Law Society enhances diligence standards for lawyers to combat money laundering, terrorist financing

The Law Society of Ontario has approved By-Law amendments aimed at enhancing and clarifying diligence requirements to prevent licensees from assisting clients in money laundering and terrorist financing.

At Convocation last Thursday, the Professional Regulation Committee moved to implement amendments to By-Laws 7.1 and 9, under the Law Society Act. The motion passed, with 37 in favour, 14 opposed and one abstention. The amendments will come into effect Jan. 1, 2022. In the meantime, the Law Society will produce guidance and resource materials for education on the new requirements.

“The Law Society of Ontario needs to provide our licensees with direction and guidance about accepted diligence standards so that they can meet their obligations not to assist clients in illegal activity,” says Megan Shortreed, chair of the Professional Regulation Committee.

The amendments strengthen the Law Society’s anti-money-laundering framework and equip licensees to avoid unwittingly becoming involved or assisting with money laundering and terrorist financing, says Jacqueline Horvat, the Committee’s vice-chair.

“These amendments are part of an ongoing effort by law societies and the Federation of Law Societies of Canada to maintain a comprehensive and up-to-date regulatory scheme that guards against lawyers and licensed paralegals becoming involved in money laundering or the financing of terrorist activities,” says Horvat, who is also a litigator and founder of Spark LLP.

Bencher Gerard Charette opposed the motion and told Law Times the initiative puts small and solo firms "in great peril."

"The new requirement does a great disservice to lawyers and their clients," says Charette, who practises primarily health law, business law, tax and estate planning, with Miller Canfield LLP in Windsor, Ont. "It forces lawyers to interrogate their own clients. It won't survive a Constitutional challenge."

"The large, money-centre law firms will be equipped to meet the vague professional standards set by the new professional rules. The smalls and solos on the other hand, will not fare so well."

In 2001, the federal government enacted the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The Federation of Law Societies of Canada challenged the legislation for the requirements it placed on lawyers to report on client transactions. The Supreme Court of Canada upheld the challenge in 2015, in Canada (Attorney General) v Federation of Law Societies of Canada, but called on legal regulators to develop their own standards which would advance Ottawa’s objective. The Federation drafted model rules aimed at preventing lawyers from being involved in money laundering and terrorist financing, while also protecting solicitor-client privilege.

The Law Society’s amendments properly maintain that balance, says Andrew Spurgeon, chair of the Anti-Money Laundering Working Group.

“I think the enhancement of licensees’ due diligence in terms of identifying the identities of participants in transactions and sources of money will make a contribution to negating money laundering in Ontario,” he says.

Law Society By-Law 7.1 covers “operational obligations and responsibilities,” while By-Law 9, concerns “financial transactions and records.”

One change to By-Law 7.1 provides new methods by which licensees can verify their clients’ identity. When dealing with corporate clients and trusts, another change adds a requirement that licensees identify and verify the corporate directors and make “reasonable efforts” to identify and verify trustees, trust beneficiaries and shareholders owning more than 25 per cent of all shares. If that information is too difficult to obtain, the amendments allow licensees to identify and verify the senior managing officer and monitor the services being provided.

There are two new requirements when a retainer involves the receipt, payment or transfer of funds. Licensees must find out about the source of the funds from the client, but licensees do not have to verify this information, nor find out about the source of funding for other parties to the transaction. Second, licensees must “periodically monitor ongoing retainers” to ensure the client’s activities and funding sources are consistent with the terms of the retainer and the information the client has provided. The requirement does not involve monitoring the client’s business or investigating internal operations, only allowing the licensee to “determine whether there have been any changes that create a risk that the licensee may be assisting in dishonesty, fraud, or other illegal activity.”

Among the amendments to By-Law 9 is a clarification of the cash transaction rule. A licensee cannot accept greater than $7,500 in cash, which is how the Law Society already interprets the requirement. The exemption for cash received pursuant to a tribunal order has been removed, having been identified as a money-laundering risk.

Also under By-Law 9, the changes clarify the restriction requiring trust accounts only be used for “transactions or matters for which a licensee or a licensee’s firm is providing legal services.” Licensees are required not to hold money in trust “beyond a reasonable amount of time” after the performance of services.

In her comments to Convocation, Shortreed said the new obligations are not expected to add extra burdens but to make existing requirements more robust.

“These new requirements do not require licensees to conduct layers of investigations. In the vast majority of instances, the recorded information from the client will be sufficient to conclude the obligation and will be evidence of compliance,” said Shortreed.

Where the client provides information that is “unusual, unreasonable or does not conform with what the licensee knows about the client, additional questioning and professional judgment may be required, as it is now,” she said.