PRACTICE WATCH, by Barbara Buchanan, Practice Advisor
Don’t be taken advantage of by dishonest clients – ethical guidelines and rules
Lawyers are regularly confronted by potential scams and dishonest clients and have had to learn to be “street smart.”They are an attractive target for criminals, by virtue of having trust accounts and duties of confidentiality and undivided loyalty to clients.
What are the Law Society’s ethical guidelines and rules in relation to clients trying to use lawyers for dishonest, fraudulent or criminal purposes? See the following on the Law Society website:
- The Annotated Professional Conduct Handbook
- The Code of Professional Conduct for British Columbia (non-conflicts portion)
- Law Society Rules 3.51.1 and 3-61.1 (cash transactions)
- Law Society Rules 3-91 to 3-102 (client ID and verification)
The Annotated Professional Conduct Handbook
The Law Society has a serious commitment to maintain high ethical standards for lawyers. This is reflected in the guidelines set out in the Professional Conduct Handbook.
The starting place is the Canons of Legal Ethics in Chapter 1. The Canons were first adopted in BC in 1921 and set out some of the overriding principles of ethical conduct related to integrity, such as:
- A lawyer owes a duty to the state, to maintain its integrity and its law. A lawyer should not aid, counsel, or assist any person to act in any way contrary to the law.
- A lawyer should endeavour by all fair and honourable means to obtain for a client the benefit of any and every remedy and defence which is authorized by law. The lawyer must, however, steadfastly bear in mind that this great trust is to be performed within and not without the bounds of the law. The office of the lawyer does not permit, much less demand, for any client, violation of law or any manner of fraud or chicanery. No client has the right to demand that the lawyer be illiberal or do anything repugnant to the lawyer’s own sense of honour and propriety.
- No client is entitled to receive, nor should the lawyer render any service or advice involving disloyalty to the state, or disrespect for the judicial office, or the corruption of any persons exercising a public or private trust, or deception or betrayal of the public.
- All lawyers should bear in mind that they can maintain the high traditions of the profession by steadfastly adhering to the time-honoured virtues of probity, integrity, honesty and dignity.
Rule 6 of Chapter 4 is more specifically directed at dishonesty, crime or fraud:
6. A lawyer must not engage in any activity that the lawyer knows or ought to know assists in or encourages any dishonesty, crime or fraud, including a fraudulent conveyance, preference or settlement.3
The footnote to Rule 6 states:
3. A lawyer has a duty to be on guard against becoming the tool or dupe of an unscrupulous client or of persons associated with such a client and, in some circumstances, may have a duty to make inquiries. For example, a lawyer should make inquiries of a client who:
(a) seeks the use of the lawyer’s trust account without requiring any substantial legal services from the lawyer in connection with the trust matters, or
(b) promises unrealistic returns on their investment to third parties who have placed money in trust with the lawyer or have been invited to do so.
Various other rules exist regarding integrity. For example, Rule 1 of Chapter 2 provides that a lawyer must not, in private life, extra-professional activities or professional practice, engage in dishonourable or questionable conduct that casts doubt on the lawyer’s professional integrity or competence or reflects adversely on the integrity of the legal profession or the administration of justice. Rule 1 of Chapter 6 provides that, as a general principle, a lawyer has a duty to give undivided loyalty to every client. Subrule 1(b) of Chapter 8 prohibits a lawyer from knowingly assisting the client to do anything or acquiesce in the client doing anything dishonest or dishonourable.
The current version of the Professional Conduct Handbook was published in 1993, and is in the process of being replaced by an updated and revised set of guidelines contained in The Code of Professional Conduct for British Columbia (the BC Code); however, most of the rules in the Handbook have counterparts in the BC Code.
The Code of Professional Conduct for British Columbia
The Federation of Law Societies of Canada recommended to individual law societies a Model Code of Professional Conduct to be used across Canada. In April 2011, after consultation with the profession, the Benchers adopted the non-conflicts portion of the BC Code based on the Model Code, with an effective date to be determined. A draft of the conflicts portion of the BC Code is available on the website, and lawyers are encouraged to review it and provide feedback.
