CANADIAN SUPREME COURT RULING EXCLUDING LAWYERS FROM AML MONITORING

A widely-anticipated ruling by the Canadian Supreme Court shielding lawyers from certain anti-money laundering-related client obligations could be a magnet for organized crime groups and mar the country’s upcoming evaluation of financial crime countermeasures.

The unanimous ruling last week centered on a contentious legal quandary being debated by the Attorney General of Canada and the Federation of Law Societies of Canada related to the country’s anti-money laundering (AML) regime: should attorneys be required to send information on the potential suspicious activities of clients to the government, which could, ostensibly, then turn around and use such data points as proof of the client’s guilt.

The ruling strikes down portions of Canada’s chief counter-financial crime law, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, which since 2001, has required lawyers to collect and report any suspicious financial activity involving their clients to the country’s financial intelligence unit, the Financial Transactions and Reports Analysis Centre of Canada.

In a nearly 100-page decision, Supreme Court judges agreed that requiring attorneys to do that – even when acting in consulting and brokering capacities in sectors already subject to AML rules, such as advising on a real estate deal – was “inconsistent with the lawyer’s duty of commitment to their client’s cause.”

The ruling is a major defeat for Canada’s cumulative AML framework, said Garry Clement, the former National Director for the Royal Canadian Mounted Police’s Proceeds of Crime Program with more than 30 years of financial crime investigative experience.

“I am a firm believer that solicitor-client privilege is sacrosanct,” he said. “But what we are looking at here are instances when the lawyer acts in a capacity in other professions, like a real estate deal or giving financial advice, that is in my view outside the scope of solicitor-client privilege. If these attorneys are working like that in the financial arena for example, they should be brought in under the legislation.”

Lack of attorney oversight could torpedo AML exams

Having what is considered a higher-risk sector virtually insulated from AML program details could become a looming albatross when international evaluation teams arrive in Canada later this year.

The Paris-based Financial Action Task Force, which sets global AML recommendations, is sending examiners as early as October to grade the country’s counter-financial crime framework, the first time since its last review in early 2008. Different in this latest round of evaluations is a much higher focus on “effectiveness,” which focuses more on the actual implementation of certain laws and edicts, rather than just the fact that they exist and mirror international standards.

That may be unavoidable, though.

Attorneys the world over – including in the United States, United Kingdom and Europe – have fought with abandon to keep financial crime program requirements from invading the sanctity of this area of law, called “attorney-client privilege.”

These jurisdictions and others have settled the issue differently, with the UK and Europe still requiring AML duties for attorneys when they are acting in other capacities outside of directly representing a client in a criminal case. The US has never extended such requirements to attorneys, but has blanketed myriad sectors, from banks to real estate, with AML obligations.

Organized crime groups love attorneys too

In Canada’s case, the question also extended to when attorneys are acting in other capacities, such as giving financial advice, advising on real estate or securities deals and standing in as proxies in company formation activities.

Lawyers, though bound by ethics and other requirements to uphold all applicable laws, are also not immune to being caught up in major financial crime cases, Clement said.

“In every financial crime tied to a large organized crime group, there are always one or two lawyers in there,” he said. “Every professional can be co-opted to do crime and lawyers come into contact with nearly as many criminals as law enforcement. The temptation is always going to be there.”

In one case, Canadian investigators seized funds given to an attorney from a drug dealer under surveillance, Clement said. The suspect had a bag of dirty cash with him to attempt to use as bail money for another member of the group. But later, after the successful interception of the suspected illicit funds, authorities later had to give the cash back because a court ruled officers didn’t have the authority to confiscate funds in attorney client accounts in the first place, Clement said.

The organized crime groups are also persistently probing for the vulnerable parts in a country’s financial crime countermeasures, and will surely gravitate to businesses using attorneys, particularly when they are not engaging in classic client-privilege scenarios, such as acting as a broker in securities, real estate or company formation, Clement said.

“Criminals are always looking for the weakest link, and when they find one, the illicit funds flow like water,” he said, adding that he has personally worked on cases where these groups gave dirty funds to attorneys ensure they were harder to seize.

In shadows, criminals groups thrive

The decision is tantamount to creating a nigh immovable stumbling block to investigative agencies when transactions have links to attorneys and will also close the spigot on streams of vital data flowing to the country’s financial intelligence unit, creating a virtual blind spot, he said.

As a result of the ruling, attorneys will not have to send key AML-related documents to the government, such as reports of customer transactions over certain thresholds or instances of possible suspicious activity, even when the solicitor is acting in a capacity other than directly representing a client accused of financial crimes, Clement said.

That means even when an attorney offers his or her services in areas that banks and brokerages can do as well – and they are subject to the full panoply of AML program requirements – the individual does not have to report anything to the government, but instead is required to send such details, if they choose to, to their designated law societies, Clement said.

But it’s up to those law societies if they want to send those submissions to Canadian government officials, or not, and further, if they want to do a broader review of a particular law practice to determine if they are following through on their diluted AML duties, he said.

That dynamic, though, “makes it 10 times more difficult for government investigators to get access to the information,” Clement said, adding that the search must be sealed and then a court must review it and judge approve the details before giving it do the requesting agency. “Normal citizens don’t have those protections.”