit unions, life insurance companies, trust companies, money exchanges and accountants may require advice on their own compliance.
The questions of conflict and confidentiality raised above will be placed on the agenda of the Ethics Committee with a request for some guidelines before the new legislation comes into force, which may be as early as this fall.
The Law Society of B.C. raised the question of Bill C-22 at the recent Federation of Law Societies board meeting and is currently considering what further steps will be taken to address these issues.
In addition to the FINTRAC Guidelines, the draft regulations were published in the Canada Gazette on February 17, 2001 for a 90-day public comment period. The regulations, the guidelines, and information about where to send comments can be found at www.fin.gc.ca/newse01/01-016e.html.