In the BC Code, unless the context indicates otherwise, a “client” includes a client of a lawyer’s firm, whether or not the lawyer handles the client’s work, and may include a person who reasonably believes that a lawyer-client relationship exists, whether or not that is the case at law.
The Canons of Legal Ethics have been preserved in Chapter 1 of the BC Code. Rule 1.06(1) is similar to Rule 1 of Chapter 2 (Integrity) in the Professional Conduct Handbook, and states:
1.06(1) A lawyer has a duty to carry on the practice of law and discharge all responsibilities to clients, tribunals, the public and other members of the profession honourably and with integrity.
Integrity is the fundamental quality of any person who seeks to practise as a member of the legal profession. If a client has any doubt about his or her lawyer’s trustworthiness, the essential element in the true lawyer-client relationship will be missing. If integrity is lacking, the lawyer’s usefulness to the client and reputation within the profession will be destroyed, regardless of how competent the lawyer may be.
Public confidence in the administration of justice and in the legal profession may be eroded by a lawyer’s irresponsible conduct. Accordingly, a lawyer’s conduct should reflect favourably on the legal profession, inspire the confidence, respect and trust of clients and of the community, and avoid even the appearance of impropriety.
Dishonourable or questionable conduct on the part of a lawyer in either private life or professional practice will reflect adversely upon the integrity of the profession and the administration of justice. Whether within or outside the professional sphere, if the conduct is such that knowledge of it would be likely to impair a client’s trust in the lawyer, the Society may be justified in taking disciplinary action.
Generally, however, the Society will not be concerned with the purely private or extra-professional activities of a lawyer that do not bring into question the lawyer’s professional integrity.
Rule 2.02(7) of the BC Code deals with dishonesty and fraud by a client:
2.02(7) When acting for a client, a lawyer must not engage in any activity that the lawyer knows or ought to know assists in or encourages any dishonesty, crime of fraud, including a fraudulent conveyance, preference or settlement.
Commentary (in part)
A lawyer should be on guard against becoming the tool or dupe of an unscrupulous client, or of others, whether or not associated with the unscrupulous client.
A lawyer should be alert to and avoid unwittingly becoming involved with a client engaged in criminal activities such as mortgage fraud or money laundering. Vigilance is required because the means for these, and other criminal activities, may be transactions for which lawyers commonly provide services such as: establishing, purchasing or selling business entities; arranging financing for the purchase or sale or operation of business entities; arranging financing for the purchase or sale of business assets; and purchasing and selling real estate.
Before accepting a retainer, or during a retainer, if a lawyer has suspicions or doubts about whether he or she might be assisting a client in any dishonesty, crime or fraud, the lawyer should make reasonable inquiries to obtain information about the client and about the subject matter and objectives of the retainer. These should include making reasonable attempts to verify the legal or beneficial ownership of property and business entities and who has the control of business entities, and to clarify the nature and purpose of a complex or unusual transaction where the nature and purpose are not clear.
The lawyer should also make inquiries of a client who:
(a) seeks the use of the lawyer’s trust account without requiring any substantial legal services from the lawyer in connection with the trust matter, or
(b) promises unrealistic returns on their investment to third parties who have placed money in trust with the lawyer or have been invited to do so.
The lawyer should make a record of the results of these inquiries.
