B.C. report on money laundering calls for sweeping change, including more rules from legal regulator

Sweeping changes are needed to tackle “dirty money,” says the final report on money laundering in B.C., and that includes more stringent law society rules governing matters that could involve money laundering.

“Given the potential for privilege to attach to trust account transactions, the Law Society [of British Columbia] should further limit what can enter a trust account in the first place, in order to ensure that trust accounts are used only when truly necessary,” former B.C. Supreme Court Justice Austin Cullen said in his report, released Wednesday three years after his inquiry began.

Cullen noted that the society already has several anti-money laundering regulations in place – they must keep a variety of records, reconcile their trust accounts every month, make annual reports, and undergo regular audits.

“This oversight is crucial given that others, particularly law enforcement, cannot compel lawyers to produce privileged information or documents,” he wrote. The trust accounting rules, and audit process significantly mitigate the money laundering risks associated with trust accounts.

However, given the potential for privilege to attach to trust account transactions, the Law Society should further limit what can enter a trust account in the first place, to ensure that trust accounts are used only when truly necessary.

Lawyers do much of their work confidentiality, and their zone of confidentiality is strongly protected, Cullen noted. “This is a sound principle, and it has been given constitutional protection. But the confidential nature of lawyers’ work, coupled with the enormous variety and inherent nature of the transactions they are involved in, gives rise to an obvious risk of lawyers being used, knowingly or unwittingly, to facilitate money laundering.”

Cullen noted that his report “is not the proper forum to determine if it is possible to create a constitutionally compliant reporting regime for lawyers.” He added that attempting to do so would be very challenging due to issues with solicitor-client privilege and the duty of commitment.

A reporting regime for lawyers poses significant constitutional challenges and should not be pursued Unlike many professionals, lawyers are not subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The federal government attempted to include them in the regime in 2001, but the Supreme Court of Canada determined in 2015 that it had not done so in a constitutionally compliant way.

The SCC concluded that the regime (a) authorized searches of lawyers’ offices that inherently risked violating solicitor-client privilege, and (b) was inconsistent with lawyers’ duty of commitment to their clients’ causes.

Since the SCC’s decision, the federal government has not enacted new legislation to bring lawyers into the PCMLTFA regime. Critics contend that the failure to do so means there is a gap in Canada’s anti–money laundering regime, and that lawyers in this country are not regulated for anti–money laundering purposes.

Cullen’s report says that “given these difficulties,” the province should not attempt to design a constitutionally compliant reporting regime at the provincial level.” However, it goes on to say “this is not to say that lawyers cannot be regulated for anti–money laundering purposes.” Regulation should simply take a different form than in other sectors to accommodate the constitutional rules that apply to lawyers.

Instead of a reporting regime for lawyers, a better approach to anti– oney laundering efforts in the legal sector should focus on:

• continuing to revisit and expand anti–money laundering regulation by the law society, including limiting the circumstances in which a client’s funds can enter a trust account;

• strengthening and making better use of information-sharing arrangements between the law society and other stakeholders;

• increasing the law society’s use of its ability to refer matters to law enforcement where there is evidence of a potential offence;

• encouraging law enforcement to make better use of existing mechanisms by which it can access the information it needs from lawyers during investigations; and

• increasing public awareness about these measures to counter any perception that transactions conducted through a lawyer in furtherance of an unlawful aim are immune from detection.

Cullen also said that it is ‘essential that law enforcement bodies and regulators bring concerns about the involvement (or potential involvement) of lawyers in money laundering activity to the attention of the Law Society for investigation.”

The federal anti-money laundering agency tasked with identifying to money laundering threats — the Financial Transactions and Reports Analysis Centre, or FINTRAC — is "ineffective," Cullen said, and B.C. needs to strike out on its own, including the establishment of a dedicated provincial money laundering intelligence and investigation unit and appoint a commissioner to oversee the government's approach to the problem.

"If the province is to achieve success in the fight against money laundering, it must develop its own intelligence capacity in order to better identify money laundering threats," Cullen said in his report, which is more than 1,800 pages long.

Recommendations specific to the legal profession include:

