Anti-Money Laundering and Counter Terrorist Financing Laws Not Applicable to Canadian Lawyers and Law Firms

This White Paper has been prepared by the FATF Task Force of the American College of Trust and Estate Counsel^[1]

Executive Summary

The Canadian Court of Appeal for British Columbia (the “appellate court”) recently held unconstitutional legislation that applied anti-money laundering and counter terrorist financing statutes and regulations to lawyers.^[2] Federation of Law Societies of Canada v. Canada (2013 BCCA 147, April 4, 2013). The appellate court, while recognizing the importance of legislation to deter money laundering and terrorist financing, held that applying certain requirements to lawyers violated the liberties guaranteed under Canadian Constitutional law. The Attorney General of Canada has appealed the appellate court’s ruling to the Supreme Court of Canada.

The law and regulations being examined (referred to in the opinion and in this paper as the “Regime”) were enacted to reduce money laundering and terrorist financing transactions. Among other requirements, the Regime required lawyers (i) to collect certain information from their clients so that the information can be available for law enforcement officials if they wish to review it; (ii) to provide confidential information of the client; and (iii) not to disclose any such actions to the client.^[3] The records being maintained by lawyers were subject to warrantless search, and the Regime subjected lawyers to criminal penalties for failure to comply with these requirements.^[4]

The Supreme Court of British Columbia (the “lower court”) found that the Regime violated the attorney-client privilege. However, the appellate court stated that the safeguards built into the Regime adequately protected against inappropriate violation of such privilege. Instead, the appellate court held that the Regime threatened the right to liberty granted to individuals and their lawyers and violated the constitutional principle of independence of the Bar.^[5]

The appellate court found that model self-regulatory anti-money laundering and counter-terrorist financing measures enacted by the governing bodies for Canadian lawyers were sufficient to protect the government’s valid interest in reducing the incidence of money laundering and terrorist financing activities without violating the constitutionally protected rights of individuals and their lawyers.

Because of the similarity of Canadian and U.S. law regarding matters of the independence of the Bar, the attorney-client privilege and the self-regulation of the legal profession, any attempt to apply similar mandates on U.S. lawyers may face similar scrutiny in the U.S. courts.

Analysis of the Case: Federation of Law Societies of Canada v. Canada.

In 2008, the Canadian Parliament amended the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and Regulations. This followed regulatory changes enacted in 2007.^[6] These amendments made the requirements and restrictions contained in those Acts applicable to lawyers.

The Regime imposed the following obligations on lawyers who receive or pay funds on behalf of their clients, other than funds received or paid in respect of professional fees, disbursements, expenses or bail, to:

(a) Perform client identification and verification;

(b) Keep records of financial transactions; and

The records required to be maintained are subject to warrantless search. When the information may be subject to attorney-client privilege, the Regime provides a procedure for asserting that privilege. However, client-identifying information is required to be reported even if the lawyer successfully asserts the privilege. When lawyers are required to reveal client records as prescribed to an independent agency created by the Regime (the “Financial Transactions and Reports Analysis Center of Canada”, or FINTRAC).

The Federation of Law Societies of Canada (FLSC) filed a petition challenging the application of certain parts of the Regime to lawyers. The lower court found the legislation violated the constitutionally protected attorney-client privilege, even though the legislation contained procedures for asserting a claim of privilege before the examination of the records required to be reported.

Both before and after the initial enactment of the Regime, the FLSC had enacted model ethical rules known as the “no cash rules” and the “know your client rules.” Under those rules, members of the legal profession are prohibited from accepting $7,500 or more in cash from a client. A client who has given cash to a lawyer and who is owed a refund must be given the refund in cash. Strict know your client rules require that a lawyer exercise due diligence to ascertain the identity of all clients.

The appellate court agreed with the FLSC in its contention that “the Regime requires all lawyers to obtain and retain certain client information as a condition of advising clients,” and not just lawyers receiving and paying funds on behalf of a client.^[8] This finding was made despite a specific provision of the Act (section 10.1), enacted in 2006, that provided that the reporting obligations do not apply to lawyers when they are offering only legal services. This is because all lawyers are required to maintain a “receipt of funds record” that includes records of the “purpose of the transaction.”^[9] The appellate court rejected the government’s contention that the Regime is applicable only to lawyers who choose to act as financial intermediaries, and found that all lawyers could be subject to the Regime.

