Spotting the red flags

Nobody loves spam. Lawyers — who sometimes receive spam of the career-ending kind — have reasons to hate it more than most.

“Lawyers get these pitches all the time. We’ll get an email from someone who claims they’re in Quebec, and they need to set up a corporation in Ontario, and they need to move some money through Jamaica, for some reason,” says Jeffrey Simser, a Toronto-based lawyer and expert in money laundering law.

“Experienced lawyers, we’re used to that and we see the red flags. But say you’re a young lawyer with a new practice and this client comes along — you don’t really know anything about them, but you know their fee can pay the rent.”

Ignorance of the law is no defence, of course — especially for lawyers. Law societies and the Federation of Law Societies of Canada (FLSC) have been beating this drum for years, reminding legal professionals of their duty to avoid getting drawn into money laundering schemes.

The message may not be getting through to everyone. In a report completed in 2022 — a year before Ronald Pelletier became the first lawyer in B.C. to be disbarred for money laundering — the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) found legal professionals were "implicated in a wide range of suspicious activity," including deals involving drug traffickers and organized crime.

According to reporting by CTV News and the Investigative Journalism Foundation, FINTRAC alerted police to 229 cases between 2017 and 2021 in which it saw indications of money laundering or terrorist financing, and identified 92 cases of suspected links between legal professionals and money laundering schemes.

How many of those cases involved lawyers who genuinely didn’t know what they were getting into? Maureen Ward, a commercial litigator at Bennett Jones specializing in cross-border financial crime, says lawyers in small firms or solo operations can be vulnerable.

“We’ve seen a substantial uptick in financial crime lately, and Canada is a very popular target for that sort of activity.”

She says our law enforcement regime, which tackles financial crime, is sophisticated but under-resourced compared to the volume of illicit financial flows — particularly when compared to enforcement in the United States.

“Bennett Jones is a big firm and we have a lot of stringent processes and internal checks to ensure we comply both with the regulations and law society guidance,” Ward says.

“But all firms have an obligation to protect themselves. Small firms don’t get a pass just because they’re small.”

The FLSC has a list of model rules that are meant to keep lawyers from crossing the line, and all law societies have adopted them. They limit the use of lawyers’ trust accounts to functions directly linked to the provision of legal services and cap cash payments at $7,500. They also instruct legal professionals to conduct detailed client identification and verification checks so they know who their clients are and where their money is coming from.

Last year, the FLSC released a crib sheet of money laundering “red flags” lawyers should look for when taking on new clients. Again, most of those warning signs involve clients who refuse to identify themselves or their business partners, or who obscure the source of their funding.

“There’s no simple set of rules. But for starters, if what your client is asking you to do doesn’t make any sense, investigate or walk away,” says Simser, who testified before the Cullen Commission, British Columbia’s money laundering inquiry.

“If you’re asking me to provide legal services, I need to establish who you are and exactly what it is you want me to do. Is there anything weird about it? Are you, for example, a first-year university student who wants to buy a new home for $2 million? That actually happened in Vancouver.”

The FLSC’s red flag list also suggests that money launderers seek out inexperienced lawyers or those with no background in complex or “especially large” transactions.

However, the fact that bad actors target inexperienced legal professionals doesn’t relieve those professionals of the obligation to know who they’re working for.

“There’s a difference in law between being truly unaware and being willfully blind,” says Michelle Gallant, a professor of law at the University of Manitoba who studies money laundering.

“I can see a situation involving a simple real estate transaction where the lawyer might not know — a one-off, in short. But for lawyers who are involved in 50, 60, 100 transactions, I’d say it’s less likely they’re unaware. There are hints there that should prompt further investigation.”

Where you practice also matters. For example, if you’re in B.C., she says, “You really have no excuse for not knowing the role real estate transactions play in money laundering, for not doing your due diligence.”

There’s a political dimension to all of this, of course. Ottawa has tried twice to bring lawyers under anti-money laundering laws that would require them to report suspicious transactions to FINTRAC. Its last attempt ended in failure before the Supreme Court, which ruled that bringing lawyers under FINTRAC would amount to “state interference with the lawyer’s duty of loyalty to the client.”

The Financial Action Task Force (FATF), the global watchdog that sets international standards to curb money laundering, will review Canada’s anti-money laundering regime next year. What that report says could help determine where the conversation about the legal profession and money laundering goes from here.

“It’s worth remembering that the SCC decision didn’t close the door entirely to oversight,” says Simser.

“That FATF evaluation could end up having a lot of influence if it’s particularly critical.”

Gallant warns that the profession shouldn’t assume the constitutional right to solicitor-client privilege pushes outside oversight off the table forever, noting self-governance and solicitor-client privilege are two separate things.

“Lawyers have codes of conduct. The profession is self-regulating. Other professions don’t enjoy that privilege,” she says.

“And it is a privilege. There’s a reason ethics is a mandatory course in law schools. Lawyers don’t just work with the law — they are the law.”