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
BC Law Firm Accounting 