Client Identification & Verification
ANTI-MONEY LAUNDERING RULES
(Division 16 and 17 of the Rules of the Law Society of Yukon)
Money laundering is on the rise in Canada. The Federation and its member law societies have been actively engaged in the fight against money laundering and the financing of terrorist activities for more than 15 years.
Effective anti-money laundering and terrorist financing rules and regulations for lawyers continue to be a priority for all law societies in Canada.
The Society approved amendments to Division 16 and 17 of its rules on client identification and verification, as well as its accounting rules governing the receipt of cash and the permitted use of lawyers’ trust accounts. These changes took effect in Yukon on September 1, 2020.
Rules on Client Identification and Verification
Lawyers are required to follow client identification and verification procedures when retained by a client to provide legal services.
Identification and verification are separate but related concepts. The client identification rules require that the lawyer must obtain basic identification information about clients. Client verification rules apply when a lawyer receives, pays or transfers funds on behalf of a client, or gives instructions on behalf of a client in respect to the receipt, payment or transfer of money.
The amended rules on client identification and verification at Division 17 of the rules introduce more stringent requirements to verify a client’s identity as well as provide more options for how to confirm a client’s identity. In addition, the amendments require lawyers in financial transactions to obtain additional information about a client’s source of funds, and periodically monitor their professional business relationship with clients to assess if the information about the client is consistent with the purpose of the retainer.
There are six main requirements:
- Identify the client
- Verify the client’s ID if there is a financial transaction
- Obtain from the client and record, with the applicable date, information about the source of money if there is a financial transaction
- Maintain and retain records
- Withdraw if you know or ought to know that you would be assisting in fraud or other illegal conduct
- Monitor the lawyer/client professional business relationship periodically while retained in respect of a financial transaction and keep a dated record of the measures taken and information obtained
Identifying the Client
When providing any legal service, lawyers are obliged under the rules to identify a client by obtaining the client’s name, address, phone numbers, and occupation, and if applicable, their business address and telephone number. “Occupation” does not need to be “employment’. If the client is retired, a homemaker, a volunteer caregiver or otherwise occupied, the lawyer should record that information.
Lawyers must identify client organizations by obtaining the organization’s full name, business address and business telephone number, and where applicable, its incorporation or business identification number and where it was issued. The lawyer must also obtain the name, position and contact information of the person or persons instructing on the matter, and obtain the general nature of the business.
Verifying the Client
Verification of a client’s identity is required if the lawyer is engaged in, or gives instructions in respect of, the receipt, payment or transfer of funds on the client’s behalf.
An important change to the rules is the payment of settlement funds in litigation files is no longer exempt from the requirement that the lawyer verify the identity of the client, even if the funds are pursuant to an order of a court or tribunal.
In addition, the verification process requires lawyers to obtain information about the source of the funds being transferred.
When working with corporate clients, lawyers must take additional steps to determine ownership and control of the corporation and assess the accuracy of that information.
For clients that are corporations, societies or unregistered organizations, the lawyer must verify the identity of the person who instructs on behalf of the organization.
If a lawyer is unable to obtain or confirm the accuracy of information to verify an organization as required under rule 177(1) or (2), the rules require the lawyer to exercise diligence in determining and assessing potential risks associated with the client’s transaction.
Lawyers can use one of the following three methods to verify an individual client:
- government-issued photo identification method;
- credit file method; or
- dual process method which allows the lawyer to refer to information from any two different, reliable and independent sources that contain:
- the individual’s name and address;
- the individual’s name and date of birth; or
- the individual’s name and confirmation they have a deposit account, credit card or other loan with a financial institution.
The dual process method allows verification using sources such as banks, utility service providers, cell phone providers, and government agencies, to name a few.
When obtaining photo identification from a client, the lawyer or agent is required to meet personally with the client and obtain a copy of the identification. Skype meetings are not permitted.
Lawyers can also use an agent to verify the identity of an individual, including circumstances where the individual is not in Canada. The agent should provide the same information the lawyer would have gathered to verify the client’s identity.
The rules do not specify who can act as an agent, so lawyers should ensure agents are reputable and must have a written agreement in place.
Please refer to the Guidance on using an Agent document prepared by the Federation of Law Societies for more detailed information on using an agent.
Timing for Verifying Identification
Under rule 178(1), if the client is an individual, the lawyer must verify the client’s identity upon engaging in a financial transaction. The same applies to verifying the identity of any individual authorized to instruct counsel for a client that is a corporation or other organization.
Under rule 178(3), if the client is an organization, the lawyer must verify the organization within 30 days of engaging in a financial transaction.
Even though the lawyer has within 30 days of engaging in a financial transaction to comply with the verification requirements if the client is an organization, the lawyer should take steps to verify the identity of their client as early as possible in the retainer.
The following are sample forms that you can use to help meet the client identification and verification requirements outlined in the rules:
- Client Identification and Verification – Individuals
- Client Identification and Verification – Organizations
- Client ID Confirmation Form using Dual Method and Credit File
- Sample Agreement with Agent for Verification of Client Identity with Sample Attestation Form
Exemptions to the Identification and Verification Rules
Not all client relationships are captured under this rule. For example:
- in-house and corporate counsel are exempt as they only provide legal services to their employers.
- lawyers who provide legal services through a duty counsel program are exempt, except when giving instructions for receiving, paying or transferring funds.
- lawyers who act as an agent for another legal professional or when a matter is referred by another lawyer – provided the other lawyer has complied with the identification and verification requirements.