Rule 2.02(8) contains the following additional provisions with regard to clients who are organizations:
2.02(8) A lawyer who is employed or retained by an organization to act in a matter in which the lawyer knows or ought to know that the organization has acted, is acting or intends to act dishonestly, criminally or fraudulently, must do the following, in addition to his or her obligations under subrule (7):
(a) advise the person from whom the lawyer takes instructions and the chief legal officer, or both the chief legal officer and the chief executive officer, that the proposed conduct is, was or would be dishonest, criminal or fraudulent and should be stopped;
(b) if necessary because the person from whom the lawyer takes instructions, the chief legal officer or the chief executive officer refuses to cause the proposed conduct to be stopped, advise progressively the next highest persons or groups, including ultimately, the board of directors, the board of trustees, or the appropriate committee of the board, that the proposed conduct was, is or would be dishonest, criminal or fraudulent and should be stopped; and
(c) if the organization, despite the lawyer’s advice, continues with or intends to pursue the proposed wrongful conduct, withdraw from acting in the matter in accordance with Rule 2.07.
A model rule on cash transactions was the Federation’s first anti-money laundering initiative, intended to ensure that lawyers were not unwittingly involved in money laundering. It was also intended to avoid government intervention that could threaten solicitor-client privilege and confidentially or the independence of the legal profession. All 14 Canadian law societies adopted cash transaction rules based on the model rule.
The Law Society of BC was the first Canadian law society to adopt a limit on trust funds that lawyers could receive in cash. Rule 3-51.1 — the “no cash rule” — came into effect on May 7, 2004. At that time, the rule prohibited lawyers from receiving $10,000 or more in cash in the course of a single transaction, subject to certain exceptions. The rule was amended in June 2005 to reduce the threshold amount to $7,500, which brought BC into line with the model rule. Rule 3-61.1 requires lawyers to make a detailed record of cash transactions.
Lawyers are encouraged to ensure that they and their staff are familiar with the rules regarding cash and to establish office procedures, including what to do if a client unexpectedly shows up at the office with cash and how to make a refund. Rule 3-51.1 has been the subject of discipline decisions.
Rules 3-91 to 3-102 – client identification and verification
The Federation’s second anti-money laundering initiative was the model rule on client identification and verification. These rules are now in force in all Canadian provinces and territories.
The Law Society of BC’s client identification and verification rules (Rules 3-91 to 3-102) are designed to codify the steps that prudent lawyers must take in the normal course to identify and verify the identity of their clients. Lawyers are required to comply with the rules on all new matters commenced on or after December 31, 2008, regardless of whether the client is an existing or new client.
Wide definition of “client” and “financial transaction
”With few exceptions, lawyers must take reasonable steps to identify their clients (Rule 3-93). Lawyers are encouraged to pay close attention to all of the definitions in Rule 3-91. It’s important to note that there is a wider definition of “client” in these rules than in common usage. Rule 3-91 provides that a “client” includes another party that the lawyer’s client represents or on whose behalf the client otherwise acts in relation to obtaining legal services from the lawyer. Further, in Rules 3-95 to 3-98, an individual who instructs a lawyer on behalf of a client in relation to a “financial transaction” is also included as a client.
A “financial transaction” means the receipt, payment or transfer of money on behalf of a client or giving instructions on behalf of a client in respect of the receipt, payment or transfer of money (Rule 3-91). It’s important to understand that a financial transaction can take place without money being deposited to a trust account. If there is a financial transaction, and no exception applies, a lawyer must take reasonable steps to verify the client’s identity, even if no money is deposited in trust.
“Identification” and “verification” are different
Identification and verification of identity are two distinct steps. “Identification” refers to the basic information that lawyers need to get from clients to establish their identity (Rule 3-93). This is simple and may be accomplished by telephone and email. “Verification” refers to the information that lawyers need to confirm that their clients are who they say they are (Rule 3-95). This requires physically meeting with an individual to verify his or her identity. Verification of identity is required, with few exceptions, when a “financial transaction” exists.
When a lawyer acts for a client that is an “organization,” not only must the lawyer make reasonable efforts to obtain information about the organization, the lawyer also must obtain information about the individual instructing the lawyer on behalf of the organization. If there is a “financial transaction,” the lawyer must take reasonable steps not only to verify the organization’s identity, but to verify the individual instructing the lawyer on behalf of the organization.
