Pelar Law Society Rules

Law Firm Regulation – Update

Will your law firm be selected by the Law Society of BC to self-assess in 2021? If not, your firm will be required to complete its self-assessment in 2022 or 2023. That is, so long as your firm is not exempted by Rule 12-12.1(2), and the Law Society of BC follows the timeline laid out by its law firm regulation task force.

At this point, you might ask “what is meant by self-assessment?” Self-assessment is the requirement that each law firm in BC complete the Law Society of BC Self-Assessment Report. Self-assessment is the second phase of law firm regulation (the first phase having been law firm registration and the nomination of representatives by each BC law firm). The process of completing this report is intended to ensure that each firm reviews its practice management systems in light of existing rules and regulations (such as those found in the Legal Profession Act, the Code of Professional Conduct for British Columbia, and the Law Society of BC Rules).

While this latest phase of law firm regulation began in 2018, with the selection of BC law firms to participate in a pilot project, law firm regulation has been years in the making. Well before the 2012 amendments made to the Legal Profession Act, which gave the Law Society the authority to regulate law firms, the Law Society was considering law firm regulation as a means to address deficiencies in law firm policies and procedures. The notion was that if law firms were operating with internal processes and policies that were compliant with existing rules, some of the complaints brought to the Law Society’s attention might be eliminated. At its core, law firm regulation represents a shift from reactive to proactive regulation.

In order to ensure that the goal of proactive regulation is met, the Law Society prepared an online self-assessment “tool,” made up of the Self-Assessment Report and a Workbook, which was tested by the pilot project. As part of the pilot project, completion of the Self-Assessment Report was mandatory and use of the Workbook was optional.

The Self-Assessment Report used in the pilot project had eight parts, referred to as “elements,” that focused on the following core areas: management, client relations, confidentiality, conflicts of interest, records management, fees and disbursements, financial management, and diversity. For example, Element 7 “Ensuring Responsible Financial Management” had as its objective: “[e]stablish mechanisms to minimize the risk of fraud and procedures that ensure compliance with Law Society accounting rules.” The remaining elements had equally descriptive titles and objectives.

Each element was broken down into “indicators,” defined by the Law Society as “key aspects of firm practice which support the objective.” These indicators were written in the form of a question, which was to be answered using the following 4-point scale:

  1. Policies and processes have not yet been developed
  2. Policies and processes are under development but not all are functional
  3. Policies and processes are in place and are functional
  4. Policies and processes are fully functional and regularly assessed and updated.

One of the indicator questions, Indicator 1 of Element 7, was: “[a]re policies and processes in place that ensure that client funds received in, and withdrawn from trust accounts are properly handled?”

The Workbook, consisting of a list of “considerations” and “resources” tailored to each indicator question, was included to assist law firms with answering these questions. The “considerations” were defined in the Guidelines as a “more detailed list of the types of policies, procedures, processes, methods, steps and systems that a prudent law firm might employ,” while the  “resources” were defined as links to relevant materials that could assist a firm “establish or improve their policies and processes.”

After the completion of the pilot project, the Law Society’s law firm regulation task force drafted recommendations, all of which were adopted by the Benchers at their October 2019 meeting. This paved the way for Recommendation 1, the “profession-wide implementation of the self-assessment process.”

Acceptance of these recommendations also set the timeline. In 2020 the self-assessment report will “undergo… modifications to improve its format, functionality and content, including revising the rating scale, adding a goal setting component… and requiring firms to review the material contained in the Considerations and Resources sections.” While 2020 will be the year that the self-assessment tool is reviewed and revised, it will also be the year that the Law Society’s resources are updated so that in 2021 when the first third of BC law firms is required to self-assess, they will have comprehensive resources to refer to.

When law firms complete their Self-Assessment Report, they can rest assured that the completion of this report is for educational purposes and that their answers will not be used in the disciplinary process. Specifically, Recommendation 2 states that self-assessment is “educational in nature,” so information gathered through the self-assessment process “will not be used as evidence in, or to inform the outcome of, a disciplinary action or proceeding.” This position is reaffirmed by the Law Society in its post on law firm regulation: “information provided to the Law Society by firms in their self-assessment report will not be used in the disciplinary context.” Further, Recommendation 7 stipulates that materials prepared by the Law Society to assist lawyers with preparing policies and procedures, will not be “prescribed.” Instead, the Law Society may develop “sample policies and procedures as part of the expanded set of practice resources that will be made available to all firms.”

In 2027, after two self-assessment cycles are complete, the Law Society will spend the year evaluating the self-assessment process and, on the basis of that evaluation, will “make evidence-based recommendations to the Benchers about future phases of law firm regulation.”