When addressing the constitutional issues, the appellate court first determined that the Regime threatened the right of liberty, a constitutionally protected interest. The liberty interest of a client is deprived as a result of (i) the Regime’s authorization of a warrantless search of the lawyer’s records, and (ii) the required disclosure of the lawyer’s records to FINTRAC. Because confidential information may be used by law enforcement for any purpose, including criminal prosecution, the client’s right to liberty is potentially deprived. Since the appellate court found that the lawyer could be criminally liable, it applied the same analysis and outcome to lawyers as to the clients. Once the appellate court determined the potential for deprivation of a basic right, it addressed the issues of independence of the Bar, privilege, and a lawyer’s duty of undivided loyalty to the client.

The Independence of the Bar

The appellate court held that the independence of the Bar “is fundamental to the way in which the legal system ought to operate”^[10] and that without a constitutionally protected Bar, the right of liberty granted to individuals by the Canadian constitution could be violated. Regulation of the Bar must be designed to protect the legal profession from state interference, in the political sense: “The public interest in a free society knows no area more sensitive than the independence, impartiality and availability to the general public of the members of the Bar and through those members, legal advice and services generally.”^[11] The appellate court found that the Regime interacts with the liberty interests of clients and lawyers in a way that violates the independence of the Bar because it “imposes conflicting interests and corresponding obligations on the lawyer, regarding clients’ interests, state interests, and Lawyers’ liberty interests.”^[12]

The Attorney-Client Privilege

The lower court held that the Regime violated the attorney-client privilege. The lower court found that “any information that must be collected by a lawyer as a condition of providing legal advice and is solely for potential use by the state interferes to an unacceptable degree with the solicitor[attorney]-client relationship.”^[13] The appellate court, while agreeing that the attorney-client privilege is a “principle of fundamental justice,”^[14] found that the protections in the legislation providing for an opportunity to assert the privilege were sufficient. The appellate court did, however, state its concern that the identity of the client was revealed as part of the procedure to determine the applicability of the privilege in any given situation.

Duty of Undivided Loyalty

As a result of its determination that the Regime was unconstitutional, the appellate court specifically did not address the issue of whether the Regime violated the lawyer’s recognized duty of loyalty owed to his or her client. The lower court, however, held that the duty of loyalty owed by lawyers to their clients is a fundamental right; a regulatory process, such as the Regime, puts lawyers in an impossible situation in trying to balance that duty of undivided loyalty with the statutory duty to gather evidence against those clients.^[15]

Self-Regulatory Measures of the Canadian Bar

The appellate court acknowledged that the measures taken by the FLSC were sufficient to protect against the use of lawyers to facilitate money laundering and terrorist financing.

Applicability of the Case in the United States

The holdings of both the lower court and the appellate court found the Regime was unconstitutional for different reasons. The lower court found the Regime not in accordance with the “principle of fundamental justice” because it offended the attorney-client privilege pursuant to Section 7 of the Canadian Charter of Rights and Freedom, Part 1 of the Constitution Act, 1992. ^[16] The appellate court, in reaching the same conclusion regarding the unconstitutionality of the Regime, based its decision instead primarily on the principles of “liberty interests” and the “independence of the Bar.” ^[17] In addition, each court addressed other important principles relating to the attorney-client privilege, the lawyer’s duty of undivided loyalty to the client, and self-regulatory measures of the Canadian Bar, which were significant in both courts’ analyses. No U.S. state bar has enacted similar self-regulatory provisions as were enacted in Canada.

If the United States Congress enacted a similar statutory scheme, the same challenges would likely be made in the state and federal courts of the United States as were made in Canada, since the United States and Canadian constitutions and common law rest on the same traditional principles of law. An individual’s right to liberty, the independence of the judiciary and the Bar, the attorney-client privilege, and a lawyer’s duty of undivided loyalty to his or her client are each as much of a principle of fundamental justice in the United States as they are in Canada.

