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REQUEST FOR INPUT

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PROPOSED AMENDMENTS TO ANTI-MONEY LAUNDERING MODEL RULES

The Law Society is seeking input from the profession on a number of proposed amendments to the Federation of Law Societies of Canada’s Model Rules. Attached here you will find:

  1. Report of Federation working committee
  2. Black-lined and clean versions of the proposed model rules
  3. Proposed new trust accounting model rule 

The Law Society is required to deliver feedback on the proposed amendments to the Federation by March 15, 2018. To provide a meaningful and comprehensive report to the Federation, we are asking for your input by Friday, February 2, 2018.

Please direct your comments to Leah Kosokowsky at lkosokowsky@lawsociety.mb.ca

 

Background

In 2000, the Government of Canada passed the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to reduce the money supply for financing terrorism. Under the legislation, the government created a monitoring agency, FINTRAC, to which all regulated persons and entities, including lawyers, were required to report any suspicious transactions and any cash transactions or electronic funds transfers exceeding $10,000.00 as they related to clients.

The Federation of Law Societies mounted a constitutional challenge to the legislation and temporary injunctions were obtained in many Canadian jurisdictions. Settlement negotiations followed which resulted in the federal government withdrawing the application of the legislation to lawyers.

Concurrently, the Federation developed model rules regarding the receipt of cash and client identification and verification which were drafted in large part to mirror the federal regulations, absent the reporting to FINTRAC. These rules were passed by every Canadian law society, including Manitoba.

 

What’s Happening Now?

While the model rules have not changed since they were enacted, there have been significant developments in the anti-money laundering and terrorist financing world. In particular:

  • There have been substantial amendments to the federal regulations on which the law society rules were modeled in large part;
  • An international mutual evaluation report of the Financial Action Task Force was released in September 2016 in which it identified the exclusion of legal counsel from Canada’s regime as a significant weakness and in which it criticized the effectiveness of law society regulation in this area; and
  • There appears to be renewed interest in the government extending the federal regime to the legal profession.

Accordingly, the Federation of Law Societies established a working group to review the model rules and make recommendations for amendments. The attached report and appendices set out the recommendations and amended rules.

 

Highlights

While a summary of the more significant proposed amendments is provided herein, please refer to the report itself for the detailed analysis and explanation of the proposed changes.

1. No Cash Rule

Under the current rule, lawyers are prohibited from receiving cash in excess of $7,500.00, with certain exceptions, including cash that is received from a peace officer, law enforcement agency or other agent of the Crown acting in his or her official capacity or cash received pursuant to a court order or to pay a fine or penalty. The working group concluded that these exceptions to the rule are used so rarely that they are of limited value and therefore is recommending that they be deleted.

The working group is also recommending the addition of definitions for “disbursements”, “expenses”, “financial institution” and “professional fees.”

2. Client Identification and Verification

The recommended amendments to the client identification and verification model rules are more extensive and more significant. Many of the proposed amendments are intended to reflect the changes that have been made to the federal regulations.

Under the current regime, lawyers are required to identify a client or obtain certain basic information about the client, whenever they are retained to provide legal services. If there is a financial component to the retainer, the lawyer must verify the client’s identity by looking at the original identifying document from an independent source.

The more significant recommended changes to these rules are:

  1. Under the client identification rules, expansion and clarification of the information that must be obtained when the client is an individual;
  2. Under the verification rules, removal of the “reasonable measures” standard for verifying a client’s identity, making it mandatory to verify the client’s identity in the specified circumstances;
  3. The independent source documents that must be obtained be changed to: 
    1. government issued photograph identification; or
    2. credit file information obtained directly from the credit report issuer; or
    3. any two of the following:
        • information from a reliable source that contains the name and address of the individual
        • information from a reliable source that contains the name and date of birth of the individual
        • information that contains the name and confirms a deposit account, credit card or loan with a financial institution; or
        • confirmation from a legal firm that it has previously verified the client’s identity
  4. Additional requirements to verify the identity of clients who are under the age of 16;
  5. When verifying the identity of a client that is an organization, lawyers will be required to obtain and record the names of all directors, all persons who own directly or indirectly 25% of more of the organization or shares in the organization, the names and addresses of all trustees and all known beneficiaries of a trust and in all cases, information establishing the ownership, control and structure of the entity.
  6. Lawyers will be required to take reasonable measures to confirm the accuracy of the information obtained in (e) above and if the lawyer is not able to obtain the information or confirm its accuracy, the lawyer must take reasonable measures to ascertain the identity of the most senior managing officer and treat the activities as requiring ongoing monitoring by the lawyer.
  7. When verifying the identity of a client who is elsewhere, either within or outside of Canada, lawyers will be required to use an agent and to satisfy themselves that the information obtained from the agent is valid and current and that the agent verified the identity in accordance with the model rule requirements.
  8. The time period within which lawyers should verify a client’s identity is immediate but, in any event, no later than 30 days (reduced from 60 days).
  9. Lawyers will have a positive obligation in the course of a retainer to monitor the relationship with the client to ensure that the client’s information and instructions are consistent with the purpose of the retainer and to ensure that the lawyer is not assisting in or encouraging dishonesty, fraud, crime or illegal conduct.

3. New Trust Accounting Rule

The working group identified a concern that a lawyer might use his/her trust account for a purpose unrelated to the provision of legal services, which unnecessarily increases the risk of money laundering or other illegal activity.

The group is therefore recommending a new model rule that will require that all deposits, transfers, withdrawals or transfers of funds through a trust account be directly related to an underlying transaction for which the lawyer is providing legal services.

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