Tracking dirty money

A turf war between law societies and the federal government is almost inevitable with new rules on anti-money laundering and terrorist financing in the pipeline. From where he sits in his downtown Vancouver office, Kim Marsh doesn’t like what he sees.

Tracking dirty money
Kim Marsh, former head of the RCMP
A turf war between law societies and the federal government is almost inevitable with new rules on anti-money laundering and terrorist financing in the pipeline.

From where he sits in his downtown Vancouver office, Kim Marsh doesn’t like what he sees.

Offshore money pouring into real estate. Trusts and nominees set up to conceal the true owners of companies and property. Neighbourhoods where half the houses are dark at night because properties are being used to park or launder money.

Much of it, says the former head of the RCMP’s International Organized Crime Investigation Unit, has been set up with the help of Canadian lawyers.

“Lawyers, they’re the biggest problem with money laundering in this country, as far as I’m concerned,” says Marsh, now president of IPSA International.

However, Marsh isn’t the only one raising questions about the role some Canadian lawyers may be playing in helping to “snow wash” money and whether Canada’s law societies are doing enough to stop them.

Canada is under increasing international pressure to include lawyers in its anti-money-laundering and terrorist-financing system, setting the stage for a new confrontation between the federal government and Canada’s law societies in coming months.

In 2016, an evaluation by the international Financial Action Task Force identified the absence of lawyers and Quebec notaries as a “significant loophole” in Canada’s anti-money-laundering monitoring system.

That’s at odds, however, with a 2015 judgment of the Supreme Court. It ended a 14-year-long legal saga between the federal government and Canada’s law societies when it ruled that making lawyers subject to Canada’s money-laundering and terrorist-financing act risked violating solicitor-client privilege.

Malcolm Mercer, a partner in Toronto with McCarthy Tétrault LLP and a bencher with the Law Society of Upper Canada, says the ruling did more than simply reaffirm the importance of solicitor-client privilege.

“The greater significance was around the importance of commitment to the client’s cause. That was the new ground for the Supreme Court of Canada that was broken.”

The Federation of Law Societies of Canada considers the case closed.

“It is a cornerstone of our democracy that the public be able to speak in confidence with legal counsel,” says Maurice Piette, president of the federation. “Requiring legal counsel to report confidential client information to the state is unconstitutional because it would violate fundamental legal principles designed to protect the public.”

The federal finance department has a different reading.

Finance department officials don’t see the ruling as the final word but rather as an invitation to amend the law so that it doesn’t threaten lawyer-client privilege.

Finance Minister Bill Morneau has already quietly decided that lawyers should be part of Canada’s anti-money-laundering and terrorist-financing system.

“The government believes that the application of the rules to lawyers is important to maintain the integrity of Canada’s AML/ATF Regime in order to prevent, detect and deter money laundering and terrorist financing in Canada, consistent with international standards established by the Financial Action Task Force,” his office wrote.

“It is important that financial intermediaries (including non-designated finance professionals, such as lawyers and businesses) take measures to ensure they are not unwittingly used to launder money or to finance terrorism.”

Now that the decision has been made, finance department officials are working behind the scenes on proposals to bring to Morneau in the coming weeks.

While Canada has five years to fix the problems identified in the FATF report if it wants to remain in good standing, it has to present a progress report by October.

The finance department’s actions could take a number of forms such as legislation, possibly accompanied by regulations. Officials even muse about working with law societies to craft new rules.

The federation, however, appears cool to the idea.

“Lawyers in Canada are covered by comprehensive anti-money-laundering and terrorist-financing rules and regulations implemented by the law societies,” says Piette, when asked whether the federation would be willing to work with the government to develop a new regime.

“Law societies have been at the forefront of the fight against money laundering for more than 15 years, putting in place a regime that prohibits members of the legal profession from accepting cash from clients and requires them to comply with strict know-your-client rules. In fulfilling their mandates to protect the public, law societies have implemented an anti-money-laundering regime for members of the Canadian legal profession that respects the fundamental rights of all Canadians as affirmed by the Supreme Court of Canada.”

For Mercer, any new proposal from the finance department would have to avoid solicitor-client-privileged information being shared with the state — something that he says the government hasn’t appeared to be willing to do. If information is shared, it leaves lawyers in a conflict, he explains.

“The lawyer is placed in a position where he or she has a potentially conflicting obligation to the state, which could interfere with their commitment to their client’s cause.”

