Practice Watch

by Barbara Buchanan, Practice Advisor

Client identification and verification help
Scams, scams and more scams
Title reports — tying up loose ends with lenders
No cash rule — rent and real estate conveyances
Pooled trust accounts
The Top 10 compliance audit exceptions
Lawyers providing indemnities
Further information

Client identification and verification help

Help is on the way for lawyers looking for assistance in implementing the Law Society's client identification and verification rules.


Once the rules have been approved by the Benchers, a client identification and verification

checklist will be available on the Law Society website as part of the Practice Checklists Manual.

Online course

A short online course will be available on the Law Society website to help familiarize you with the new client identification and verification rules.

Frequently Asked Questions

In July 2008, 38 frequently asked questions and answers about the new client identification

and verification rules were posted on the Law Society website. Visit the Practice Support section for important updates to these FAQs.

Scams, scams and more scams

In September, the Law Society issued a Notice to the Profession that a BC law firm fell victim to a sophisticated counterfeit cheque scam. No clients were affected by the scheme; however, the firm suffered a loss. The scheme was similar to the phony collection scam described in the July 2008 issue of Practice Watch and an earlier Notice. This same scam is still making the rounds. Be on the look-out for it or some variation.

The details, including the method of payment (certified cheque, bank draft, money order or even regular cheque), may change as scamsters work to create a ruse that seems entirely plausible. All these scams, however, involve a lawyer depositing funds into trust pursuant to a banking instrument that appears legitimate, and subsequently paying those funds, or a portion of them, out of trust.

The phony debt collection scheme

The fraudster, a new "client" located outside of Canada, requests your assistance to recover a debt from a Canadian company in another province. You receive correspondence

that appears legitimate. The correspondence lists a long distance telephone number and maybe even a "1-800" number. You contact the client's office and the telephone is answered professionally. You ask to be put through to various departments (e.g. the accounting department) and someone answers the extension.

You issue a demand letter to the "debtor" resulting in payment of some or all of the amount of the demand by way of a banking instrument (e.g. certified cheque or bank draft), made out to your firm in trust. The instrument looks real and, assuming that it is, you deposit it into your trust account and transfer the funds to your "client." You later discover that the very authentic looking instrument was phony.

To best avoid the risk, contact your banker and ask him or her to contact the issuing bank to verify the instrument's authenticity and confirm to you when it is safe to pay out. You cannot assume that the telephone numbers that appear on the payment instruments are legitimate. Keep a record of the advice given.

Other scams

Over the past few years, the Law Society has described a number of identity scams, often in the real estate context. Typically these scams are attempted in situations where no realtor is involved. Another common scam is value fraud. Typically the fraudster agrees to purchase real property and flips it to a complicit purchaser at an artificially inflated price. This step positions the purchaser to deceive a mortgage lender as to the true value of the property when obtaining a loan. In Ontario, phony commercial loans transactions have surfaced and may make their way to BC.

If you think you have been contacted by a fraudster, please contact the Law Society's Practice Advice Department.

Title Reports — Tying up loose ends with lenders

When acting for a financial institution client in connection with the registration of a mortgage, you agree to provide a form of title report to the lender. Some lenders have complained to the Law Society that lawyers are not providing this information in a timely manner.

Sometimes the lawyer is waiting for a mortgage discharge before ordering a State of Title Certificate and that is the reason forthe delay. However, the fact that you are waiting does not excuse you from your reporting obligations.

Communicate with your client about what is happening. Review the instructions that you typically receive from the lender and remind your staff to bring any warning letters to your attention.

According to Chapter 3, Rule 3 of the Professional Conduct Handbook, a lawyer must serve each client in a conscientious, diligent and efficient manner so as to provide a quality of service at least equal to that which would be expected of a competent lawyer in a similar situation. Rule 3 sets out a number of ways that a lawyer's service may be measured, e.g. keeping the client reasonably informed.

No cash rule — rent and real estate conveyances

A few cautions about the "no cash rule" (Rule 3-51.1) in relation to collecting rents and conveyances of real property:


If you are receiving monthly rent on behalf of a client from your client's tenant, note that you must not receive an aggregate amount in cash of $7,500 or more in respect of any one client matter or transaction.

Accordingly, if you accept cash and deposit it in your trust account, you could quickly find yourself in violation of the no-cash rule. You may deposit into trust cash that in the aggregate amounts to less than $7,500 for the client matter. For example, if the tenant's monthly rent is $1,000 and you make monthly cash deposits, you would have deposited $8,000 in the aggregate by the eighth month. This is not permitted.

Real estate conveyances

Likewise, if you are acting for a client who is purchasing real property and the client wants to provide you with cash as part payment of the purchase price, you must not receive an aggregate amount in cash of $7,500 or more. For example, if your client wants to provide you with $25,000 in cash and the rest of the purchase money is to be paid by way of mortgage funds, you should not accept the $25,000 cash payment.

Make sure that your clients and your staff are aware that you cannot receive cash in amounts of $7,500 or greater. To be even safer, you could have a policy of not accepting cash at all.