• The Law Society of British Columbia should work with the Federation of Law Societies of Canada to develop uniform metrics to track, at a minimum: the nature and frequency of breaches of rules that are relevant to anti–money laundering regulation;  the number of breaches that are referred for investigation or into a remedial stream; the outcome of the referrals, including the nature and frequency of sanctions that are imposed; the rules, policies, and processes law societies have regarding information sharing with and referrals to law enforcement; the frequency, nature, and circumstances of the information sharing or referrals, including whether this includes sharing of non-public or compelled information and the stage of a proceeding or investigation at which it occurs; and the use of data analytics by law societies.
• The Law Society of British Columbia and the Federation of Law Societies of Canada should develop systems to facilitate the more effective sharing of tactical information and coordination on investigations that affect multiple jurisdictions or involve lawyers who practise in multiple jurisdictions.
• The Law Society of British Columbia should amend Rule 3-59 of the Law Society Rules to make explicit that any cash received under the professional fees exception to the cash transactions rule must be commensurate with the amount required for a retainer or reasonably anticipated.
• The Law Society of British Columbia should amend its client identification and verification rules to explain what is required when inquiring into a client’s source of money. The rules should make clear, at a minimum: that the client identification and verification rules require the lawyer to record the information specified in the fall 2019 Benchers’ Bulletin; the meaning of the term “source of money”; and that lawyers must consider whether the source of money is reasonable and proportionate to the client’s profile.
• The Law Society of British Columbia should extend its client identification and verification rules to include the situations in which a lawyer is truly acting as a gatekeeper. The rules should be extended to include, at a minimum: the formation of corporations, trusts, and other legal entities; real estate transactions that may not involve the transfer of funds, such as assisting with the transfer of title.
• The Law Society of British Columbia should amend the Law Society Rules to require lawyers to verify a client’s identity when holding fiduciary property on the client’s behalf.
• The Law Society of British Columbia should amend Rule 3-58.1 of the Law Society Rules to clarify, at a minimum, what is meant by “directly related to legal services” and to consider how to further limit the use of trust accounts so that they are used only when necessary.
• The Law Society of British Columbia should require that all trust auditors and investigators charged with investigating possible transgressions of the trust accounting rules receive anti–money laundering training.
• The Law Society of British Columbia implement mandatory anti–money laundering training for lawyers who are most at risk of facing money laundering threats. The education should be required, at a minimum, for lawyers engaged in the following activities: the formation of corporations, trusts, and other legal entities; transactional work, including real estate transactions; some transactions that do not involve the transfer of funds (such as transfer of title); and litigation involving private lending.
•  The British Columbia Solicitor General should direct law enforcement to refer matters involving lawyers to the Law Society of British Columbia where appropriate, and that the Law Society continue its advocacy with government, regulators, and other stakeholders about its role and when referrals to the Law Society should be made.
• The Law Society of British Columbia should review and assess its approach to determining whether it possesses information or documents that may be evidence of an offence, and, if so, whether the executive director should seek approval from the Discipline Committee to deliver the information or documents to law enforcement.
• The Law Society of British Columbia and the province should work to increase public awareness of measures available to investigate wrongdoing involving lawyers, including: the limitations on the use of a lawyer’s trust account; the information-sharing agreements that exist between the Law Society and government agencies; the ability of the Law Society to refer matters to law enforcement when there is evidence of a potential offence; and the pathways that exist for law enforcement to obtain information about lawyers during investigations.

Cullen's report contains a total of 101 recommendations covering areas from law enforcement to real estate and banking regulations.  These include a more vigorous approach to asset seizure and the introduction of unexplained wealth orders to "discourage foreign corrupt officials and others from moving their illicit wealth to British Columbia through the purchase of real estate and other valuable assets."

Cullen was appointed to lead the inquiry into money laundering in 2019 after reports of illicit funds washing through the province's casinos, housing and luxury car markets. About 200 witnesses, including former politicians, law enforcement officials and academics, testified to the inquiry.

Acknowledging that it is impossible to come up with an exact dollar amount for money laundered in B.C., he put the figure in the billions. "Sophisticated professional money launderers operating in British Columbia are laundering staggering amounts of illicit funds," the report said, with an "an unprecedented volume of cash” laundered through B.C. casinos during the period he studied from 2006 to 2016.

A Law Society of B.C. spokesperson replied through an email that "we received the final report of the Cullen Commission earlier today and will need some time to review its findings and recommendations."

The Federation of Law Societies of Canada said in a statement that it welcomes the report and its recognition that the law societies of British Columbia and other provinces are doing "important work" with the federation to address money laundering risks that may arise in the practice of law. "Collaborating through the federation, law societies have worked to develop and implement robust and effective rules that respect the very significant constitutional duties legal professionals owe their clients, including the duty to protect solicitor-client privilege."

The BC Civil Liberties Association said it is "disappointed" by the final report of the Cullen Commission, as it recommends "invasive measures and a tough-on-crime approach that does not give due consideration to constitutional  rights."

"The final report calls for sweeping changes to tackle money laundering in the province, including the introduction of unexplained wealth orders, the aggressive pursuit of civil forfeiture, increased policing, and broad information collection and sharing," said the association in a statement. It was the only civil liberties organization given full participant status in the commission.

Jessica Magonet, BCCLA staff lawyer said "we are extremely troubled that the Cullen Commission is encouraging the province to ramp up civil forfeiture to fight money laundering." She added the association is also disturbed that the commission  is calling for the introduction of unexplained weath orders, saying it is a "controversial legal tool that erodes the presumption of innocence."