How much money laundering is taking place in Canada depends to a large extent on how you define it.

Canada’s Criminal Code says a money launderer is anyone who “uses, transfers the possession of, sends or delivers to any person or place, transports, transmits, alters, disposes of or otherwise deals with, in any manner and by any means, any property or any proceeds of any property with intent to conceal or convert that property or those proceeds, knowing or believing that all or a part of that property or of those proceeds was obtained or derived directly or indirectly as a result of a) the commission in Canada of a designated offence or b) an act or omission anywhere that, if it had occurred in Canada, would have constituted a designated offence.”

The federation relies on the Criminal Code definition.

However, some of its members, such as Herman Van Ommen, president of the Law Society of British Columbia, believe only transactions involving physical cash qualify as money laundering.

“Money laundering, to me, is taking illicit cash, putting it through some accounts so you can get clean money in a bank account. It starts with cash,” he says.

Van Ommen says B.C.’s law society doesn’t see signs of its members being involved in the practice.

“We don’t have evidence of lawyers being involved in money laundering. We have no evidence that it’s happening once, twice or widespread.”

A case before the society of lawyer Donald Gurney, who is accused of allowing $25 million in offshore money to flow through his trust account without doing substantial legal work for the client, is being treated as a violation of the society’s rule that you can’t be involved in transactions that may assist a client in doing something wrong — not as money laundering, says Van Ommen.

However, experts in tracking down money laundering say the days of gym bags full of cash being brought into a bank branch have given way to much more sophisticated techniques.

The more sophisticated those techniques, the more those seeking to launder money need professionals such as lawyers, says Denis Meunier, former deputy director of the Financial Transactions and Reports Analysis Centre and a member of Transparency International.

“As they move up the ladder . . . they need help. Who is going to help them? Professionals. People who know how to do it.”

Just how many lawyers across Canada have participated — wittingly or unwittingly — in money laundering in recent years is difficult to tell for sure.

The Nova Scotia Barristers’ Society says no lawyers have been sanctioned or charged in connection with money laundering or terrorist financing over the past 10 years. The Law Society of Alberta says it doesn’t have “statistical information available specific to money laundering or terrorist financing offences.”

Ontario lumps any potential money laundering into the same category as other financial wrongdoing, making it difficult to single out.

British Columbia says it knows of two cases — both involving former members of the society. One is in Canada and the second is in the United States.

However, Mora Johnson, an Ottawa lawyer who specializes in anti-corruption, says you just have to look at the jurisprudence for law societies across the country in CanLII to find them.

“There are quite a few lawyers disciplined for money laundering if you go down the list.”

A study prepared for FINTRAC in November 2015 and obtained by Canadian Lawyer under the Access to Information law analyzed 40 cases of money laundering across Canada between 2000 and 2014. Lawyers were high on the list.

“The second largest profession in the sample are lawyers, representing 15 per cent of the individuals charged in the cases reviewed,” the authors wrote. “Based on court documentation, lawyers convicted of money laundering were willing to exploit reporting exemptions in order to launder funds.”

The FINTRAC study highlights the 2005 case of Toronto lawyer Simon Rosenfeld in which wiretaps confirmed Rosenfeld used solicitor-client privilege “to enhance his money laundering services.”

Rosenfeld was convicted of laundering $250,000 and US$190,000. He was sentenced to three years in prison, but that was increased to five years by the Ontario Court of Appeal in 2009.

“Rosenfeld’s status and position as a lawyer was noted as one of the significant aggravating factors in the court’s decision,” said the report.

Many of the cases studied involved using shell companies to “facilitate layering of funds and legitimize unexplained source of income by masking them as profits from business operations.”

One thing was common to all the cases studied.

“Each of the money laundering operations involved at least one individual with a ‘white collar’ profession,” according to the study.

Experts say real estate transactions are a popular way to launder money, in part because of the large sums involved.

A Transparency International study made public earlier this year raised questions about who is buying some of Canada’s priciest real estate.

“Transparency International Canada’s analysis of land title records found that nearly a half of the 100 most valuable residential properties in Greater Vancouver are held through structures that hide their beneficial owners,” the authors wrote.

“Nearly one-third of the properties are owned through shell companies, while at least 11 per cent have a nominee listed on title.”

Among the report’s recommendations was that “governments and professional associations should introduce rules prohibiting lawyers, accountants and other professionals who are not registered with the relevant anti-money laundering supervisory body from engaging in real estate transactions.”