Pooled trust accounts
Receiving cancelled cheques and bank statements in electronic form

Rule 3-52(1)(c) requires lawyers to periodically receive cancelled cheques and bank statements for their pooled trust account(s). These cancelled trust cheques and bank statements may be received or retained by lawyers in an acceptable electronic form (Rule 3-52 (1.1)).

Some financial institutions have advised lawyers that they will no longer provide them with their actual cancelled trust cheques. For example, a bank has advised its lawyer customers that it will provide them with paper copies of cheque images and electronic cheque images with their paper bank statements. The images will show both the front and back of each cheque. Is this acceptable?

The Law Society's Trust Assurance Department has determined the following acceptable electronic forms for cancelled trust cheques:

Acceptable electronic form for cancelled trust cheques
  1. A CD-Rom of the cheque images, including the front and back of each cheque, provided by the bank to the lawyer on a monthly basis with the monthly bank statement.
  2. Scanned paper copies of the cheques, including the front and back of each cheque, with the monthly bank statement.
  3. PDF copies of the cheques, including the front and back of each cheque, stored on the law firm's server or on a disk in the law firm's possession.

Cheque images stored on the financial institution's server and available to lawyer customers only through on-line access are not considered to be acceptable electronic form for cancelled trust cheques.

If you are not certain whether or not your financial institution is providing cancelled trust cheques to you in an acceptable electronic form, you are welcome to contact the Trust Assurance Department at 604-697-5810 or contact a practice advisor for more information.

The Top 10 Compliance Audit Exceptions

The Law Society's Trust Assurance Department has been conducting financial responsibility compliance audits since October 2006. As of September 26, 2008, the top 10 compliance exceptions found by the department during audits are as follows:

  1. Cash transactions not recorded in cash receipt book of duplicate receipts.
  2. Bank and trust listing balances not reconciled; no supporting documentation.
  3. Cash receipt book of duplicate receipts not maintained.
  4. Trust bank reconciliations not prepared within 30 days of month end.
  5. Withdrawals from trust not made in accordance with Rule 3-56.
  6. Trust account records such as trust transfer journal or accounts receivable sub-ledger not maintained.
  7. Sufficient funds not kept on deposit to meet the lawyer's obligations in respect to funds held in trust for clients.
  8. CDIC letter either not sent or not sent within correct time frame.
  9. Unclaimed trust funds not dealt with on a timely basis.
  10. Trust shortages not corrected as soon as discovered.

Keep off the top 10 list. The Law Society has resources to assist you. For example, see The Bookkeeper's Handbook prepared by the Trust Assurance Department.

Lawyers providing indemnities

New regulatory requirements for the real estate sector under the federal Proceeds of Crime (Money Laundering) and Terrorist Financing legislation has led some realtors to engage lawyers to be their agents for the purpose of providing identity verification services.

The regulations require that realtors obtain information to verify the identity of their clients and keep related records for all real estate sales and purchases. If a realtor's client resides in Canada but the realtor cannot meet with the client in person to obtain and record the required information, the realtor can use an approved agent or mandatory (a form of representative) — who can be another realtor, a lawyer, or a notary — to identify the client. In such case, there must be a contract between the realtor and the agent or mandatory to identify the client on behalf of the realtor.

The Law Society has learned that realtors may be asking lawyers to be their agent and enter into a real estate "Identification Mandatary/Agent Agreement" that purports to require the lawyer, as the identification agent, to provide identification particulars regarding the client and to indemnify the real estate broker against any claims, liability, costs and reasonable expenses arising directly from the agent's negligent acts or omissions in the performance

of the services. Since lawyers are responsible for their own negligence, an indemnity is largely unnecessary. As your insurance policy responds to claims against you in negligence, not in contract, you will want to contact the Lawyers Insurance Fund before agreeing to any indemnity.

Of course, even if the realtor agrees to leave out the indemnity, you will want to consider whether you want to accept the role. You may prefer to act for the purchaser or seller instead.

Further information

Feel free to contact Practice Advisor Barbara Buchanan at 604-697-5816 for confidential advice or more information regarding any items in Practice Watch.

Protect yourself from would-be scammers

While this is not an exhaustive list, here are some steps that you can take to reduce your risk:

  • Ask yourself why the new client chose you to act. Does it make sense that someone in New York, Tokyo, or China would ask you to send a demand letter to a debtor in a province outside of British Columbia?
  • Has the client offered to pay you a fee that is higher than usual, or maybe a bonus?
  • Ask the client for a retainer before you do anything. If you do not receive it or the retainer cheque bounces, that's a reason not to get involved.
  • Verify both the client and the debtor's address and telephone number by checking for published addresses and numbers to see if they correspond to the information the client gave to you.
  • If you send a demand letter, consider asking the debtor to make the cheque payable to the client, not to your firm, so that you are not using your trust account.
  • If your demand letter results in a payment to your firm in trust, resist pressure to pay out from your trust account quickly.
  • Wait for the payment instrument to clear before paying out. This reduces the risk, but may not eliminate the risk completely.
  • Assuming you will not see the client face-to-face because the client is not present in Canada, obtain an agent in the client's home location to meet with the client and verify the client's identity.
  • Trust your judgment if you get a bad feeling.