Other exemptions apply when funds are from certain sources. For example, when funds are:
- transferred from the trust account of one lawyer to another;
- paid by or to a financial institution, public body or reporting issuer;
- paid or received to pay a fine, penalty or bail or for professional fees;
- received from a peace officer, a law enforcement agency, or a public official acting in their official capacity; or
- sent by electronic funds transfers (EFT).
Identifying Beneficial Ownership
Lawyers are required to make reasonable efforts to obtain information about the beneficial owners of an organization and about the control and structure of the organization. Identifying beneficial ownership is important in order to remove anonymity and identify the actual individuals behind a transaction.
What is a beneficial owner?
Beneficial owners are the actual individuals who are the trustees or known beneficiaries and settlors of a trust, or those who directly or indirectly control 25% or more of an organization, such as a corporation, trust or partnership.
Collection and confirmation of beneficial ownership information is an important step in client identification in ensuring that lawyers are not assisting illegal transactions. You may obtain information establishing the organization’s structure or beneficial ownership from the organization, either verbally or in written form. Concealing beneficial ownership information of accounts, businesses and transactions is a technique used in money laundering and terrorist financing schemes.
Source of Funds
As part of the verification process, under rule 174(1)(a) the lawyer must obtain from the client and record, with the applicable date, information about the source of funds being received, paid or transferred.
A client’s source of money is relevant to understanding the risk of acting for the client with respect to a financial transaction. Also, if the source of money is coming from a third party unrelated to the transaction or from outside of Canada, this may also be an indication of increased risk.
The lawyer should record information obtained from the client about:
- The activity or action that generated the client’s money (e.g. salary, bank loan, inheritance, court order, sale agreement, settlement funds);
- The economic origin of the money (e.g. bank account, Canada Post money order, credit card charge, cash);
- The date the money was received; and
- The source from whom the money was received (i.e., the payer; the client or name and relationship of the source to the client).
Record Keeping & Ongoing Monitoring of Clients
Lawyers must retain a record of the information and any documentation obtained for the purpose of identifying and verifying their client for the duration of the lawyer/client relationship and for a further period of at least six years following completion of the work for which the lawyer was retained.
Lawyers must monitor client relationships to assess if information about the client’s activities and source of funds is consistent with the purpose of the retainer.
The purpose of monitoring is to assess if there is a risk that the client is engaged in fraud or other illegal conduct. Lawyers are obliged not to participate in, or facilitate, money laundering or terrorist financing. If a lawyer discovers the client is engaged in illegal conduct, the lawyer is obliged to withdraw from representing the client.
Refer to the Guidance on Monitoring Obligations document prepared by the Federation of Law Societies for more detailed information.
Rules on Cash Transactions
The rules on cash transactions means lawyers must not accept:
- more than $7,500 in cash from clients or prospective clients, in respect to any one client matter.
- more than $7,500 in cash on a client matter even if there is more than one client. The limit applies despite the number of clients.
A lawyer can accept greater than 7,500 cash from a client:
- for unrelated matters, but only if the amount for each individual matter is $7,500 or less; or
- in foreign currency, but the amount once converted to Canadian dollars must not be greater than $7,500.
The following exception applies:
- A lawyer may receive more than $7,500 cash in connection with the provision of legal services if it:
- comes from a financial institution or public body;
- comes from a peace officer, law enforcement agency, or a public official acting in their official capacity;
- is used to pay a fine, penalty or bail; or
- is for professional fees, disbursements, or expenses, provided that any refund is also made in cash.
A lawyer who receives or accepts cash for professional fees, disbursements or expenses in an aggregate amount greater than $7,500 must make any refund in cash. Do not write a trust cheque in these circumstances.
- See table for scenarios for cash or cheque refunds.
Trust Accounting Rule
The amended rules on trust accounts explicitly provides that funds paid into a trust account must be directly related to legal services provided by the lawyer or law firm.
Under rule 154 the definition of ‘trust money’ has been narrowed to mean money received by a member that is directly related to legal services that the member or the member’s law firm is providing. Rule 155(2) requires that only trust money can be paid into a trust account.
Federation of Law Societies of Canada
The Federation of Law Society’s Anti-Money Laundering and Terrorist Financing Working Group has developed the following resources to assist lawyers to identify and combat money-laundering:
- Guidance for the Legal Profession (Link: https://flsc.ca/wp-content/uploads/2020/01/Individual-Guide-EF.pdf)
This document is a guide to the responsibilities of Canada’s legal professionals to ensure they are not facilitating money laundering and terrorist financing. It describes the context for money laundering and terrorist financing in Canada and sets out the components of the legal professional’s duties as contained in the proposed amended Rules.
- Risk Advisories for the Legal Profession (Link: https://flsc.ca/wp-content/uploads/2020/01/RiskAdvisory6EN.pdf)
In this document, the advisories address client and transaction risks that arise in five areas of practice; real estate, trusts, private lending, shell corporation and litigation.
- Risk Assessment Case Studies for the Legal Profession (Link: https://flsc.ca/wp-content/uploads/2020/02/CasestudiesENv5.pdf)
In this document, case studies are used to assist lawyers to learn how to spot red flags and to develop practical responses when faced with situations of possible money laundering. It also includes a Red Flags Quick Reference Guide as an appendix.
- Anti-Money Laundering (Link: https://flsc.ca/wp-content/uploads/2020/02/CasestudiesENv5.pdf)
The Law Society of Yukon hosted a CPD event on Anti-Money Laundering and Client Identification/Verification on July 21, 2020. Speakers were Frederica Wilson, Executive Director, Policy and Public Affairs and Deputy CEO of the Federation of Law Societies of Canada and Chioma Ufodike, Manager of Trust Safety, Law Society of Alberta. To view this recorded webinar click here.