Anti-Money Laundering Measures: Client Identification and Verification/Receipt of Cash – What You Need to Know
As Canadian and international concerns over money laundering and terrorism financing have grown, Canadian law societies have tightened rules on the receipt of cash by lawyers as well as client identification and verification.
Like all people in Canada, lawyers are subject to the Criminal Code, but they are exempted from the federal legislative regime under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”) due to constitutional principles that protect the rights of clients and the obligations of legal professionals within their confidential relationships. As a result, the legal profession has adopted model rules for lawyers and notaries to follow that are designed to reflect the government’s legislative objectives under PCMLTFA, while reflecting the rights of clients and the obligations of legal professionals.
Council has adopted amendments to the Rules on Cash Transactions, the Rules on Client Identification and the Uniform Trust Account Rules. These amendments come into force on May 1, 2021. The changes are based on the Federation of Law Societies of Canada Model Rules and are part of the Law Society’s ongoing commitment to combat money laundering.
All lawyers and firms must review and revise their processes to ensure they comply with the existing and new rules. These rules are extremely important in the fight against money laundering and terrorist financing in New Brunswick, Canada and internationally. Adopting and enforcing consistent rules is a critical part of the Federation and the law societies’ strategy to address the risks of money laundering and terrorism financing activities.
Highlights of the Amended Rules
Rules on Cash Transactions (“No Cash” rule):
- No longer $7,500 in a single transaction, but $7,500 in connection with a client matter (s.2)
- Limit is now “greater than $7,500” rather than $7,500 or more (s.2)
- Specify that the exceptions to the cash limit apply only where the lawyer or law firm is providing legal services (s.5)
- The exception for cash received pursuant “to a court order” is removed (paragraph 5(c))
- If more than $7,500 accepted for professional fees, expenses, and disbursements refunds must be in cash
- Added definitions of terms used in the rule: disbursements, expenses, financial institution, financial services cooperative, credit union central and professional fees
Rules on Client Identification, 2021:
- Added definitions of terms used in the rule: disbursements, expenses, financial services cooperative, credit union central and professional fees
- Amended definitions of “financial institution” to incorporate changes in the federal regulations (referred to there as “financial entity”), including the addition of references to a “financial services cooperative” and a “credit union central”
- Amended definitions of “funds”, “public body” and “securities dealer” to maintain consistency with the government regulations
- Added specific reference to the obligation on a lawyer to “know your client” (subsection 2(1))
- Verification – the exception for funds paid pursuant to a court order and paid or received pursuant to the settlement of any proceeding is removed (subsection 5(2))
- Deleted the words “take reasonable steps to” from subsection 6(1) to match changes in the federal regulations
- When receiving, pay, or transferring funds - new requirement to obtain and record information about the source of the funds (subsection 6(1))
- Use of an agent agreement is required when lawyers choose to use an agent in Canada as well as when agent is required for verifying id of a client outside of Canada (subsections 6(2) to 6(5))
- Amended the provisions of the Client Identity Verification – subsection 6(1) & 6(2) (now subsection 6(6)) to specify the documents and information that may be relied upon to verify an individual’s identity (photo ID, credit file, etc.); these changes reflect extensive amendments to the federal regulation
- Amended the rule to incorporate new provisions on the verification of the identity of children (subsections 6(8) & 6(9))
Verification and Identification – new requirements for organizations
- Amended subsection 6(3) (now subsection 6(10)) to create a requirement to obtain, rather than simply to make reasonable efforts to obtain, the names of all directors of an organization; tracking the changes to the federal regulations. The amended rule also introduces a requirement to “take reasonable measures to confirm the accuracy of the information obtained (subsections 6(10) & 6(11))
- Amended subsection 6(3) (now subsection 6(10)) to require lawyers to obtain information on beneficial owners of an organization; this change addresses a specific criticism of the law society anti-money laundering and terrorist financing rules that has been raised by the government and the FATF
- Amended subsection 6(12) (now subsection 6(16)) to the allowed time to 30 days for verification, which is in keeping with the federal regulations; this addresses concerns that a transaction could be completed before the expiration of the 60-day deadline for verification, thus undermining the purpose of the requirement
- Added a new provision requiring ongoing monitoring of clients; such a requirement is included in the revised federal regulations (s.10)
- Added a reference to ongoing monitoring to the provision requiring a lawyer to withdraw from representation of the client if, once retained, the lawyer becomes aware that they would be assisting the client in fraud or other illegal conduct (s. 11)
Uniform Trust Account Rules:
- Definitions added to ensure consistency with the definitions found in the Rules on Cash Transactions and the Rules on Client Identification, 2021
- Explicitly provide that funds paid into or out of a trust account must be directly related to legal services provided by the lawyer or law firm (definition of “trust money”; paragraph 3(5)(a), s. 3.1)
- In addition, on completion of the legal services to which the funds relate, a lawyer or law firm must take reasonable steps to obtain appropriate instructions to pay out the funds as soon as practicable (s. 3.1)
Members acting in a representative capacity (s. 8.1 – new section)
- When a lawyer receives money in a representative capacity such as an executor or administrator of an estate, the money must not be paid into the lawyer’s trust account but must be paid into a separate trustee account that has been established by the lawyer for that purpose.
When a lawyer acts as a personal representative, an executor, administrator, etc., the lawyer must:
- notify the Executive Director in writing that he or she is acting in a representative capacity, within fourteen days of receiving the money;
- submit particulars relating to the member’s appointment and a list of the beneficiaries of the estate or trust, together with their last known addresses; and
- file with the Executive Director an undertaking to submit, on demand, the books, records, accounts and transactions of the estate or trust in a form sufficient to accommodate an examination, review, audit or investigation ordered by the Executive Director and to co-operate with the Society’s auditor or investigator in the conduct of any examination, review, audit or investigation that may be ordered.
To assist the legal profession in following the model rules, the Federation of Law Societies has developed the booklet Guidance for the Legal Profession which details the professional responsibility to avoid facilitating or participating in money laundering or terrorist financing activities.
As an additional resource, the Federation’s Anti-Money Laundering and Terrorist Financing Working Group (“AMLTF Working Group”) has also developed Risk Assessment Case Studies to raise awareness of money laundering risks in legal practice by exploring real world scenarios. Each case study identifies “red flags” arising on the facts and offers guidance on how members might respond to mitigate the risks of involvement in or facilitation of illegal activity.
To address the money laundering and terrorism financing vulnerabilities they may face, legal professionals need to be aware of the risks that may be inherent in legal practice. A Risk Advisories document published by the Federation is intended as a quick reference on money laundering risks that can arise in five areas. These include real estate transactions, litigation, setting up and managing trusts, setting up shell corporations and private lending transactions. Law societies are invited to share the document with members at their discretion.
Some risks identified in this publication are related to clients and their activities; others may arise from the nature or circumstances of a transaction. Some risks may be more likely to arise in specific practice areas, others may arise regardless of the area of practice.
In addition, you will find the following additional resources:
- Guidance on Expired Government-Issued Identification
- COVID-19 and Client Identification and Verification
- Guidance on Using an Agent
- Guidance on Monitoring Obligations
- Frequently Asked Questions on the Client Identification and Verification Model Rule