The Independence of the Bar

The United States Supreme Court has not specifically recognized a separate constitutional right to an independent Bar in the same manner that the appellate court did. It is clear, however, that lawyers are generally regulated by the judicial branch of the federal and state governments, as it relates to the rules of practice before the courts and the ethical rules applicable to lawyers. The ability of lawyers to represent adequately their clients would be significantly hampered if the executive or legislative branches of government were in charge of lawyer regulation. The independence of the Bar is necessary to insure that the individual rights of those represented are not violated by a Regime similar to that enacted in Canada.

When the appellate court upheld the independence of the Bar as a constitutional right, it emphasized the need to protect the liberty interests of the attorney and the client.^[18] The independence of the Bar is an inherent aspect of a free and democratic system, and any impingement of it would be harmful and intrude on the traditional role of state bar associations and state judiciaries to regulate and monitor the legal profession.^[19]

The Attorney-Client Privilege in the United States

Although the appellate court found that the Regime adequately protected against encroachment of the attorney-client privilege, the provisions of the Regime would violate the principles of the attorney-client privilege if they were adopted in the United States.

The attorney-client privilege is one of the oldest and most protected principles in the United States legal system.^[20] The privilege is considered inviolate, a bedrock principle of American jurisprudence.^[21] The attorney-client privilege is based on the premise that effective representation requires full disclosure by a client of the client’s problems. Full disclosure is attainable only if the client believes that his or her communications will be kept confidential.^[22]

Promoting “full and frank” communication between the attorney and the client serves compelling public interests by safeguarding the administration of justice.^[23] The United States Supreme Court has uniformly and consistently protected the attorney-client privilege, even after the death of a client.^[24] In general, an attorney must respect and judiciously guard the confidentiality of information relating to the representation of a client.^[25] Specifically, an attorney is obligated to take “reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.”^[26] This protective duty extends to any communication that is made in confidence between an attorney and the client for the purpose of obtaining legal advice.

To fulfill an attorney’s professional duties and responsibilities, he or she must be able to learn all relevant facts and thereafter determine which facts are important to a given legal issue. Without open and free communication with the client, an attorney cannot provide proper advice or adequately represent the interests of the client.^[27] As the ABA and the United States Supreme Court recognize, the attorney must have full and complete information to represent the client effectively; and given that clients most often follow their lawyer’s advice about complying with the law, accuracy and frankness in the attorney-client relationship are essential to ensuring that the law is upheld.^[28] It needs to be emphasized that the privilege applies equally to both criminal and civil cases.^[29] Thus, when a client communicates with his or her attorney, all confidential information should be covered by the attorney-client privilege.

Although the privilege endorses open communication, some courts note that the privilege must not be invoked to hinder discovery of the truth.^[30] Regardless of such caution and admonishment, the core rationale for the privilege remains uncompromised. The attorney-client privilege is elemental to the functioning of the legal system, and any limitation on it is only appropriate to prevent abuse.

The Model Rules of Professional Conduct, which are created by the ABA to define the legal and ethical responsibilities of all attorneys, underscore the importance of the attorney-client privilege. Rule 1.6 emphasizes the responsibility of an attorney to protect all confidential communications made by the client. The ABA acknowledges that trust “is the hallmark of the client-lawyer relationship.”^[31] Without adequate safeguards to the attorney-client privilege, attorneys will not be able to represent their clients effectively. This privilege also has implications for an individual’s right to representation under the Sixth Amendment of the federal Constitution because the lack of unconditional and free communication between a client and his or her attorney will prevent an attorney from properly representing his or her client.^[32]

Educational and Regulatory Efforts

Although the U.S. Congress has not formally adopted international monitoring measures like the Regime or the FATF Recommendations applicable to lawyers, it is not necessary to do so because in circumstances of serious criminal activity, attorneys may report the same to the authorities.^[33] In the jurisdictions that have adopted the Model Rules of Professional Conduct, an attorney cannot counsel a “client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent.”^[34] If an attorney intentionally partakes in criminal activity, such as using his or her trust account to hide (or launder) the proceeds of a crime, he or she is subject to disciplinary sanctions like disbarment, together with other penalties under both the criminal and civil law.^[35] An attorney is also under an ethical obligation to “maintain[] the integrity of the profession” and a violation of the law or a state’s rules of professional conduct exposes the attorney to similar sanctions and penalties.^[36]

Many professional efforts are now underway in the United States to educate attorneys about potential problems in this area, including the “voluntary good practices guidance” developed by the ABA Task Force and promoted by state and local bar associations.^[37] These efforts aim to make U.S. attorneys aware of the need to be vigilant, to conduct due diligence when establishing an attorney-client relationship, and to continue to remain informed about the client’s activities.^[38]

Conclusion

Because of the similarities of Canadian and U.S. law concerning the rights of individuals under the constitutions of each country and the independence of the judiciary in each country, the holding of The Federation of Law Societies of Canada v. Canada should be instructive in identifying the pitfalls in enacting a similar Regime in the United States.

