Canadian anti-money laundering laws need update

The legislation originally placed lawyers within the scope of the Act.

“They were identified in the law because they were an area that was vulnerable,” Peter Lamey, a spokesman for FINTRAC says. “All the businesses that the law identified as reporting entities are engaged in financial transactions where they act as financial intermediaries—that is, as gatekeepers to the legitimate financial system.”

The law societies challenged the inclusion of lawyers in the Act, and in late 2001 they got their way in the Supreme Court of British Columbia, which granted a 10-year exemption. The rest of the country followed suit, but the clock has run out and the Finance Department is making its case to reverse the ruling.

One of the major drivers for their request? Criminals remain largely unknown and unpunished in Canada, reported the Globe and Mail in June 2011.

The Canadian Centre for Justice Statistics says the reported number of money-laundering schemes has increased in the past decade, but law enforcement officials have been largely unable to locate and punish the criminals responsible.

Where’s the line?

One of the arguments lawyers make against being included in the Act revolves around attorney-client privilege.

Few would call into question the paramount importance of confidentiality guarantees for attorneys and their clients. These guarantees are a critical component of the framework of principles and conventions that provides for fair trials, a cornerstone of our legal tradition. It seems legitimate to ask, however, whether certain services provided by legal professionals fall outside the sphere of activity that attorney-client privilege was designed to safeguard.

No one would suggest breaching the confidentiality of an attorney’s consultations with, for example, a client facing trial for car theft. But when lawyers venture into overtly financial terrain, essentially taking deposits from clients into trust accounts and acting as the public face of their clients’ money, it could be argued they’re entering a fundamentally different sphere of activity—conducting the same type of activity engaged in by financial services professionals, who are subject to the PCMLTFA.

“I think that’s the spirit of the legislation,” Lamey says. “It was identifying those activities where [lawyers] became financial intermediaries or are involved in the handling of transactions other than what is specifically related to fees, retainers, and bail.”

Both Lamey and a spokesman from the Finance Department declined to comment directly on any position Finance may have on the specific question of the appropriate boundaries of attorney-client privilege, and whether that position will figure prominently in its arguments before the bench next month.

Advice for advisors

The Act exemption for lawyers has at least some potential to make life difficult for advisors. The Canadian legal scene has its share of lawyers who exclusively serve organized crime clients, and advisors would be remiss if they neglected this fact.

“The law for the advisor is that they have to make a reasonable effort to make a third party determination and to learn the beneficial owner. Do I know who owns the money? How far do I have to go [to find out]? Right now the law says [advisors] have to make reasonable efforts: asking the question or making the request,” Lamey explains.

If the advisor can’t make a determination on the identity of the third party, he or she may want to consider flagging the account as high-risk. If the account is held by a corporation, the requirement is to learn the name, address and occupation of all the directors and all those who control more than 25% of the company.

Advisors “are also asked to take a risk-based approach to their compliance, and if they’re uncertain about who the actual beneficial owner of the account is, [they] may look at the account and say, ‘Am I operating a higher risk account relative to the others?’ ”

“That may elevate your risk profile of the account and lead ultimately to filing a suspicious transaction report if you feel there’s something else going on or if you’re assessment leads you that way,” Lamey says.

If the tide turns

Advisors would do well to keep an eye on the outcome of the Finance Department’s attempt to bring lawyers within the reach of the PCMLTFA.

A win for the government may give advisors reason to be even more careful when it comes to determining whose money they’re managing. Assume the case of an advisor and an attorney who have a common client. The attorney, now subject to the PCMLTFA, submits a suspicious transaction report to FINTRAC; but the advisor, out of ignorance of any wrongdoing on the part of his client, does not. Would a report from the attorney automatically trigger an investigation into why the advisor failed to file a report?

Concerns about this type of scenario may already be warranted: accountants, for example, presently have FINTRAC reporting requirements, so it might be argued that from an advisor’s perspective, a government victory next month wouldn’t change much. At the very least, however, a win for Finance would seem to open up an additional front in the area of compliance, upping the ante for advisors in terms of vigilance and due diligence.

Lamey, as well as a spokesman for the Finance Department, declined to comment specifically on this possibility. Lamey notes, however, that in 2008 FINTRAC acquired the legislative authority to issue what they call Administrative Monetary Penalties (AMPs). To date “there have been no AMPs for not filing suspicious transaction reports,” but AMPs have been issued for “recordkeeping requirements, client identification and policies and procedures that are documented,” he explains.

Penalties can be as high as $500,000, and those fined $10,000 or more are identified on FINTRAC’s website.