Rule 3-97 applies when a lawyer provides legal services in respect of a financial transaction for a client who is an individual not physically present before the lawyer. If the lawyer cannot physically meet with the individual to verify his or her identity, another qualified person must physically meet with the individual to do so. If the client is in Canada, the lawyer must obtain an attestation from a commissioner of oaths for a jurisdiction in Canada, or a guarantor engaged in one of the permitted occupations in Canada listed in Rule 3-97(4). The lawyer’s responsibilities may be fulfilled by other members of the lawyer’s firm in any Canadian jurisdiction.
If the client is outside of Canada, the lawyer must retain an agent to physically meet with an individual to verify identity. There must be a written agreement or arrangement between the lawyer and the agent (Rule 3-97(5) and (6)). It is not sufficient for a client to send the lawyer by fax or email a scan of the individual’s passport, driver’s licence or other form of identification.
The timing of verification is important. The lawyer must verify the identity of an individual, including an individual who is giving instructions on behalf of an organization, at the time the lawyer provides legal services in respect of the financial transaction (Rule 3-98). Explaining this requirement to a potential new client outside of Canada who may be a fraudster may be enough to make them quickly disappear.
In the case of an organization, verification must be completed within 60 days of engaging in the financial transaction (Rule 3-99); however, as explained above, verification of the identity of the individual who gives instructions on behalf of the organization must take place earlier.
A detailed Client Identification and Verification Procedure Checklist is available in the Practice Checklists Manual.
If, in the course of obtaining client identification or verification information, a lawyer knows or ought to know that he or she is or would be assisting a client in fraud or other illegal conduct, the lawyer must withdraw from representation of the client (Rule 3-102). This is consistent with the provisions of Rule 6, Chapter 4 of the Professional Conduct Handbook and Rules 2.02(7) and (8) of the upcoming BC Code.
Record keeping and retention
All documents obtained to identify and verify the identity of any individual or organization must be retained as long as the lawyer acts for the client and for at least six years following completion of the work (Rule 3-100).
Following the ethical guidelines, the no cash rule and the client identification and verification rules can help keep lawyers safe from being taken advantage of by dishonest individuals. Some other steps that may assist lawyers include:
- modifying file opening procedures to include a requirement to comply with the cash transaction rules and the client identification and verification rules (the “rules”);
- using a client identification and verification procedure checklist. If there will be a “financial transaction,” lawyers should consider at the beginning of the retainer who will physically meet with the client to verify their identity. This is particularly important if the client is present elsewhere in Canada or outside of Canada. Lawyers should plan ahead to determine who can act as an agent outside of Canada;
- being cautious about anyone who contacts them via the Internet. They should ask why they chose them. Does it make sense that a stranger from England, Hong Kong, Japan or the U.S. would use them to collect money for a loan gone bad, for money outstanding on a collaborative divorce agreement, unpaid invoices, or act on a conveyance?
- using independent resources (e.g. reverse telephone directories) to cross-check names, addresses and telephone numbers to confirm information provided to them;
- providing information about the rules to new and existing clients in retainer letters and on the law firm website;
- modifying trust accounting procedures to require confirmation of rule compliance before paying funds out of trust;
- keeping a close watch on their trust account and understanding the law firm’s financial institution’s policies and procedures. Before paying out on a negotiable instrument, lawyers should ask their financial institutions to confirm that the funds have cleared. Certifying the cheque is another option. If lawyers receive funds by electronic transfer, they should determine whether the transfer occurred via an irrevocable deposit or a revocable deposit;
- appointing someone in the law firm to ensure that lawyers and relevant staff keep up to date with Law Society rule changes, fraud alerts and practice advice. They should familiarize themselves with the common scams that target lawyers;
- contacting a Law Society practice advisor for confidential ethics advice.
Contact Practice Advisor Barbara Buchanan at 604.697.5816 or email@example.com for confidential advice or more information regarding any items in Practice Watch.