Anti-Money Laundering Legislation

The Problem

Money laundering is a grave societal problem. Where there is money laundering, there is organized crime. Where there is money laundering, there is upward pressure on real estate. Where there is money laundering, the rule of law is thwarted and distorted. Where there is money laundering, society is negatively affected.

In BC, money laundering has made a significant impact on housing affordability by driving up housing prices, making housing unaffordable for those who live and work in the Lower Mainland. Money laundering in BC has put pressure on businesses, which cannot compete with businesses funded by criminal activities.

Looking for Solutions

With its adoption of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and Regulations , the government of Canada has been fighting money laundering in Canada. It continues this process, including striking a Working Group with the Federation of Law Societies of Canada (Federation) on 13 June 2019 to explore issues of money laundering that arise out of the practice of law.

For its part, the BC government commissioned studies to determine the extent of the money laundering problem in BC. The first, conducted by an expert panel chaired by Maureen Maloney, looked at the impact of money laundering on real estate. The second, by Peter German, looked at how money is being laundered: through real estate, luxury vehicle purchases and gambling. Armed with knowledge and recommendations, the government of BC has started to implement some of those recommendations and continues to work on the task of cutting off avenues for money laundering in BC.

Federation Model Rules

The Federation, with input from the provincial and territorial law societies across Canada, developed a set of model anti-money laundering rules that were adopted in some form or other by those law societies. The first set of those rules, the “no cash” rules, were finalized by the Federation in 2004, while the client identification and verification (CIV) rules were finalized in 2008.

In October 2018 a new model rule and revisions to the model anti-money laundering rules (the “no cash” and CIV rules) were published by the Federation.

These changes could entail significant changes to law firm practices.

Model Trust Accounting Rule

The new model rule, the “Model Trust Accounting Rule,” articulates a fundamental, formerly unwritten, principle regarding the use of trust accounts, namely that lawyer trust accounts must only be used as part of the legal services provided by a lawyer.

This new rule addresses a deficiency that a Law Society of BC discipline case uncovered, specifically that a lawyer could accept funds into the trust account without providing substantive legal work, other than the receipt and disbursal of funds through the trust account, which could put the lawyer’s trust account at risk of being used for money laundering.

Once this new rule is adopted by the Law Society of BC, lawyers will be barred from accepting funds into or disbursing funds from trust unless the funds are “directly related to legal services that the lawyer or the lawyer’s law firm is providing,” and lawyers will be required to pay out the balance in trust “upon completion of the legal services to which the money relates.”

The requirement to return trust funds to a client upon completion of the legal services imposes an obligation on lawyers that, prior to the adoption of the new rules, had only been implied by Law Society of BC Rule 3-89, “Payment of unclaimed trust funds to the Society.”

No-Cash Rules

The model rule on cash transactions restricts lawyers from accepting cash from their clients. With some exceptions, lawyers are not allowed to accept cash, in aggregate, on any one file of $7,500 or more.

In the revised model rule on cash transactions, a lawyer cannot accept more than $7,500, in aggregate, in cash on a file. While the difference between the old and the new model rule amounts to $0.01, the new wording makes this concept easier to grasp.

However, the most significant change to this model rule is the elimination of the exception that allowed lawyers to received cash “pursuant to a court order.”

Client Identification and Verification

The model client identification and verification rules are designed to ensure that lawyers “know their clients.” Under the old model rules, all clients—including family and friends—had to be identified and, when required, their identities verified. One of the main changes to the model rules is the addition of subsection 2(1) that requires lawyers to keep in mind their “obligation to know their client, understand the client’s dealings in relation to the retainer… and manage any risks.”

Another significant change to this section is the removal of the “reasonable efforts” exception. Going forward, lawyers must comply with the requirements set out in the client identification section and, where required, the client verification section.

Finally, the requirements related to individuals and to organizations were rewritten to make them easier to read and understand. All information received to comply with the CIV rules must be dated.