^[1]The primary authors are task force members and ACTEC Fellows Robert C. Lawrence III, Esq. and Margaret Van Houten, Esq. They were assisted by Dori Cohen, a third year student at Emory University School of Law and summer associate at Cadwalader, Wickersham & Taft LLP, New York, New York; and Lori A. Bullock, a third year student at the Drake University College of Law and summer associate at Davis, Brown, Koehn, Shors & Roberts PC, Des Moines, Iowa.

^[2]Solicitors, attorneys, lawyers, law firms and Quebec notaries are all referred to as lawyers or attorneys in this paper. Also, whereas in Canada the attorney-client privilege is referred to as the solicitor-client privilege, it will be referred to herein as the attorney-client privilege.

^[3]There was no provision in the Regime as challenged in this case that would have required lawyers to report ?suspicious transactions.? Such a requirement was proposed as part of 2001 legislation, but as a result of injunctive relief prohibiting its enforcement against lawyers, the government repealed that requirement in 2003.

^[4]The requirements of the Regime effectuate the Recommendations proposed by the Financial Action Task Force (“FATF”), a Secretariat of the Office for Economic Co-operation and Development. The FATF Recommendations are an effort to impose strict anti-money laundering and counter-terrorist financing obligations on professionals such as lawyers. See International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: The FATF Recommendations, (February 2012).

See also Nicole M. Healy et al., U.S. and International Anti-Money Laundering Developments, 43 Int’l Law. 795, 799 (2009).

^[5]Federation of Law Societies of Canada v. Canada, 2013 BCCA 147, para. 160.

^[6]There was an earlier attempt by the Canadian government to apply certain requirements to lawyers, but after granting injunctive relief, lawyers were formally exempted from those earlier requirements. The legislation and regulations currently in effect are not being enforced in the attorney-client context pending the outcome of the appeals process.

^[7]Federation of Law Societies of Canada v. Canada, 2013 BCCA 147, para. 21.

^[8]Id. at paras. 47 & 69.

^[9]Id.

^[10]Id. at para. 107.

^[11]Id. (citing Canada (Attorney General) v. Law Society (British Columbia), [1982] 2 S.C.R. 307 at 335-336).

^[12]Federation of Law Societies of Canada v. Canada, 2013 BCCA 147, para. 123.

^[13]Federation of Law Societies of Canada v. Canada, 2011 BCSC 1270, para. 108.

^[14]Federation of Law Societies of Canada v. Canada, 2013 BCCA 147, para. 103.

^[15]Id. at paragraphs 79 through 84.

^[16]Federation of Law Societies of Canada v. Canada, 2013 BCCA 147, para. 6.

^[17]Id. The appellate court reasoned that “this is not a case which turns on solicitor [attorney]-client privilege being the applicable principle of fundamental justice” and that “[t]o the extent that the Regime may interfere with privilege, this is a secondary concern which Canada has attempted to address . . . the independence of the Bar is a principle of fundamental justice with which the Regime interferes to an unacceptable degree.” Id.

^[18]Federation of Law Societies of Canada v. Canada, 2013 BCCA 147, para. 85.

^[19]See generally ABA, Gatekeeper Regulations on Lawyers, (last visited June 6, 2013) (arguing that “suspicious activity reporting (SAR) requirements on lawyers . . . could require lawyers to report certain confidential client information to the government, thereby eroding the attorney-client privilege, harming the lawyer-client relationship, conflicting with existing state bar ethical obligations of lawyers, and undermining traditional state court regulation of the legal profession.”).

