Client identification and verification rules

[go to Frequently asked questions]
 

Anti-Money Laundering Measures webinar (free of charge)

The Law Society of BC is offering a free two-hour program provided by Practice Advisor Barbara Buchanan, QC and Audit Team Leader Tina Kaminski to help lawyers comply with the Law Society’s anti-money laundering rules. The program includes information on money laundering, cash, client identification and verification, red flags and risk management. The program is eligible for two hours of CPD credit (practice management; professional responsibility and ethics).

View the program on YouTube


A lawyer is obligated to know his or her client, to understand the client’s financial dealings in relation to the retainer, and to manage any risks arising from the professional business relationship with the client. Law Society Rules, Part 3, Division 11, Rules 3-98 to 3-110 require lawyers to follow client identification and verification procedures when retained by a client to provide legal services. There are six main requirements:

  1. Identify the client (Rule 3-100).
  2. Verify the client’s ID if there is a “financial transaction” (Rules 3-102 to 3-106).
  3. Obtain from the client and record, with the applicable date, information about the source of money if there is a “financial transaction” (Rules 3-102(1)(a), 3-103(4)(b)(ii), and 3-110(1)(a)(ii)) effective January 1, 2020).
  4. Maintain and retain records (Rule 3-107).
  5. Withdraw if you know or ought to know that you would be assisting in fraud or other illegal conduct (Rule 3-109).
  6. Monitor the lawyer/client professional business relationship periodically while retained in respect of a “financial transaction” and keep a dated record of the measures taken and information obtained (new Rule 3-110 effective January 1, 2020).

If you have questions regarding the rules, you are welcome to contact a practice advisor (practiceadvice@lsbc.org or 604.443.5797).

Guidance during the COVID-19 pandemic

For this extraordinary period of serious public health concerns with in-person meetings, the Law Society has provided guidance about using a virtual means to verify the identity of an individual located in Canada under unique circumstances. This virtual means is limited to situations where lawyers are unable to avail themselves of any of the verification methods provided for in the existing rules.

For detailed information, lawyers are encouraged to read Knowing your client - Guidance and rules during COVID-19 in the Summer 2020 Benchers' Bulletin (pp. 18 -21).


Frequently asked questions – Rules 3-98 to 3-110, effective January 1, 2020

Below are FAQs in relation to the client identification and verification requirements.

The series of questions and answers are meant to assist in explaining the client identification and verification requirements. More information may be added at a future date.

See also Client ID & Verification - FAQs archive

Resources

Client Identification and Verification Checklist, current to September 1, 2020; includes Sample Agreement with Agent for Verification

Knowing your client - Guidance and rules during COVID-19, Summer 2020 Benchers' Bulletin (pp. 18 -21) – includes the March 17, 2020 Notice to the Profession (client verification in the context of COVID-19)

Know your client – addressing questions and risks, Spring 2020 Benchers’ Bulletin (pp. 8 – 11)

New client verification and source of money requirements, Winter 2019 Benchers’ Bulletin (pp. 13 -17)

CLE-TV: Anti-Money Laundering – Client Identification and Verification Rules
One-hour webinar initially provided on November 27, 2019 by Practice Advisor Barbara Buchanan, QC (eligible for one hour of CPD credit)

Rule amendments enhance Law Society’s anti-money laundering measures, Fall 2019 Benchers’ Bulletin (pp. 14-17)

Anti-money laundering cash transaction rule essentials, Summer 2019 Benchers’ Bulletin (pp. 10-14)

Anti-Money Laundering initiative

Discipline advisories:

Federation of Law Societies of Canada:

Source of money

One of the changes is that lawyers are required to obtain information about the source of money in relation to a financial transaction. This comes up in Rule 3-102(1)(a), Rule 3-103(4)(b)ii) and Rule 3-110(1)(a)(ii). In order to assist lawyers and firms with compliance, we offer the following guidance.

