Anti-money laundering initiatives

The Law Society of BC will enact new, client identification rules later this year. The rules, which will be effective as of November 1, 2008, are based on a model rule prepared by the Federation of Law Societies of Canada and are part of the legal profession’s commitment to the fight against money laundering.

All provincial and territorial law societies are expected to enact similar rules this year. This initiative is comparable to an earlier one organized by the Law Society of BC and the Federation that resulted in Canadian law societies adopting “no cash” rules.

This article provides background to the client identification rules, as well as a general overview of the rule requirements.

Before the rules are implemented, specific information about their application along with detailed FAQs will be posted on the Law Society’s website and circulated to members.

Also included below is information about the federal government’s proposed client identification and verification regulations. These regulations would require lawyers to obtain client information and would authorize warrantless searches of lawyers’ offices. The federal regulations are not yet in force and, under the terms of a BC Supreme Court injunction, cannot come into force without the consent of the Federation of Law Societies of Canada and other parties to the court order, including the Law Society of BC.

Background to the Law Society’s know-your-client rules

In 2000, the federal government passed legislation now known as the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PC(ML)&TF Act). Under the Act, regulated persons and entities are required to report financial transactions involving $10,000 or more in cash or those defined as “suspicious” to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), a federal agency set up to receive and analyze financial intelligence and disclose it to the police.

The Federation of Law Societies of Canada and the Law Society of British Columbia, supported by the Canadian Bar Association, initiated proceedings in the Supreme Court of BC challenging the constitutionality of the legislation as it applied to the legal profession.

The Federation contended that the legislation, which required lawyers to collect information about clients against the client’s interests and to report that information to a government agency, threatened fundamental Canadian constitutional principles that require lawyers to maintain undivided loyalty to their clients. The Supreme Court of Canada, in Maranda v. Richer, [2003] 3 SCR 193, has stated that lawyers, who are bound by strict ethical rules, must not have their offices turned into archives for state authorities.

The BC Supreme Court, in Law Society of BC v. AG Canada, 2001 BCSC 1593, concluded the legislation was “an unprecedented intrusion into the traditional solicitor-client relationship” and granted an interim injunction in November 2001. The BC Court of Appeal affirmed the order and the Supreme Court of Canada denied the government’s application for a stay. The government subsequently agreed that lawyers and Quebec notaries would be exempt.

Since then, the Federation has held discussions with the federal government regarding the appropriate anti-money laundering regime for the legal profession and has developed initiatives for lawyers in Canada.

The first initiative was a model rule that prohibits lawyers from receiving cash in amounts of $7,500 or more. This rule was adopted by all law societies. The federal government subsequently amended the PC(ML)&TF Act to exempt lawyers from the Act’s reporting requirements.

The second initiative is a model client identification rule. All law societies have committed to enact this rule. The new requirements will assist lawyers in identifying potentially fraudulent client activities, such as a client who is attempting to use the lawyer to improperly transfer funds.

The client identification rules

The new, client identification rules are designed to codify the steps prudent legal counsel would take in the normal course to verify the identity of a new client. The rules will also outline the records lawyers must keep to demonstrate compliance with the rule.

“Identification” refers to the basic information lawyers need to get from their clients to ensure they know who their clients are at the beginning of the retainer.

“Verification” refers to the information lawyers need to confirm their clients are who or what they say they are.

To identify an individual client, a lawyer will have to obtain and record the person’s full name, home address, telephone number and occupation. Where applicable, a lawyer must also get the client’s business address.

If the client is an organization, such as a company, a public body or a trust, a lawyer must obtain its full name, business address and, where applicable, its incorporation or business identification number, where it was issued, the general nature of its business and the name, position and contact information of the persons authorized to give instructions.

The verification requirements are triggered when a lawyer receives, pays or transfers funds on behalf of a client or gives instructions on behalf of a client for receipt, payment or transfer. There are exemptions for funds received for professional fees and disbursements and for funds received from a financial institution, a public body (such as the government) or a public company.

To verify the identity of an individual, a lawyer must review and retain a copy of a document that he or she reasonably believes is an independent and reliable original source identification document, such as a government-issued driver’s licence, birth certificate or passport. How a lawyer verifies the identity of an organization will depend on the nature of the organization. A company’s certificate of corporate status issued by the Registrar of Companies is an example of a reliable and independent document.

A lawyer will also be required to retain client identification and verification records for the longer of (a) the duration of the professional relationship and for as long as is necessary for the purpose of providing service to the client, and (b) at least six years following the completion of the work for which the client retained the lawyer. The records must be kept in the client file; there is no need to maintain a separate file. As long as a paper copy can be readily produced, the records may be kept in a machine-readable or electronic form.

The federal government’s proposed regulations

In June 2007, the federal government released a draft of proposed client identification and verification regulations. Law societies and other interested stakeholders were also asked to provide comments on the proposed regulations.

The Law Society of BC advised lawyers of the draft regulations through a Notice to the Profession (July 10, 2007) and an article in the July 2007 Benchers’ Bulletin. Some members provided comments on the government’s proposal. The Law Society prepared its own comments to the Federation, which then prepared a response on behalf of all provincial and territorial law societies.

The federal government formally published the regulations, substantially unchanged, on December 30, 2007 with an implementation date of December 30, 2008. The new regulations include detailed requirements for client identification, verification of client identity, record-keeping and compliance. The requirements are triggered when the lawyer receives or pays funds, other than those received or paid in respect of professional fees, disbursements, expenses or bail, on behalf of any person or organization, or gives instructions in respect of these activities.

The new regulations require a lawyer to identify a client whenever the lawyer receives $3,000 or more in the course of the lawyer’s business activities, with some narrow exceptions.

The Federation has noted several concerns with the regulations including:

  • The regulations would authorize warrantless searches of a lawyer’s office, contrary to the Supreme Court of Canada’s decision in Lavallee, Rackel & Heintz v. Canada (AG), [2002] 3 SCR 209.
  • The nature and extent of the information required to be collected goes beyond what is necessary for lawyers to serve their clients.
  • Some of the regulations are unclear or overly broad or impose unreasonable and impractical requirements on legal counsel. For example, the requirement to obtain the identities of all persons controlling more than 25 per cent of a corporation may be impossible to comply with in the case of a private company.

The Law Society of BC believes the Federation’s model know-your-client rule respects the constitutional requirements imposed on the legal profession regarding gathering information from clients. A lawyer must maintain and keep all information needed to serve a client, but must not obtain any information that serves only to provide potential evidence against the client in a future investigation or prosecution by state authorities.

The federal government’s client identification and verification regulations are subject to the November 2001 BC Supreme Court injunction and cannot come into force without consent from the parties to the litigation or further order of the judge. The Federation has been discussing its model rule and the proposed regulations with the Department of Finance. These ongoing discussions are part of a dialogue that began when the PC(ML)&TF Act was first introduced.