Financial-crime regulations governing lawyers require ‘considerable improvements,’ watchdog says

Financial-crime regulations governing Canadian lawyers require “considerable improvements,” according to a recent assessment of the country’s anti-money-laundering regime by a global watchdog, a task complicated by a historic Supreme Court ruling.

Canada’s regime for combatting financial crime received a passing grade from the Financial Action Task Force (FATF) in a highly anticipated report published earlier this week. But the intergovernmental body, which sets standards to combat money laundering and terrorist financing, identified several areas where it believes improvements are needed.

Among its recommendations is that Canada beef up the effectiveness of its risk-based supervision of certain non-financial businesses and professions, a category that includes lawyers.

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Canada’s 2025 national risk assessment rates lawyers and Quebec notaries as highly vulnerable to money-laundering risks. That’s because of their roles in real estate transactions and the attractiveness of their trust accounts to criminals seeking to place dirty money into the financial system.

In one notable case, Vancouver lawyer Ronald Pelletier was disbarred for allowing his clients to stash proceeds of securities fraud in his trust account. The Law Society of British Columbia Tribunal called the case “novel,” noting that it appeared to be the first time that a lawyer had been disciplined for money laundering.

Past efforts by Ottawa to bring lawyers under the purview of the Financial Transactions and Reports Analysis Centre of Canada, or FinTRAC, have failed. In 2015, the Supreme Court of Canada deemed applying certain provisions of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to lawyers unconstitutional.

The court found that the reporting requirements could subject lawyers to unreasonable search and seizure, or incarceration, if they refused to violate solicitor-client privilege, for instance by handing over records.

As a result, lawyers are not required to report suspicious transactions to FinTRAC. Instead, under the industry’s self-regulation model, provincial and territorial law societies impose anti-money-laundering rules on lawyers and supervise their compliance with those requirements.

The FATF calls the lack of suspicious transaction reports from lawyers “a significant gap, limiting FinTRAC’s visibility over certain higher risk financial activities.”

The watchdog also notes that neither provincial law societies nor their umbrella organization, the Federation of Law Societies of Canada, have carried out a risk assessment of the industry, and that law societies don’t have a proper framework through which to evaluate the financial-crime risks of individual lawyers.

The report points out that some law societies, including in British Columbia, have started creating sectoral and individual risk assessments.

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The FATF also identified the legal profession as a gap in Canada’s financial-crime controls during the country’s last evaluation, in 2016, and the global financial watchdog notes in its latest report that the law societies have taken “positive initiatives.”

It said, for instance, that the Federation of Law Societies of Canada has published financial-crime risk advisories for the legal profession, and launched an online learning program.

The federation said in a statement that the report “recognizes the significant progress made by Canada’s legal regulators” to strengthen their financial-crime controls.

“The report also identifies areas where continued diligence is needed. The Federation recognizes that maintaining an effective [anti-money-laundering and anti-terrorist-financing] regime requires ongoing attention, continuous improvement and collaboration among regulators, law enforcement and other authorities as financial crime risks and international standards continue to evolve,” the statement said.

Michelle Gallant, a law professor at the University of Manitoba, said that although the previous attempt to bring lawyers under Canada’s anti-money-laundering laws failed, the government “could try again.”

“The right of lawyers to police themselves is not a constitutional guarantee,” Prof. Gallant added.

“The provinces might say, ‘look, you’re not doing enough on money laundering. Maybe you lawyers have had too much control over yourselves for too long, and we have to pull back.’”