2027 is a few years off, but 2021 is just around the corner. Even though the self-assessment package used in the upcoming self-assessment cycle will differ from that used in the pilot project, BC law firms could use 2020 to assess their internal policies and processes against the pilot project self-assessment tool (which is available on the Law Society’s website). However, with the, as yet unknown, consequences of the COVID-19 pandemic, the Law Society could decide to delay implementation of this phase of law firm regulation.

Pelar Law Society Rules

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.

© 2019 Pelar Davidson

Pelar Law Society Rules

Law Firm Regulation

Protection of the public

The object and duty of the law society of BC, as specified by the Legal Profession Act, is to protect the public interest. One way that the Law Society of BC accomplishes this is through regulation of its members.

A new way that the Law Society of BC hopes to accomplish this is through regulation of law firms. With law firm registration starting in May 2018, law firm regulation went into effect. As part of its registration, each law firm in BC was required to nominate a designated representative, who would be required to respond “promptly and completely to any communication from the [Law] Society.”

Once law firms had registered, the Law Society of BC randomly selected 10% of BC law firms to participate in a pilot project. Those pilot firms were required to complete the Law Society of BC’s online self-assessment tool by the end of October 2018. Those self-assessments are intended to help law firms and their representatives evaluate their practice management systems. The Law Society will use feedback from the law firms in the pilot project to determine next steps in its implementation of law firm regulation.

While the Law Society of BC has not specified exactly what areas will be covered in its law firm regulation, initial Law Society of BC documentation touched on some major areas in law firms, including: accounting, marketing, hiring practices, training, and education. In anticipation of the adoption of law firm regulation, BC lawyers and law firm staff might want to familiarize themselves with the Law Society of BC website, particularly its links to the Legal Profession Act, its Rules, and Code of Professional Conduct. A review of these documents, along with other Law Society resources, should provide a context for each law firm to review its policies and procedures.

The Law Society of BC has expressed its hope that law firm regulation will result in potential practice issues being resolved before they create problems for the legal community and the public.

Future blogs will focus on individual rules and how those might inform law firm practices.

© 2019 Pelar Davidson

Pelar Law Society Rules

FLSC Model Rule Changes

Changes to the Federation of Law Societies of Canada model anti-money laundering rules

In 2004, the Federation of Law Societies of Canada developed the first of its model anti-money laundering rules: the “no cash” rule. Four years later, the Federation finalized its client identification and verification rules. Those model rules were quickly adopted by the Canadian law societies, including the Law Society of BC.

In October 2018, with input from the provincial and territorial law societies across Canada, a new model rule and revisions to the model anti-money laundering rules were published by the Federation.

New Model 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 are only to 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, 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. Furthermore, “upon completion of the legal services,” lawyers will be required to refund any balance in trust.

No-Cash Rule

The no-cash rule restricts lawyers from accepting cash from their clients. In this rule, the presumption is that lawyers will not accept cash, with some exceptions. Other than as provided for in these exceptions, lawyers are not allowed to accept cash, in aggregate, on any one file of $7,500 or more.

In the revised model rule, a lawyer cannot accept more than $7,500, in aggregate, in cash on a file (or for a transaction). While the difference between the old and the new model rules amounts to $0.01, the new wording makes it an easier concept to grasp.

The most significant change to this model rule, however, is the elimination of an exception to the rule: “cash received pursuant to a court order.” Once this rule is adopted, cash received pursuant to a court order will be restricted in the same manner as all other cash receipts.

Client Identification and Verification

The 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) requiring 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.”

Client Identification

Client identification entails gathering pieces of information from each client prior to providing legal services. A major change to this part of the rules is that the information 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 new client identification rules, there is a new requirement to date information that is received. All records and efforts to obtain verification must be dated and kept.

The 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; not doing so will be considered a violation of this rule, even if a lawyer has made reasonable efforts to verify the client.

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. The verification of an individual must be done immediately, as is currently the case.

As with the change to the no-cash rule, the exceptions to the verification requirement “dealing with funds paid or received pursuant to a court order or a settlement of any legal or administrative proceeding” were 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.”

Conclusion

While the Federation’s model rules have not yet been incorporated into the provincial and territorial law society rules across Canada, given that the previous renditions of the FLSC model anti-money laundering rules were adopted fairly quickly, lawyers and law firms would do well to consider implementing these changes into their own firm policies and procedures so that they are not caught when their particular law society’s rules are changed.

© 2019 Pelar Davidson