The Federation of Law Societies of Canada (the “Federation”) is in the midst of a consultation with its members, the 14 provincial and territorial regulators of the legal profession, on proposed amendments to the Model Rules that have formed the cornerstone of the law societies’ fight against money laundering and the financing of terrorist activities for more than a decade. The amendments, and a proposed new rule that would tie the use of lawyer trust accounts to the provision of legal services, are intended to ensure that the law societies’ anti-money laundering and anti-terrorism financing regulations are as robust and effective as possible.
As a result of litigation between the Federation and the Canadian government, federal anti-money laundering and terrorism financing legislation and regulations do not apply to members of the legal profession. Acknowledging the importance of combatting these illegal activities, the regulators have been at the forefront of the fight against money laundering and the financing of terrorism since adoption in 2004 of the No Cash Rule. Intended as substitute for the suspicious transaction reporting requirements in the federal Proceeds of Crime (Money-laundering) and Terrorist Financing Act that the Federation challenged in court, the No-Cash Rule prohibits members of the profession from accepting more than $7,500 in cash. A second Model Rule, the Client Identification and Verification Rule, was adopted in 2008 and contains most of the same requirements that are in the federal government’s corresponding regulations. These Model Rules have been adopted and implemented by all law societies as part of regulatory initiatives that are in keeping with important constitutional principles, as affirmed by the Supreme Court of Canada.
Fighting the threat that members of the legal profession will be used to launder money or finance terrorist activities remains a strategic priority for the Federation and its members. Recognizing that the Model Rules had not been reviewed since first adopted, in late 2016 the Federation established a special working group to undertake a full examination of the rules. The Anti-Money Laundering and Terrorist Financing Working Group (the “Working Group”) is also developing best practices guidance on ensuring compliance with and enforcement of the rules. The development of comprehensive educational materials for the legal profession is also underway.
The proposed amendments to the Model Rules would clarify some aspects of the rules and would also impose new obligations, including a requirement to obtain information on beneficial owners of an organization. This proposed change would address a specific criticism of the law society anti-money laundering and terrorist financing rules that has been raised by the Canadian government and the Financial Action Task Force. As there is not currently a robust corporate registry system for beneficial ownership information at either the federal or provincial levels in Canada, the Working Group recognized that compliance with this amendment may prove difficult in some cases. To address this possibility the draft amendments prescribe additional measures that must be taken when the required information cannot be obtained.
A proposed new rule would prohibit legal counsel from depositing client funds into their trust accounts except where directly related to a matter for which the lawyer or firm is providing legal services. The Working Group is of the view that by restricting use of trust accounts, the rule, which is modeled on rules in force in several Canadian jurisdictions, would assist in reducing the risk of lawyers’ trust accounts being used for purposes related to money laundering or the financing of terrorist activities.
The consultation on the amendments and new rule will continue through March 15, 2018. It is anticipated that final amendments will be approved before the summer and will then be referred to the law societies for implementation.
As the Federation’s consultation is wrapping up the Canadian government has launched a mandated review of its anti-money laundering legislation. Although government representatives have suggested on a number of occasions that the government will try again to bring legal counsel within the scope of the federal anti-money laundering and anti-terrorism financing regime, a government lawyer testifying at recent hearings being held as part of the review acknowledged that this may not be possible. Referring to the 2015 decision of the Supreme Court of Canada that found the application of the legislation to legal counsel was unconstitutional, the lawyer said “It won’t be easy. If you read this case, you will realize there is very little latitude to require information from lawyers, or to impose a requirement with respect to the submission of client information.”
Article contributed by Frederica Wilson, Executive Director, Policy and Public Affairs and Deputy CEO, Federation of Law Societies of Canada