Marsh points to the millions coming into Canada from China, which is being poured into the real estate market. He says lawyers and banks aren’t doing enough to vet people and determine the true source of the money.

“So if you’ve got 10 people sending 50K each, how do you know what the sources of funds are? Did you do due diligence on all 10 of those people?”

Lawyers can also make it difficult to determine who is the actual beneficial owner of a corporation, says Johnson.

“A bank, just as an example, does business with that corporation, they have to ask the question that is in Canadian law — who is really behind the corporation. They need to know. Is it legitimate or is it a corrupt official? Is organized crime the true owner?

“What we find is when due diligence is performed is that often a trail hits a brick wall at a law firm and then the information is simply unavailable.”

 Johnson is concerned that Canada’s legal profession risks being a weak link in Canada’s anti-money-laundering, anti-terrorism-financing system.

“If I were a criminal organization or terrorist group looking to set up a trust for illegal purposes, would I pick a trust company or financial institution? Probably not,” says Johnson. “They have statutory AML rules and obligations and they are quite strict; whereas solicitor-client privilege and the way things are currently could be quite attractive to criminals seeking anonymity for their illegal entities, arrangements and transactions.”

Without the co-operation of the professionals who participate in transactions, money laundering is difficult for police to detect, adds Johnson.

“I think the real difficulty with AML is that it is very different from other kinds of offences and other kinds of crimes in that it’s completely secret and hidden unless it is detected by the people who are there helping with the transactions.”

While a lawyer can refuse to represent a client who asks them to do something they believe is illegal, solicitor-client privilege means they can’t then alert authorities that somebody is trying to break the law, Johnson points out.

“What if a client asks a lawyer to do something that is clearly illegal and the lawyer says no? There’s no reporting function. Unlike, say, financial institutions or others, that information will never see the light of day. It will never be useful to law enforcement.”

The fact that some professionals, such as lawyers and Quebec’s notaries, aren’t covered by federal anti-laundering rules undermines Canada internationally and risks Canada getting a reputation that could subject business transactions conducted in Canada to more checks, says Meunier.

“When Canada makes claims about money laundering or a commitment to prevent tax evasion and money laundering and that kind of thing, it can make all kinds of claims except it has this big hole in its system and that is because some of the most desirable facilitators and gate keepers and the most professional and well-educated people aren’t covered.”

Law societies, though, say they are taking the steps necessary to prevent and police any potential money laundering by their members.

The Federation of Law Societies of Canada has drafted two model rules, which have been adopted by individual law societies across the country.

The first, known as the No-Cash Rule, was adopted in 2004.

“It prevents lawyers and Quebec notaries from accepting cash in amounts of $7,500 or more other than if the payments fall within certain defined exceptions mirroring exceptions contained in the federal regulations,” says Piette.

The second is the Client Identification and Verification rule adopted in 2009, which imposes comprehensive know-your-client requirements on lawyers and Quebec notaries, says Piette.

Individual law societies can go further. In British Columbia, for example, Van Ommen says the law society audits every lawyer’s books every six years and more often if they are considered “at risk.”

British Columbia’s law society has also given seminars, webinars and issued information briefs on the client ID and no-cash rules, he says.

In Nova Scotia, the law society is vigilant about the rules to prevent money laundering, says Darrel Pink, executive director of the Nova Scotia Barristers’ Society. “Any time we learn that a lawyer in Nova Scotia has failed to comply with the Client ID Rules, the society works with that lawyer to address the weaknesses and ensure future compliance or undertakes another response that will ensure the purpose of the rules is met.”

Meunier says the no-cash rule is good, but the law societies have too many loopholes in their client ID rule, which can be exploited.

“There are so many exceptions to that rule that basically you could probably find a reason if ever a law society auditor comes to you and say I applied this exemption so, therefore, I didn’t have to go too far.”

Beyond the requirements of the law societies, Meunier says there are questions lawyers should ask themselves to ensure that they don’t end up facilitating laundering — wittingly or unwittingly.

Some areas are more prone to money-laundering activities than others, he says.

“Lawyers are involved in real estate transactions particularly. But also setting up complex structures in such a way that it would be difficult to find out who the beneficial owner is and mortgage fraud.”

Know not only your client but also the key risks they present, Meunier advises.

“This is what the casinos, the banks, everybody else is supposed to be doing and that is to identify the client in terms of who they are, what kind of business they’re in. What kinds of products are they involved in? The delivery channels — how do they conduct their business? Face to face? In person? The geographic location of the person? Other relevant factors such as is this person potentially a politically exposed person? Who is in front of me?”

