Duhaime's Financial Crime & Anti-Money Laundering Law in Canada

Lawyers in British Columbia generally have two separate anti-money laundering obligations:

• Client identification; and
• Client verification.

Client Identification

A lawyer in British Columbia who is retained by a client to provide legal services must make reasonable efforts to obtain the following information:

• The client’s full name, business address and business telephone number;
• If the client is an individual, the client’s home address, home telephone number and occupation;
• If the client is an organization, the name, position and contact information for the person who gave instructions with respect to the matter for which the lawyer was retained; and
• If the client is an organization
  • the nature of the type of business engaged in by the client, and
  • the organization’s incorporation number and the place of issue of its incorporation.

Client Verification

When a lawyer provides legal services in connection with a financial transaction (i.e., receives, pays or transfers funds on behalf of a client or gives instructions for such activities on behalf of a client), the lawyer must take reasonable steps to verify the identity of the client using what the lawyer reasonably considers to be reliable, independent source documents, data or information.

When a lawyer provides legal services in a financial transaction for a client that is an organization, the lawyer must make reasonable efforts to obtain the

• Name and occupation of all directors of the organization, and
• Name, address and occupation of all persons who own 25 per cent or more of the organization or of the shares of the organization.

Lawyers must also record and retain documents they collected or referred to for the purposes of client identification and client verification.

It is recommended that lawyers consult the full scope of the client identification and client verification rules which is in Part 3 Division 11 of the Law Society Rules available here.

Background – Constitutional Challenge by Law Societies

In 2001, regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act made the legislation applicable to lawyers, requiring that they secretly report suspicious transactions by their clients to FINTRAC.

The Federation of Law Societies of Canada challenged the constitutionality of the legislation and sought interlocutory relief from the application of the regulations to lawyers on the basis that the legislation threatened fundamental Canadian constitutional principles which require that lawyers maintain undivided loyalty to their clients, consistent with the independence of the bar and the integrity of the administration of justice. The Supreme Court of British Columbia found that the legislation represented an unprecedented intrusion into the traditional solicitor-client relationship and granted an injunction exempting lawyers from the reporting requirement. The Court of Appeal for British Columbia affirmed the decision and the Supreme Court of Canada subsequently denied the federal government’s application for a stay.

In May, 2002, the Attorney General of Canada agreed to suspend the application of the legislation to all Canadian lawyers and Québec notaries and subsequently amended the legislation to exempt lawyers from the suspicious transaction reporting requirements. The Federation and provincial law societies then adopted a model “no cash” rule prohibiting lawyers from receiving $7,500 or more in cash from a client in the course of one transaction, except in limited circumstances.

In 2007, regulations requiring client ID measures became applicable to lawyers. In response to the regulations, the Federation of Law Societies of Canada drafted a model “client ID & verification” rule that was adopted by all provincial law societies.

The client ID and verification rules adopted by the law societies are less onerous than those required under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act or the FATF.

The issue of whether the client ID & verification rules under the legislation apply to lawyers is before the courts for determination. The federal government’s position is that AML rules applicable to lawyers must be legislated, and FATF compliance cannot be accomplished by model rules implemented by individual associations (e.g.) law societies.

With respect to lawyers, the FATF 40+9 Recommendations require that member states (such as Canada) implement due diligence and record keeping requirements applicable to lawyers when lawyers are retained in connection with the following transactions:

• Buying and selling real estate;
• Managing client money, securities or other assets;
• Managing bank, savings or securities accounts;
• Incorporation, operation or management of corporations;
• Registration or incorporation, operation or management of other legal entities; and
• Buying and selling business entities.

The due diligence and record keeping requirements that the FATF has determined are applicable to lawyers require, among other things, that lawyers:

• Have appropriate measures in place to identify politically exposed persons and take reasonable steps to ascertain the source of wealth and funds of politically exposed persons;
• Refuse to keep anonymous accounts or accounts in fictitious names; and
• Identify and verify clients when establishing the relationship including identifying beneficial owners and scrutinizing transactions to ensure they are consistent with client’s business and source of funds.

The FATF also requires that lawyers:

• Be required by law to report suspicious transactions and suspected terrorist financing transactions to FINTRAC if the lawyer has reasonable grounds to suspect that the funds are the proceeds of crime;
• Be prohibited by law from disclosing that a suspicious transaction report or related information was filed with FINTRAC;
• Develop compliance programs to combat against money laundering and terrorist financing; and
• Take special precautions when dealing with clients, or transactions from countries that are not sufficiently FATF compliant

unless the information was obtained in circumstances where the lawyer is subject to what the FATF called “professional secrecy” or the matter is protected by privilege.