Effective January 1, 2022, amendments to the Law Society of Ontario’s Anti-Money Laundering measures, will require law firms to ask their clients for additional information from time to time. The obligation to identify clients and to obtain basic contact and employment information has been with us for some time. Law firms have been required to verify this client information by reviewing identification documents where the nature of the retainer involves the receipt, payment or transfer of funds and there is no applicable exemption.
The amendments to the LSO by-laws have eliminated some of the exemptions and have imposed additional requirements to obtain information about the source of funds being used in the retainer, an active requirement to monitor the retainer to ensure no indications of fraud, and that instructions received are consistent with the retainer.
Some of these changes are:
For clients who are individuals, where the nature of the retainer has triggered the obligation to verify identity, law firms are now required to take and maintain copies of government-issued photo identification documents. Where photo identification documents are not available there are other approved methods for verifying identification, such as through a credit file or through two pieces of valid and current information from a reliable source. The copies taken are to be maintained for the duration of the retainer and for up to 6 years after completion of the file. Firms will have to find a way to locate and then delete or destroy such information, after completion of the retainer, to comply with their obligations under privacy laws.
For clients that are corporations or organizations, and the duty to verify is triggered, law firms are required to verify the identity of the client within 30 days of the date they are retained. Part of this obligation requires that reasonable efforts be made to obtain the contact information of each director, partner, trustee, beneficiary, or settler as the case may be. Where the client is a corporation, it is now required that the law firm obtain the contact information for anyone owning more than 25% of the shares of the corporation, as well as information establishing the ownership, control, and structure of the organization.
If the names of the directors are not available, reasonable efforts must be made to confirm the identity of the most senior managing director. It may be necessary to obtain copies of the organization’s constating documents. These could include a trust or partnership agreement, or similar record that confirms the organization’s existence and validity.
Where the obligation to verify is triggered and subject to the exemptions set out below, law firms are now required to inquire and record information from clients about the source of the funds. Note that funds paid or received pursuant to a court order or settlement in a proceeding were exempt from the verification requirements under the earlier measure but are no longer.
The most effective exemption is for funds paid by electronic funds transfer (EFT) or wire, and it remains best practice to provide funds by wire for use in transactions, settlements or pursuant to a court order.
In addition to the new obligation to inquire about and record the source of the funds, lawyers are now required to monitor a retainer periodically and to reach out to their client from time to time, to ensure that the instructions and information obtained are consistent with the purpose of the retainer and to satisfy themselves that they are not assisting or facilitating fraudulent activities. The inquiries made and the information obtained must be recorded. There is no guidance on what is meant by “periodically,” so law firms will have to satisfy themselves on what is reasonable.
If any of the exemptions listed below apply then although there remains the requirement to identify the client, the more onerous verification requirements need not be followed. This of course is subject to a lawyer’s overriding professional obligation to be vigilant and to watch out for red flags indicating that a matter on which they are retained runs the risk of being fraudulent.
Exemptions apply where the funds:
- Are paid to or received from a financial institution, public body, or reporting issuer.Are paid, received, or transferred by electronic funds transfer (as defined in Bylaw 7.1).
- Are received from the trust account of another licensee or lawyer authorized to practice law in Canada.
- Are received from a peace officer, law enforcement agency, or other public official acting in an official capacity.
- Are used to pay a fine, penalty or bail; or
- Are used to pay for fees or disbursements billed for legal services.