Know your client – draft anti-money laundering regulations

The federal government has released new draft regulations under the Proceeds of Crime (Money Laundering and Terrorist Financing) Act outlining the steps lawyers must take and the records they must keep to verify client identity.

Independent of the government’s current initiatives, the Federation of Law Societies of Canada has also prepared a model rule focusing on client identification and verification requirements.

The draft regulations have been published in Part 1 of the June 30, 2007 Canada Gazette for a 60-day comment period to be followed by consultations (canadagazette.gc.ca/index-e.html). This is pre-publication of the regulations only. They will not come into force until a date determined after the consultation period.

The government’s objectives through the regulations are to continue the fight against money laundering and terrorist financing and to demonstrate to the global community that Canada’s anti-money laundering regime meets international standards.

While there are few cases of lawyers knowingly laundering money on behalf of criminal or terrorist organizations, the Federation recognizes that in the post-9/11 world the legal profession must take steps to prevent money laundering by lawyers and clients alike.

The Federation believes the legal profession, acting in the public interest, must move proactively to ensure lawyers are at the forefront of the fight against money laundering. The Federation also believes that this must be done in a manner that preserves and protects solicitor-client privilege and the independence of the legal profession.

The Federation’s Anti-Money Laundering Committee has been discussing the draft regulations with the Department of Finance for the past year. Committee members are now reviewing the proposed regulations and comparing them to the Federation’s model client identification rule. Finance department officials plan further meetings with the Federation and other stakeholders over the next few months.

These ongoing discussions are part of a dialogue that began a number of years ago between the Federation and the federal government about the Proceeds of Crime (Money Laundering and Terrorist Financing) Act. The primary concern for the legal profession at the outset was the threat to the independence of the Bar by requiring lawyers to secretly report confidential client information to the government with respect to suspicious transactions, and to report large cash transactions.

The Federation, at the urging of the Law Society of British Columbia, commenced a constitutional challenge to the Act and applied successfully for injunctive relief from the application of the reporting requirements of the legislation pending the hearing of the case. The injunction continues to apply and covers any new regulations under the Act affecting lawyers. Individual law societies then adopted the Federation’s model “No Cash” rule.

The government subsequently decided to exempt lawyers, through an amendment to the Act, from the reporting requirements. The Minister of Finance, in speaking to the amendment, acknowledged that the model No Cash rule was intended to deal with risks in the legal profession associated with cash placement and money laundering.