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The Federation of Law Societies of Canada (the Federation) approved a Model Code of Professional Conduct and amendments to the model client identification rules, which govern client identification and verification, cash transactions, and permitted uses of lawyers’ trust accounts. These model rules have been implemented by the Law Society of Alberta.
Within the Model Code, there are Rules that seek to limit the handling of cash by lawyers and ensure that legal counsel engage in due diligence in identifying their clients. These measures have been the cornerstone of legal regulators’ anti-money laundering and anti-terrorism financing initiatives.
The Rules of the Law Society of Alberta and Code of Conduct address the conduct of lawyers and prohibit them from assisting anyone to commit an illegal act, including money laundering and terrorist financing. By adhering to these fundamental principles, lawyers help prevent crime and maintain public trust in the justice system.
Anti-Money Laundering Rules
The No Cash Rule means lawyers must not accept:
- more than $7,500 in cash from clients or prospective clients, in respect to any one client matter.
- more than $7,500 in cash on a client matter even if there is more than one client. The limit applies despite the number of clients.
A lawyer can accept greater than 7,500 cash from a client:
- for unrelated matters, but only if the amount for each individual matter is $7,500 or less; or
- in foreign currency, but the amount once converted to Canadian dollars must not be greater than $7,500.
The following exception applies:
- A lawyer may receive more than $7,500 cash in connection with the provision of legal services if it:
- comes from a financial institution or public body;
- comes from a peace officer, law enforcement agency, or other agent of the crown (acting in their official capacity);
- is used to pay a fine, penalty or bail; or
- is for professional fees, disbursements, or expenses, provided that any refund is also made in cash.
When providing any legal service, lawyers are obliged under the Rules to identify a client by obtaining the client’s name, address, phone numbers, and occupation. Lawyers must identify client organizations by obtaining the organization’s contact information, as well as information about the individual that instructs the lawyer on the organization’s behalf, and the nature of the client’s business.
Alberta lawyers may complete virtual verification of identity with the use any of the technology products dealing with client identification and verification that have been approved by the Innovation Sandbox to comply with their obligations under the Law Society’s Rules.
More detailed verification of a client’s identity is required in the event the lawyer is engaged in, or gives instructions in respect of, the receipt, payment or transfer of funds on the client’s behalf. As part of this process, lawyers must obtain information about the source of the funds being transferred.
When working with corporate clients, lawyers must take additional steps to determine ownership and control of the corporation and assess the accuracy of that information. For clients that are corporations, societies or unregistered organizations, the lawyer must verify the identity of the person who instructs on behalf of the organization.
If a lawyer is unable to verify identity, the Rule requires the lawyer to exercise diligence in determining and assessing potential risks associated with the client’s transaction.
Lawyers can use one of the following three methods to verify an individual client:
- government-issued photo identification method;
- credit file method; or
- dual process method that allows the lawyer to refer to information from two different, reliable and independent sources that contain:
- the individual’s name and address;
- the individual’s name and date of birth; or
- the individual’s name and confirmation they have a deposit account, credit card or other loan with a financial institution.
When obtaining photo identification from a client, the lawyer or agent is required to meet with the client and obtain a copy of the identification. This can be done remotely using one of the tools approved by the Law Society’s Innovation Sandbox, but otherwise it must be done in person.
The dual process method allows verification using sources such as banks, utility service providers, cell phone providers and government agencies, to name a few.
Lawyers can also use an agent to verify the identity of an individual, including circumstances where the individual is not in Canada. The agent should provide the same information the lawyer would have gathered to verify the client’s identity. View the AML Guidance on Use of Agents for more information.
The Model Rules do not specify who can act as an agent, so lawyers should ensure agents are reputable and must have a written agreement in place.
Please note that Alberta lawyers may complete virtual verification of identity with the use any of the technology products dealing with client identification and verification that have been approved by the Innovation Sandbox to comply with their obligations under the Law Society’s Rules.
Exemptions to the Identification and Verification Rules
Not all client relationships are captured under this rule. For example:
- in-house and corporate counsel are exempt as they only provide legal services to their employers.
- lawyers who provide legal services through a duty counsel program are exempt, except when giving instructions for receiving, paying or transferring funds.
- lawyers who act as an agent for another legal professional or when a matter is referred by another lawyer – provided the other lawyer has complied with the identification and verification requirements.
Other exemptions apply when funds are from certain sources. For example, when funds are:
- transferred from the trust account of one lawyer to another;
- paid to a financial institution, public body or reporting issuer;
- sent by electronic file transfer of funds (EFT); or
- paid or received to pay a fine, penalty or bail or for professional fees.
Lawyers are required to make reasonable efforts to obtain information about the beneficial owners of an organization and about the control and structure of the organization. Identifying beneficial ownership is important to remove anonymity and identify the actual individuals behind a transaction.
Beneficial owners are the actual individuals who are the trustees or known beneficiaries and settlors of a trust, or those who directly or indirectly control 25 per cent or more of an organization, such as a corporation, trust or partnership.
Collection and confirmation of beneficial ownership information is an important step in client identification and ensuring that lawyers are not assisting illegal transactions. You may obtain information establishing the organization’s structure or beneficial ownership from the organization, either verbally or in written form. Concealing beneficial ownership information of accounts, businesses and transactions is a technique used in money laundering and terrorist financing schemes.
Lawyers must monitor all client relationships, to assess if information about the client’s activities and source of funds is consistent with the purpose of the retainer. Lawyers must maintain a record of the results of their inquiries.