^[20]See Swidler & Berlin v. United States, 524 U.S. 399, 403 (1998); Upjohn Co. v. United States, 449 U.S. 383, 389 (1981) (“The attorney-client privilege is the oldest of the privileges for confidential communications known to the common law.”); Hunt v. Blackburn, 128 U.S. 464, 470 (1888) (The attorney-client privilege “is founded upon the necessity, in the interest and administration of justice, of the aid of persons having knowledge of the law and skilled in its practice, which assistance can only be safely and readily availed of when free from the consequences or the apprehension of disclosure.”).

^[21]Michael S. Greco, Privilege Under Attack: Attorney-Client Communications Must be Kept Confidential to Protect Public, A.B.A. J. (May 23, 2006, 3:42 AM).

^[22]See Fisher v. United States, 425 U.S. 391, 403 (1976).

^[23]Upjohn Co. v. United States, 449 U.S. at 389.

^[24]See Swidler & Berlin v. United States, 524 U.S. at 403.

^[25]Model Rules of Prof’l Conduct R. 1.6 (a) (2012). Rule 1.6 (a) states “[a] lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is implicitly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).” Paragraph (b) lists several exceptions to the requirement of maintaining client confidentiality including the prevention of death, substantial harm, fraud, or other criminal activity.

^[26]Model Rules of Prof’l Conduct R. 1.6 (c) (2012).

^[27]See Model Rules of Prof’l Conduct pmbl. (2012). See also Upjohn Co., 449 U.S. at 389.

^[28]Model Rules of Prof’l Conduct R. 1.6 cmt. 2 (2012).

^[29]Swidler & Berlin v. United States, 524 U.S. at 408–409 (“[T]here is no case authority for the proposition that the privilege applies differently in criminal and civil cases.”); see also In re Lott, 424 F.3d 446, 456 (6th Cir. 2005) (there is “unity of civil and criminal law” with respect to the attorney-client privilege). In applying the privilege to both civil and criminal cases, the Swidler Court reasoned that a client may not know whether confidential or privileged information is relevant in a criminal or civil context at the time the communication is made. Swidler, 524 U.S. at 409.

^[30]Swidler & Berlin v. United States, 524 U.S. 399, 411 (1998) (O’Connor, J., dissenting).

^[31]Model Rules of Prof’ Conduct R. 1.6 cmt. 2 (2012). Each state judiciary adopts ethical rules that are applied to lawyers. The Model Rules of Professional Conduct are the basis for these ethical rules and have been applied by the judiciary in 49 states as well as the District of Columbia and the Virgin Islands. ABA, State Adoption of the ABA Model Rules of Professional Conduct, (last visited July 8, 2013). California has not adopted the Model Rules of Professional Conduct, but has a parallel privilege rule in Rule 3-100.

^[32]The Sixth Amendment guarantees certain legal protections to the accused in criminal prosecutions. These protections include the rights to a speedy and public trial, effective assistance of counsel, and to know and understand the levied charges. See U.S. Const. amend. VI.

^[33]See Model Rules of Prof’l Conduct R. 1.6 (b) (2012). See also Evan A. Davis, Symposium, Regulating the Lawyer: Past Efforts and Future Possibilities: The Meaning of Professional Independence, 103 Colum. L. Rev. 1281, 1289 (2003) (recognizing that “[u]nder the Model Rules, withdrawal is permitted but not required.”).

^[34]See Model Rules of Prof’l Conduct R. 1.2(d) (2012). California is the only jurisdiction that has not adopted this rule; there is no parallel provision in the California Bar Rules of Professional Conduct.

^[35]See, e.g., Model Rules for Lawyer Disciplinary Enforcement R. 10 (2001) (outlining the types of sanctions available for lawyer misconduct, which include disbarment, suspension, and probation); Davis, 103 Colum. L. Rev. at 1287. (“Every time a lawyer fails to prevent or rectify client dishonesty that is known to the lawyer and in connection with which his or her services were used, there arises a possibility that the lawyer may be liable for any resulting damage as a matter of civil law.”).

^[36]See Model Rules of Prof’l Conduct R. 8.4 (2012); Model Rules for Lawyer Disciplinary Enforcement R. 10 (2001).

^[37] Id. The practices guidance is “risk-based, which allows lawyers to assess the money laundering and terrorist financing risk posed by each client and then take prudent steps that are appropriate under the circumstances rather [than] follow a rigid, burdensome set of prescriptive rules in all cases.” Id. (internal quotations omitted).

^[38] Id. at 3.