A key component of client verification is that lawyers must obtain information from the "client" and record, with the applicable date, information about the source of “money” when there is a “financial transaction.” (See Rule 3-98 for the words in quotations.)

A lawyer should obtain from the client and record, with the applicable date, the following information about the source of “money” for the purposes of Rule 3-102(1)(a):

  • the payer’s full name, occupation and contact information;
  • the relationship of the payer to the client (the payer may be the client);
  • the date on which the money was received by the lawyer from the payer;
  • the economic activity or action that generated the money (e.g., bank loan, savings from salary, settlement funds);
  • the form in which the money was received by the lawyer (e.g., cheque, bank draft);
  • the full name and address of all financial institutions or other entities through which the payer processed or transmitted the money to the lawyer;
  • any other information relevant to determining the source of money.

Understanding the source of “money” and its appropriateness is the crux of anti- money laundering. You have a positive duty to make enquiries about “financial transactions” that you facilitate. This may include obtaining supporting documents if there are suspicious circumstances. 

In the absence of suspicious circumstances, a lawyer may accept a client’s explanation regarding the economic activity or action that generated the client’s source of money (e.g., inheritance, savings from salary, life insurance proceeds) without obtaining copies of the documents to support the client’s explanation. 

Where there are suspicious circumstances, lawyers must make further inquiries and assess the risk of participating in a financial transaction for a "client."

The new Rule 3-110 requires that while a lawyer is retained in respect of a “financial transaction” (as defined in Rule 3-98), a lawyer must periodically monitor the professional business relationship with clients. Risk assessment includes periodically monitoring the client’s information about the source of money used in the financial transaction and assessing whether there is a risk that the lawyer may be assisting in or encouraging dishonesty, fraud, crime or other illegal conduct. Lawyers must keep a record, with applicable dates of measures taken to comply with the rule and the client information that has been obtained.

The frequency of periodic monitoring and what information should be recorded will depend on what is reasonable in each case. For example, if a lawyer acts for a local seller of their $500,000 condominium and the matter closes in three weeks, the monitoring rule may have limited or no applicability. The file from start to finish may have ended in less than one month. On the other hand, if a lawyer acts for a buyer of multiple properties over 20 months, the lawyer should make inquiries about the source of money for the various “financial transactions.” Rule 3-110 would apply and the lawyer would be expected to engage in periodic monitoring.

Lawyers are encouraged to contact a practice advisor for further guidance on what may be required in a particular matter (practiceadvice@lsbc.org or 604.443.5797).

There is no hard and fast threshold, and the need to obtain documents about a client’s source of money will depend on the circumstances. For example, if a dispute between two neighbours regarding a fence between their properties was settled for $10,500, a lawyer may feel no need to obtain supporting documents about the source of money from the client employed as a teacher who provides a $10,500 personal cheque for the settlement. The lawyer will already have asked the client for their explanation of the source of money and recorded the information for the purposes of Rule 3-102(1)(a). 

If, however, a new client with an occupation “bank employee” from outside of Canada who wants to wire funds from a foreign bank to the lawyer’s trust account to complete a purchase of a multi-million dollar residential property, will require enhanced due diligence on the part of the lawyer. The lawyer would be expected to make sufficient enquires about the client and the source of money and obtain supporting documents as well as entering into an agreement with an agent independent of the client to verify the client’s identity, and obtain satisfactory results before receiving the money. Lawyers will need to ensure compliance with the Code and Rules in assessing whether to obtain documents to substantiate the client’s information about the source of money.

At any time where a client’s explanation for the source of money is unusual or inconsistent with the lawyer’s experience, the lawyer would need to undertake enhanced due diligence, including getting supporting documents. A lawyer should consider if he or she is acting beyond their competence, seek advice, and consider not acting.

Lawyers are encouraged to contact a practice advisor for further guidance on what may be required in a particular matter (practiceadvice@lsbc.org or 604.443.5797).