The purpose of monitoring is to assess if there is a risk that the client is engaged in fraud or other illegal conduct. Lawyers are obliged not to participate in, or facilitate, money laundering or terrorist financing. If a lawyer discovers the client is engaged in illegal conduct, the lawyer is obliged to withdraw from representing the client.
View the AML Monitoring Guidance for more information.
Using interactive tools like scenarios, videos, and quizzes, the Federation of Law Societies has developed an online learning program to provide guidance to legal professionals on how to mitigate money laundering and terrorist financing risks and comply with their legal and regulatory obligations.
The program is divided into five interactive modules that provide an overview of:
- the problem of money laundering and terrorist financing;
- risks that may be faced by legal professionals;
- key due diligence requirements under the Model Rule on Client Identification and Verification and how to comply;
- proper use of trust accounts; and,
- restrictions on cash transactions.
Specific areas of practice are more vulnerable to money laundering and terrorist financing. Lawyers working in real estate, shell corporations, private lending, trusts and litigation need to be aware of specific risks that are more likely to arise in their practice area and need to be able to recognize where additional due diligence may be required.
The Federation of Law Societies of Canada, in conjunction with the Anti-Money Laundering and Terrorist Financing Working Group, has created specific Risk Advisories related to each of the abovementioned areas of practice. Each Advisory identifies the specific situations and issues that make that area of practice vulnerable to criminals and provides a detailed list of potential client and transaction risks lawyers need to be aware of when engaging in the practise of law.
Risk Advisories by Area of Law
- Risk Advisories – Shell Corporations
- Risk Advisories – Real Estate
- Risk Advisories – Private Lending
- Risk Advisories – Litigation
- Risk Advisories – Trusts
Risk Assessment Case Studies
The following are sample forms that you can use to help meet the client identification and verification requirements outlined in the Rules. You are encouraged to download these sample forms and personalize them for your own needs.
- Attestation for Verification of Identity
- Verification of Identity Agreement
- Verification of Identity (Individual)
- Verification of Identity (Organizations)
- Client ID Method Confirmation Form for Dual Method and Credit File
We have hosted several education sessions on this topic to answer further questions:
- Anti-Money Laundering and Anti-Terrorist Financing Webinar
- Accompanying Presentation Slides
- Frequently Asked Questions: Anti-Money Laundering and Anti-Terrorist Financing Webinar
- Accompanying Presentation Slides
Why is the Law Society (and the Federation of Law Societies of Canada) concerned about money laundering and terrorist financing activities?
Money laundering is on the rise in Canada. The Federation and its member law societies have been actively engaged in the fight against money laundering and the financing of terrorist activities for more than 15 years.
Effective anti-money laundering and terrorist financing rules and regulations for lawyers continue to be a priority for all law societies in Canada.
Doesn’t Canada have federal legislation to prevent money laundering and terrorist financing activities?
Canada has enacted federal legislation to prevent these crimes through the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
The Act requires designated individuals and institutions to report information to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) about financial transactions of their clients, including large cash and suspicious transactions.
However, lawyers are exempt from this Act due to solicitor-client privilege.
Why does the Law Society need rules for lawyers around anti-money laundering and terrorist financing activities if there is federal legislation?
Like all people in Canada, lawyers are subject to the Criminal Code, but they are exempt from the Proceeds of Crime (Money Laundering) and Terrorist Financing Act due to solicitor-client privilege.
Lawyers must comply with obligations (Code of Conduct) imposed by their law society to ensure they are not facilitating money-laundering and terrorist financing. The rules and regulations exist to address the conduct of lawyers and by adhering to these fundamental principles, lawyers help prevent crime and maintain public trust in the justice system.
The Rules also protect the public’s right to independent legal counsel and ensure solicitor-client privilege.
Why are lawyers specifically targeted by people who are involved in money-laundering and terrorist financing?
As lawyers are exempt from the Proceeds of Crime (Money Laundering) and Terrorist Financing Act due to solicitor-client privilege, criminals may seek them out because communication with their lawyer, as part of legal advice, is protected.
Lawyers may be used to:
- give the appearance of legitimacy to illicit transactions;
- facilitate money laundering by creating a company or trust, or through the sale or purchase of a property; and
- eliminate the trail of funds back to the client using a trust account.
Are the rules around anti-money laundering and terrorist financing the same for all lawyers across Canada?
The Federation approved Model Rules to prevent money laundering that are being implemented by several law societies and is under review by others.
Each of Canada’s law societies enforces an ethical code of conduct for lawyers in their jurisdiction. Lawyers are prohibited from assisting anyone to commit fraud or other illegal conduct.
A law firm cannot receive $7,500 or more in cash for one client matter or transaction unless it meets one of the exemptions listed in Rule 119.57(4). The cash receipts apply on a cumulative basis.
These exemptions include funds received from a financial institution or public body, from a law enforcement agency, for the payment of fines/penalties or for legal fees, disbursements or bail.
If the law firm breached the $7,500 in cash, the law firm should self-report the matter to the Law Society and discuss with the Practice Advisor the possible return of the cash received. Send the information by email and include:
- Information about the client;
- client trust ledger card;
- cash receipt;
- bank statement; and
- any other applicable documents relating to the cash transaction.
What happens if a law firm has to return funds when $7,500 or more in cash had been received for fees and disbursements?
If you are returning on a cash receipt of $7,500 or more, the refund must be returned to the client by way of cash. This puts the client in the same cash holdings position as when he or she came to the law firm.
Typically, the law firm would write a cheque payable to the financial institution to obtain the necessary amount of cash to make the refund. The person/client receiving the cash refund must sign a receipt acknowledging that the cash was paid to them by the law firm.