One should also ask pointed questions about where they got the money, says Meunier.

“When you take a look at that and you put the lawyer in front of those people, they should be asking questions about the source of funds. Somebody who tells you ‘I got a big bonus because I left the public service and here’s $20 million invested in a particular corporation’ . . . maybe that’s the kind of question you should be asking.”

Lawyers should also ensure their own offices are equipped to deter prospective money laundering, says Meunier.

“Are they training their staff and are they updating the rules, following what’s going on in the trends in this business? Do they have a compliance officer who is responsible for making sure that everybody is following the rules within the firm and do they review their policies and procedures to make sure that they detect those situations?”

Meunier says Canada is an international outlier when it comes to applying rules to prevent money laundering to the legal profession, but other countries have found ways to include lawyers in anti-money-laundering regimes without jeopardizing solicitor-client privilege.

For example, lawyers aren’t subject to an anti-money-laundering regime in the United States, but they are in the United Kingdom, he says.

Australia and New Zealand are moving to include lawyers in their anti-money-laundering systems. In the case of New Zealand, they are tying it to specific types of transactions such as real estate sales or acting as a nominee.

“I did a count a while back and you’re probably looking at over 70 per cent of countries — and we’re talking some of these banana republics included — have national legislation that applies to lawyers,” Meunier says.

One example is the U.K.’s Solicitors Regulation Authority, which handles all regulatory activities on behalf of The Law Society but operates independently from it.

When it comes to anti-money-laundering issues, the SRA’s investigation and supervision directorate takes the lead, says James Dipple-Johnstone, director of investigation and supervision at the SRA who will move to work with Canadian Elizabeth Denham at the U.K. Information Commissioner’s Office in June.

“These teams receive intelligence from law enforcement, banks and other regulators, as well as reports from those we regulate about activity that might give rise to money-laundering and terrorist-financing concerns and the effectiveness of practice within firms. We investigate these and work with firms and individuals to improve practice, or, where necessary, discipline any misconduct in these areas,” says Dipple-Johnstone.

He says the SRA receives around 12,000 reports of concerns about law firms or solicitors each year. In 2016, it received 193 reports of potential involvement in money laundering.

The SRA also shares knowledge and best practices with other agencies investigating money laundering.

“Our Fraud and Confidential Intelligence Bureau shares intelligence with law enforcement agencies, the National Crime Agency and other regulators,” he says.

In addition, the SRA publishes information, guidance and warning notices for solicitors and alerts them to emerging threats.

Dipple-Johnstone says they do it without compromising solicitor-client privilege.

“The solicitor’s obligations to the court and to uphold the rule of law by adhering to the money-laundering and counter-terrorist financing legislation, as well as our own accounts rules, can be discharged without impacting on privilege,” he says.

“The main requirements are for due diligence (and enhanced due diligence in higher-risk matters) before acting in the transaction and to report suspicious activity, via a money-laundering reporting officer, to the U.K. Financial Intelligence Unit before proceeding with the transaction. In addition, we have powers to inspect [legal professional privilege] material in the course of its investigations.”

However, Dipple-Johnstone believes the SRA could be even more effective if it was completely independent of The Law Society.

“We believe that regulation in general, and AML supervision in particular, is most effective when undertaken by a body which is independent of the profession it oversees. There is not only a clear conflict of interest, which undermines public confidence, but also very real practical difficulties.”

Mercer says the SRA’s model is one that could be examined. He points out that the system developed by Canada’s law societies is a version of the British model with privileged information in complaints, investigations and audits remaining under the control of the law societies.

“The law societies have access to privileged information. The regime which was established was to have the know-your-client anti-money-laundering rules as part of the law society bylaws and rules of professional conduct.”

Mercer doesn’t rule out the idea of going further.

“It certainly may be the case that it’s worth considering stronger law society regulation in this area.”

Johnson is also open to change.

“I think the status quo is not ideal at the moment.

“It’s a very tricky, a very difficult question, but we do potentially have a problem in this country that we’re falling behind other countries in this area.”

Johnson says she would like to see the federal finance department and Canada’s law societies sit down and work together to find a solution.

“I think it would be in everyone’s interest to find some common ground and find a regime that is constitutional, that protects solicitor-client privilege, but also ensures that law firms don’t end up being a loophole.”

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