It will depend on the circumstances, including the size of the loan and whether there is a loan agreement. If the loan is large, there is little or no paperwork and no security, that would engage suspicious circumstances. The source of money for the lender would be a relevant question. However, even if not asking for anti-money laundering purposes, it may be prudent for a lawyer to know the name of the shareholder who loaned the money to the corporation. 

Note that if a client is a public company (a “reporting issuer” as defined in Rule 3-98), Rule 3-102(1)(a) does not apply. An exemption is provided in Rule 3-101(a)(iii)). 

Lawyers may decide to use whatever forms they want with their clients, and such forms may be very useful. A signed declaration on file will not always mean that a lawyer has met the requirements in every circumstance under the Code and Rules. Lawyers are required to apply their professional judgment to assess risks regarding client identification and verification, financial transactions and the source of money, and to ensure that they have taken adequate steps to address those risks.

For practical purposes, lawyers will need to obtain and record information about the source of money closer to the beginning of the retainer as part of the client identification and verification process as it is a key component to anti-money laundering and to prevent engagement in any activity that assists in or encourages any dishonesty, crime or fraud.

Using an agent to verify a client's identity

A lawyer may use an agent to obtain the information required under Rule 3-102 (Requirement to verify client identity) on the lawyer’s behalf when the “client” (as defined in Rule 3-98) is inside or outside of Canada (Rule 3-104). The lawyer and the agent must have an agreement or arrangement in writing that complies with the rule. A sample agent agreement, effective January 1, 2020 is on the website.

The former guarantor and commissioner provisions to verify a client’ s identity inside of Canada under subrules (2) to (4) have been rescinded with the result that a lawyer may use an agent inside of Canada as well as outside of Canada.

Yes, a lawyer may use an agent to obtain the information required under Rule 3-102 (Requirement to verify client identity) on the lawyer’s behalf when the “client” (as defined in Rule 3-98) is inside or outside of Canada (Rule 3-104). 

The guarantor and commissioner provisions to verify a client’s identity inside of Canada under subrules (2) to (4) have been rescinded with the result that a lawyer may use an agent inside of Canada too.

Subrule (7) was added to Rule 3-104, effective January 1, 2020, permitting lawyers to rely on an agent’s previous verification of an individual client in the following circumstances:

3-104(7) A lawyer may rely on an agent’s previous verification of an individual client if the agent was, at the time of the verification,

(a) acting in the agent’s own capacity, whether or not the agent was acting under this rule, or

(b) acting as an agent under an agreement or arrangement in writing entered into with another lawyer required under this division [Part 3 – Division 11] to verify the identity of a client.

You must have an agreement or arrangement with the agent in writing if you wish to rely on an agent’s previous verification of an individual. In follow-up, the verification information must match what the individual client provided to you when you obtained their basic identification information. You must satisfy yourself that the information is valid (authentic and unaltered) and current (not expired) and that the agent verified the individual’s identity through a permitted method (e.g. government-issued photo identification). If, for example, the agent used an expired driver’s licence to verify the individual’s identity, this is not acceptable. Note the date that you receive the agent’s confirmation of verification, as this relates to whether the information is recent and the timing within which verification must take place with respect to the “financial transaction” (Rule 3-105).

Yes, a lawyer must use an agent if the client is not present in Canada and is not physically present before the lawyer. The lawyer must have an agreement or arrangement in writing with the agent for that purpose that complies with Rule 3-104.However, a lawyer may be able to physically meet with a client outside of Canada before the “financial transaction” takes place and, in such case, may not require an agent.  Also, take note that the responsibilities of a lawyer to verify a client’s identity may be fulfilled by the lawyer’s firm, including members or employees of the firm wherever located (Rule 3-99(3)). An individual from the lawyer’s firm may be in a position to verify the client’s identity outside of Canada and if that is the case, the lawyer would not require an agent.    

Yes, a sample agent agreement, effective January 1, 2020 is on the website.

