In April 2019, we wrote about the federal government's efforts on transparency in shareholdings for Canada Business Corporation Act companies. In connection with those efforts, which are linked to combatting money laundering, the federal government is also engaged with the Federation of Law Societies of Canada (the "Federation") in addressing money laundering and other illicit activity that may arise in the practice of law. A joint working group (the "Working Group") between the Federation, three provincial law societies and the federal government was established in June for this purpose.
The Working Group states that its mandate is to “explore issues relating to money laundering and terrorist financing that may arise in the practice of law and to strengthen information sharing between the regulators of the legal profession and the government of Canada”. Currently, lawyers follow two general rules to address these issues. The Cash Transaction Rule limits lawyers to handing not more than $7,500 in cash per client and per matter (with an exemption for financial institutions) and to maintain prescribed records. The Client Identification and Verification Rule requires verification of the identity of clients involved in funds transfers and the maintenance of records in those circumstances.
The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada) (the “Act”) contained a number of regulations requiring lawyers to identify their clients and retain records in respect of their clients and related financial transactions. The purpose of these regulations was to assist in the fight against money laundering. These records were producible to the Financial Transactions and Reports Analysis Centre of Canada. The Federation challenged these regulations in the courts, arguing that the Cash Transaction and Client Identification and Verification rules described above are sufficient to combat money laundering. According to the Federation, additional punitive sanctions (including potential jail time for lawyers and their clients) and record keeping requirements violated solicitor-client privilege and effectively turned lawyers into archives for the use of prosecutorial conduct by the state. In 2015, the Supreme Court of Canada agreed with the Federation, finding that the Act allowed for “sweeping law office searches which inherently risk breaching solicitor client privilege…in a criminal law setting and for criminal law purposes”. Accordingly the court struck down the application of these provisions of the Act to lawyers and law offices.
The establishment of the Working Group suggests the commencement of a more collaborative approach whose goal is to have lawyers develop further anti-money laundering rules through their regulatory bodies in a manner which will not prejudice solicitor client relationships. The Financial Action Task Force (a Paris based supra-national organization that provides model standards in this area) has, in the past, not been supportive of reliance only on the Cash Transaction and Client Identification and Verification rules as sufficient regimes to prevent money laundering in transactions involving lawyers. The Working Group is likely to recommend the establishment of a national beneficial ownership registry or at least some attempt by legal counsel to obtain and verify the identity of beneficiaries of trusts and beneficial owners of organizations. The Federation has previously supported making this information public in order to bring Canadian regulatory regimes into line with other anti-money laundering regimes around the world. A public registry would also allow lawyers to disclose information for anti-money laundering purposes without breaching solicitor-client privilege.
Accordingly, financial institutions may find that Canada heads down the road of a public registry of ownership which will be of assistance in the anti-money laundering diligence that is so often connected to on-boarding clients and lending transactions. The Financial Action Task Force has also provided model guidance for legal professionals in this area and has noted that money laundering/terrorist financing may be attracted to cross border transactions involving buying and selling of real estate, buying and selling of business entities, management of client money, securities or other assets, management of bank, savings or securities accounts, organization of contributions for the creation, operation or management of companies and creating operating or management of legal persons or arrangements. These activities of course are often paired with lending transactions from financial institutions or complementary wealth-management transactions involving financial institutions. To the extent that the Federation finds common ground with the federal government of the Financial Action Task Force on their levels of diligence required by lawyers in the fight against money laundering, financial institutions may find that, particularly in respect of transactions in which funds flow through lawyers’ trust accounts, additional information as to the financial institutions’ clients will be required by legal counsel.
Gowling WLG’s partner, Ross Earnshaw, is the President of the Federation.