Client Identification

Client identification entails gathering particular pieces of information from each client prior to providing legal services. Other than revisions to the wording of this section to make it easier to understand and, therefore, follow, the major change to this part of the rules is that the information that is gathered must also be dated.

Client Verification

Verification entails verifying the identity of the client through the use of independent source documents and is required when a lawyer provides legal services “in respect of receiving, paying or transferring of funds, other than an electronic funds transfer.”

In the revised rules, there is a clearer delineation between the verification of individuals and of organizations, which should make the rules easier to read and understand and, ultimately, easier to follow.

As with the revised client identification rules, there is a requirement to date information received. All records and efforts to obtain verification must also be dated and kept.

The single most significant change to the verification rules, however, is the removal of the “reasonable measures” standard. With the new rules, there will be an expectation that lawyers will verify their client’s identity.

Another change, made partly in response to the Law Society of BC discipline case referred to earlier, is the addition of a new requirement to “obtain from the client and record… information about the source of funds.”

The deadline to verify organizational clients will be reduced from 60 days to 30 days. As is currently the case, the verification of an individual must be done immediately.

The exceptions to the verification requirement regarding “dealing with funds paid or received pursuant to a court order or a settlement of any legal or administrative proceeding” are eliminated.

In the case of non-face-to-face transactions, lawyers must engage the services of an agent and the lawyer must “have a written agreement with the agent and, upon receiving from the agent the information obtained to verify the client, must review it to ensure that it is valid and current.”

The Law Society of BC response

At its 12 July 2019 meeting, the The Law Society of BC Benchers are set to discuss the revisions to the anti-money laundering rules proposed by the Act and Rules Committee.

Those proposed revisions are sweeping and entail an almost wholesale adoption of the revised and new Federation rules, although the wording and paragraphing will be different.

New model rule

A new rule, Rule 3-58.1, specifically deals with the Federation’s new model rule and explicitly requires that trust accounts only be used when “the funds are directly related to legal services” and that the funds be returned to the client “on completion of the legal services.”

Significant change to no cash rule

The most significant change to the “no cash” rules relates to the $1,000 exemption that formed part of the Law Society of BC “no cash” rules, but not the Federation’s model “no cash” rules. The Federation’s model “no cash” rules required that all refunds of cash received in excess of $7,500 for “professional fees, disbursements or expenses” be made in the form of cash. However, the Law Society of BC provided lawyers with an exemption; only refunds in excess of $1,000 of cash received in excess of $7,500 for professional fees, disbursements or expenses had to be made in the form of cash. The Act and Rules Committee has proposed that this exception be eliminated so that all refunds of cash received in excess of $7,500 for payment of professional fees, disbursements or expenses be refunded in the form of cash.

The rationale behind this requirement to refund cash in the form of cash is so that lawyers do not launder the client’s money, which is what would happen if the lawyer issued a cheque (assuming, of course, that the initial cash received was the result of illicit activities).

This change means that lawyers should not be inadvertently laundering cash. On a practical level, this rule change means that signing officers might be required to go to the bank to withdraw cash. This change could be an incentive for firms to stop accepting cash.

One change that the Law Society might not make or might not make in its entirety is the Federation’s elimination of the exemption related to cash received pursuant to a court order.

Client identification and verification

The elimination of the “reasonable measures” standard is so significant that the Law Society of BC’s Act and Rules Committee has renamed its sections from “Client identification” to “Requirement to identify client” and from “Verification” to “Requirement to verify client identity.”

Conclusion

While the changes to the Federation’s model rules have yet to be adopted by the Law Society of BC, most of them will be. When that happens existing law firm policies and procedures may no longer comply with the Law Society of BC’s anti-money laundering rules. It will be up to each lawyer to determine what changes, if any, need to be made to ensure compliance. Ultimately, however, the goal is to ensure that lawyers do not inadvertently launder money on behalf of their clients, so lawyers (and staff) should be doing more than just abiding by the new rules.