Lawyers will often enter into a written agreement or arrangement with another lawyer to verify a client’s identity; however, using a lawyer is not a requirement. You may know a suitable notary, accountant or other professional. If the client is outside of Canada, some embassies or consulates have been known to occasionally provide verification of identity services.  If you do not know a suitable lawyer, accountant or notary, check with the regulator for the profession in the jurisdiction where the client is located to ensure that you are dealing with a legitimate professional (you can compare contact information, status, etc.)

The agent should be someone who is reputable, who takes the verification of client identity seriously, and who will carry out the required work diligently and within your time limit.

Be aware that a new client who is a criminal could try to persuade you to use a certain agent of their choice. Be very wary as a phony agent could be part of the criminal’s scheme. The agent should be independent of the client. The agent is your agent, not the client’s agent. 

Remember that you are required to have an agreement of arrangement in writing to verify the client’s identity that is in compliance with Rule 3-104. A sample agreement is on the website.

Monitoring

The new Rule 3-110 effective January 1, 2020 requires that while a lawyer is retained in respect of a “financial transaction” (defined in Rule 3-98), a lawyer must periodically monitor the professional business relationship with clients. The degree and nature of periodic monitoring should commensurate with the degree of risk associated with the client and the legal services provided.

Rule 3-110 requires lawyers to periodically monitor their professional business relationship with a client while retained in respect of a financial transaction. This includes long-standing clients.

Lawyers must periodically assess whether the information that they have obtained about their client, the client’s information about their activities, the source of “money” (defined in Rule 3-98) used in the financial transaction and the client’s instructions are consistent with the purpose of the retainer.

Risk assessment includes periodically monitoring the client’s information about the source of money used in the financial transaction and assessing whether there is a risk that the lawyer may be assisting in or encouraging dishonesty, fraud, crime or other illegal conduct (also see Rule 3-109 and Code of Professional Conduct rules 3.2-7 and 3.2-8).

Lawyers must keep a record, with the applicable dates of the measures they have taken to comply with the rule and the client information that they have obtained. The record must be retained for the period required in Rule 3-107.

The frequency of monitoring and what information should be recorded will depend on what is reasonable in each case. For example, if a lawyer acts for a local seller of their $500,000 condominium and the matter closes in three weeks, the monitoring rule may have limited or no applicability. The lawyer would have assessed the risks of acting at the outset of the retainer and during the course of the short file. The file from start to finish may have ended in less than one month. On the other hand, if a lawyer acts for a buyer of multiple properties over 20 months, the lawyer should periodically monitor the file and make inquiries about the source of “money” for the various financial transactions. Lawyers are required to apply their professional judgment to assess risks in any given circumstance.

Lawyers are encouraged to contact a practice advisor for further guidance on what may be required in a particular matter (practiceadvice@lsbc.org or 604.443.5797).

Lawyer or law firm clients (including acting as agent)

The client identification and verification rules apply the same as they would when retained to provide legal services to any individual (Rule 3-99). Lawyer clients are not treated differently. Your responsibilities may be fulfilled by your firm, including members or employees of the firm wherever located. However, you remain responsible for meeting the requirements. 

A law firm is an “organization” (as defined in Rule 3-98). The client identification and verification rules apply the same as they would when retained to provide legal services to any organization. Remember that in addition to applying the rules to the organization itself, you must also apply them to the individual instructing you on behalf of the law firm.

Let’s use a scenario. For example, a lawyer in Kamloops acts for a client in respect to a financial transaction. That lawyer asks you to attend a matter in Victoria next week regarding the transaction because the lawyer cannot attend in Victoria that day. The lawyer tells you that he or she has identified and verified the client’s identity and obtained information about the source of money for the transaction. The Kamloops lawyer is not a member or employee of your firm.  

In this situation, the other lawyer for whom you would act as agent is your client. The client identification and verification rules apply the same as they would when retained to provide legal services to any individual. In addition, the Kamloops lawyer’s client is also your “client” (as defined in Rule 3-98). If another BC lawyer or an “interjurisdictional lawyer” (member of a governing body who is authorized to practise law in another Canadian jurisdiction) has complied with Rules 3-100 to 3-106 or the equivalent provisions of another Canadian jurisdiction, and they have retained the information and documents, you do not have to identify and verify the client’s identity again when acting in respect of a “financial transaction” unless you have reason to believe that the information, or its accuracy, has changed (Rules 3-99(2.1)(a), 3-100(2), 3-105(2), 3-106(2)).

