Introduction of new AML Regulations relating to Customer Due Diligence

In February, 2013, new Regulations to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (the “Regulations”) were published by the Government of Canada.  In a statement accompanying the Regulations, the government indicated that the new Regulations were being passed to remedy the fact that Canada had been found by the Financial Action Task Force (“FATF”) to be non-compliant with the “Customer Due Diligence” standards set out by FATF in Recommendation 10 (formerly Recommendation 5) of the organization’s International Standards on Combatting Money Laundering and the Financing of Terrorism & Proliferation (the “FATF Recommendations”, revised February, 2012).

According to the Government of Canada, the new Regulations are intended to clarify existing ambiguities in the governing anti-money laundering legislation, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “Act”), and are not intended to introduce any new administrative burden on reporting entities.  In general, the substance of the new Regulations focus on the risk-based approach (“RBA”) underlying the FATF Recommendations.  The new Regulations implement the following changes to Canada’s AML regime:

  1. Ongoing monitoring - Reporting entities are to engage in ongoing monitoring of business relationships in order to keep client information and identification up to date and detect and report suspicious transactions.  “Ongoing monitoring” will be a defined term in the Act.  It provides that monitoring is to be based on an initial risk assessment undertaken as part of the statutorily-mandated compliance program for reporting entities and must be a dynamic process that includes the periodic reassessment of the level of risk associated with client transactions and activities;
  2. Enhanced due diligence - Consistent with a RBA, enhanced Customer Due Diligence measures are to be employed whenever high risk clients or activities are identified.  Enhanced Customer Due Diligence includes conducting enhanced ongoing monitoring and making efforts to keep client information up to date.  The new Regulations specify that reporting entities that are unable to obtain or confirm information relating to the ownership, control or structure of a client (including the identity of parties that own or control 25% or more of the client) shall treat the client as high risk
  3. Business relationships - The term “business relationship” is defined to mean all transactions and activities relating to client accounts held by a reporting entity.  If a client does not hold an account with the reporting entity, only those occasional transactions which require the reporting entity to ascertain the identity of the person or confirm the existence of an entity will establish a business relationship.
  4. Purpose of the business relationship – Consistent with the revised FATF Recommendations which emphasize not only obtaining the requisite information to monitor a business relationship but also understanding the intended nature of the business relationship, the new Regulations require reporting entities to set out and record the intended purpose and nature of a business relationship at the time of its formation.
  5. No exceptions – Finally, the Regulations will be amended to clarify that where transactions or activities give rise to a suspicion of money laundering or terrorist financing, Customer Due Diligence measures will be required to be employed without exception.

The new regulations do not come into force until February 13, 2014.  The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) and the Office of the Superintendent of Financial Institutions (OFSI) will issue guidance on the new Regulations prior to this date.

Amendment 13 of the new Regulations proposes to amend the record-keeping provisions applicable to legal counsel and law firms to reflect the new ongoing monitoring provisions of the Regulations.  As discussed immediately below, as these provisions would be subject to the warrantless search and seizure provisions under the Act, insofar as they relate to legal counsel and legal firms, they must be treated as constitutionally suspect.

British Columbia Court of Appeal strikes down AML regulations applicable to lawyers: Federation of Law Societies of Canada v. Canada (Attorney General), [2013] B.C.J. No. 632

On April 4, 2013, the British Columbia Court of Appeal dismissed an appeal from the Attorney-General of Canada from an earlier decision of the British Columbia Supreme Court ([2011] B.C.J. No. 1779) that had severed and struck down portions of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and related Regulations insofar as they applied to members of the legal profession.

By virtue of Regulations that came into force at the end of 2008 (SOR/2007-293) (the “2008 Regulations”), lawyers who receive or pay funds on behalf of clients other than professional fees, disbursements, expenses or bail, are reporting entities subject to the record keeping, Customer Due Diligence, suspicion transaction and registration with FINTRAC provisions of Part One of the Act.  Under the 2008 Regulations, lawyers who receive funds of $3,000 or more in a single transaction are required to keep a receipt of funds record.

At issue in this case was the ability of any person authorized by the Director of FINTRAC to enter the non-residential premises of any reporting entity (including a law firm), use any computer system found therein or reproduce any records without a search warrant.  There is no requirement that the authorized person have reasonable grounds to believe a contravention of the Act has occurred before entering the premises or inspecting records.  All this is required under s. 62 of the Act is that the authorized person have reasonable grounds to believe that the premises contain records that would be relevant to establishing compliance with the provisions of the Act relating to record keeping, Customer Due Diligence and/or suspicious transaction reports.  If, however, the authorized person forms a reasonable suspicion that there has been a contravention of the Act as a result of records inspected and copied, it may disclose such records to law enforcement agencies, including foreign law enforcement agencies, where FINTRAC enters into an agreement or arrangement with any given foreign law enforcement agencies.

In finding that that the provisions in question were unconstitutional insofar as they applied to lawyers and law firms, Justice Hinkson of the Appeal Court found that the regime created by the 2008 Regulations and the Act potentially facilities state access to information which is prima facie subject to solicitor-client confidentiality and that such information could be obtained without a warrant and subsequently turned over and utilized by law enforcement for purposes of a criminal prosecution against a lawyer’s client.  While Justice Hinkson found that the regime did not violate solicitor-client privilege (a narrower concept than solicitor-client confidentiality), his Honour did find that this scenario violated the independence of the Bar, a principal of fundamental justice, by turning “at least some lawyers into agents of the state”.

In the result, the lower court order finding the operation of the Act and the 2008 Regulations unconstitutional was affirmed.  The sections of the Act and the 2008 Regulations that made the legal counsel or law firms subject to the record keeping, Customer Due Diligence and/or suspicious transaction reports provisions of the Act, as well as the corollary compliance measures that would have subject legal counsel and law firms to warrantless search and seizures, were struck down and of no force and effect.

This does not mean that the legal profession is unregulated in the money laundering and terrorist financing realm.  To the contrary, part of the reason that the British Columbia Court of Appeal found that the provisions of the Act and 2008 Regulations were overbroad was that adequate client identification and record-keeping regulations for the legal profession already existed and are enforced by the various provincial and territorial law societies.



White Collar Crime