Obtain confirmation from the other BC lawyer or “interjurisdictional lawyer” (as defined in Rule 3-98) to satisfy yourself that he or she has complied with the rule requirements. In addition, obtain copies of the information and documents (Rule 3-107). If you cannot obtain copies, then identify and verify the client’s identity in accordance with the rules.

If you act as agent for a lawyer who is not a BC lawyer or an “interjurisdictional lawyer,” you will need to apply the client identification and verification rules to the foreign lawyer and to that lawyer’s client. For example, if you act for a Seattle lawyer for a Seattle individual, if there is a “financial transaction,” you would enter into an agreement or arrangement in writing with an agent to verify the clients’ identity. See “Using an agent to verify identity.”

Referral of a client by another lawyer

If a potential new client was referred to you by a lawyer outside of your firm, and you intend to act for the client, consider asking for the client’s consent to speak with the referring lawyer. Not only will you wish to thank the lawyer for the referral, but at the same time you can find out if the referral was genuine. Unfortunately, sometimes fraudster clients use a referral as a ruse, hoping that a lawyer will let their guard down. Assuming the referral was genuine, below is some guidance about the application of the client identification and verification rules.   

If another BC lawyer or an “interjurisdictional lawyer” (member of a governing body who is authorized to practise law in another Canadian jurisdiction) has complied with Rules 3-100 to 3-106 or the equivalent provisions of another Canadian jurisdiction, and they have retained the information and documents, you do not have to identify and verify the client’s identity again when acting in respect of a “financial transaction” (as defined in Rule 3-98) unless you have reason to believe that the information, or its accuracy, has changed (Rules 3-99(2.1)(b), 3-100(2), 3-105(2), 3-106(2)).

Obtain confirmation from the referring lawyer to satisfy yourself that the lawyer has complied with the rule requirements. In addition, obtain copies of the information and documents from the referring lawyer (Rule 3-107). If you cannot obtain copies, then identify and verify the client’s identity in accordance with the rules.

Keep in mind that if you are acting for an organization, and the instructing individual changes, you must identify the new instructing individual and verify that individual’s identity if there is a “financial transaction” (as defined in Rule 3-98). Also note that Rule 3-110 (Monitoring) applies.

Yes, you are responsible to obtain information about the source of money for a financial transaction as you would for any client. See the FAQs above about obtaining information about the source of money. Also note that Rule 3-110 (Monitoring) applies.

Private loans

There is an increased risk of illegal activity associated with private loans, though most are legitimate. Lawyers may be retained to draft private loan or security documents, to register them or to assist with the advance or recovery of funds. Lawyers should heighten their diligence with respect to knowing the client, understanding the client’s financial dealings in relation to the retainer and managing risks. Such diligence would include asking enough questions and obtaining satisfactory answers to manage the risk. See the Discipline Advisory on private lending (April 2, 2019).

A “financial transaction” can occur without “money” flowing through your trust account (the words in quotes are broadly defined in Rule 3-98). You would give instructions on behalf of your client in respect of registering a mortgage even if you do not handle the money. The definition of “money” includes a mortgage. You are require to identify the client, verify your client’s identity, obtain and record, with the applicable date, information about the source of money in respect of the financial transaction and keep records.

Acting for a real estate developer selling to the public

The purchaser is not your “client” (as defined in Rule 3-98). You have no general obligation under Rule 3-102 to verify the purchaser’s identity or to ask the purchaser questions about their source of money for the deposit and conveyance. However, if there is something suspicious about your client, the purchaser or the transaction, you should increase your level of inquiry until comfortable with receiving the money and acting on the transaction or if that is not possible, decline to act (see BC Code rules 3.2-7 to 3.2-8 and 3.7.7, Law Society Rule 3-109 and the “Source of money” FAQs on this web page). The Risk Assessment Case Studies for the Legal Profession (February 2020) and the Risk Advisories for the Legal Profession (December 2019) both provide guidance and examples regarding red flags in real estate transactions.

Before accepting the purchaser’s deposit in trust, you should have a copy of the signed contract of purchase and sale for the strata unit. Consider that if the sale transaction does not complete and the money must be returned to the purchaser, you will need sufficient information about the purchaser to return the deposit to the correct person. If the contract of purchase and sale does not contain sufficient information, you may be in a position to get more details directly from the purchaser at the time of the proposed deposit, from your developer client, its real estate broker or real estate sales representative.

Although lawyers do not have reporting obligations to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), your developer client may have obligations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its Regulations to keep records for certain financial transactions, for client verification and to fulfill other detailed requirements - including reporting to FINTRAC, aimed at preventing money laundering and terrorist financing. It would be prudent to know if your client is aware of the requirements. Also, if the purchaser’s deposit was provided through a real estate broker and sales representative acting as an agent for the purchase and sale of real estate, registered and licensed to do so by the province, these professionals also have obligations under the Act. FINTRAC provides guidance for real estate developers, brokers and sales representatives on its website.

Acting as a mediator

This is the scenario. You are a solicitor who acts for a real estate developer engaging in sales to the public. If you have acted for the client from the early stages of the development, you will have identified and verified the developer’s identity and obtained information about its source of money in respect of the financial transactions for which you have provided legal services. You may now be engaged in monitoring your professional business relationship (Rule 3-110) and starting to act on specific sale transactions. Below is guidance with respect to acting for the developer on sales of units of the development to purchasers.

Law Society Rules 3-98 to 3-110 (Part 3 – Division 11 – Client Identification and Verification) apply to lawyers who are retained by clients to provide legal services (Rule 3-99(1)).These rules generally do not apply to lawyers who act as neutral mediators of disputes for parties to a mediation. Accordingly, you are not required to identify or verify the identity of the parties or their lawyers for the purposes of Division 11. This assumes that you are not engaged in the “practice of law” as defined in section 1 of the Legal Profession Act (e.g. you are not providing legal advice, you are not negotiating on one party’s behalf, and you are not drawing a document for use in a proceeding). If you provide legal advice or perform any of the acts that are included in the definition of the “practice of law” during the course of a mediation, you would be required to comply with Division 11.  However, note the BC Code rule 3.4-3 regarding conflicts. Rule 3.4-3 and commentary [1] provide that a lawyer must not represent opposing parties in a dispute, even with consent.

Because mediation by itself is not the “practice of law,” fees paid to you for services as a mediator are “not directly related to the provision of legal services” and therefore must not be deposited to your trust account (Rule 3-58.1). You can use your general account for such pre-payments or alternatively you can open a separate form of account to hold the funds. You may wish to obtain tax advice as to the form of account that you will use.

If you open an account for mediation deposits, you should make it clear to your financial institution that the account is not a lawyer’s trust account regulated by the Law Society of BC.

Acting as an arbitrator

Law Society Rules 3-98 to 3-110 (Part 3 – Division 11 – Client Identification and Verification) apply to lawyers who are retained by clients to provide legal services. These rules do not apply to lawyers who act as arbitrators of disputes for parties to an arbitration process (Rule 3-99(1)).

Because arbitration is not the “practice of law,” fees paid to you for services as an arbitrator are “not directly related to the provision of legal services” and therefore must not be deposited to your trust account (Rule 3-58.1). You can use your general account for such pre-payments or, alternatively, you can open a separate form of account to hold the funds. You may wish to obtain tax advice as to the form of account that you will use.

If you open an account for arbitrator deposits, you should make it clear to your financial institution that the account is not a lawyer’s trust account regulated by the Law Society of BC.