FINTRAC Special Bulletin on use of legal profession in money laundering, sanctions evasion

By Jay Krushell

Chief Legal Officer & Co-Founder

On Oct. 23, 2024, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) published a Special Bulletin on the use of the legal profession in money laundering and sanctions evasion. I think this publication, especially its timing, raises an interesting question — but before I get to that question, we need to review the history between FINTRAC and the legal profession.

To start, in 1989 the Canadian federal government enacted the Proceeds of Crime and Terrorist Financing Act (PCMLTFA) to help combat money laundering and terrorist financing in Canada. In 2008, the federal government amended the Act to require lawyers and law firms to collect information on clients potentially involved in money laundering or terrorist financing and make that information available to FINTRAC. In response to this, the Federation of Law Societies of Canada (FLSC) launched a constitutional challenge claiming the amendment failed to respect solicitor-client privilege, which is covered under s. 7 of the Charter, and s. 8 of the Charter, which deals with unreasonable search and seizure.

This case went all the way to the Supreme Court of Canada (SCC) and, in 2015, the SCC ruled that the amendments, as they applied to lawyers, violated the Charter and struck them down Canada (Attorney General) v. Federation of Law Societies of Canada, [2015] 1 S.C.R. 401. However, the SCC decision left open the possibility that the Federal government could devise a constitutionally compliant inspection regime. In other words, the federal government continues to have the option of taking another run at including lawyers in Canada’s anti-money laundering (AML) regime if they want to. Long story short: the law societies won that battle, and lawyers were not added to Canada’s anti-money laundering regime.

Moving on, in 2016, the Financial Action Task Force (FATF), which is a global anti-money laundering and anti-terrorist financing organization that sets international standards aimed at preventing these activities, assessed Canada’s compliance with the FATF standards and gave Canada a lukewarm assessment. Interestingly, in its findings, FATF highlighted the fact that Canadian lawyers, law firms and Quebec notaries were not included in Canada’s AML regime and, therefore, do not have to adhere to the same anti-money laundering obligations that govern banks and other financial institutions.

It is important to note that the results of a FATF audit can have major consequences for countries because if the country fails the audit, and FATF places a country on its “black” or “grey” list, that country is labelled as having strategic deficiencies in its anti-money laundering and anti-terrorist financing regime and that label could materially affect foreign investment in that country. As a result, the stakes are very high, and the Canadian federal government is highly motivated to implement laws and practices that meet the FATF standards.

As an aside, FATF stated that the 2015 SCC decision “raises serious concerns,” which confirms FATF is closely watching what is going on in Canada from an AML perspective and is not happy that Canadian lawyers and Quebec notaries are not included in Canada’s AML regime.

Building on that theme, in 2018 FATF co-published a report that analyzed how lawyers can help criminals conceal wealth and illicit assets, further driving home their view that lawyers ought to be subject to strict anti-money laundering and anti-terrorist financing regulations and oversight.

For its part, in the past two years, the federal government has made several material amendments to the PCMLTFA, including expanding the regime to cover mortgage brokers, mortgage administrators, mortgage lenders and title insurance companies, and has accelerated enforcement activities. The next FATF audit of Canada’s AML regime, which is scheduled to start in December 2025, is widely believed to be what is motivating FINTRAC to make these changes as FINTRAC wants to do everything it can to bolster Canada’s AML regime before the audit starts to minimize the chance of Canada being placed on FATF’s “black” or “grey” list.

To summarize the background:

1. after enacting its AML legislation Canada tried to bring lawyers and Quebec Notaries into its AML regime and failed;
2. FATF is not happy that Canadian lawyers and Quebec notaries are not part of Canada’s AML regime;
3. FATF is going to conduct its next audit of Canada’s AML regime in 2025; and
4. Canada is worried about failing the audit and being placed on FATF’s “black” or “grey” list and, as a result, has been actively working to strengthen Canada’s AML regime to maximize the chances of a favourable outcome from the next FATF audit.

All of this leads to what I think is a very interesting question: is the publication of this Special Bulletin, at this time, laying the groundwork for FINTRAC to make a second attempt at including lawyers and Quebec notaries in Canada’s AML regime before the next FATF audit?

Some might argue that lawyers should be included in Canada’s AML regime, and those people have strong points to make. However, it is important to note the work the Canadian law societies have done in recent years to counter money laundering and terrorist financing activities. This work includes implementing stringent client identification, trust accounting and cash transaction rules, collaborating with the Federal government on issues related to money laundering and terrorist financing, and publishing resources that educate lawyers on issues related to money laundering and terrorist financing. As a result of this work, Canadian law societies are well positioned to argue the work they have done and the rules they have implemented already provide effective and constitutional anti-money laundering and anti-terrorist financing regimes in the legal sector and, therefore, there is no need to add Canadian lawyers and Quebec notaries to Canada’s AML regime.

I can’t predict how this will all play out, but if the Federal government does make another attempt to include lawyers and Quebec notaries in Canada’s FINTRAC regime it is an absolute certainty that the FLSC will fight that change tooth and nail. There are good arguments on either side of this debate, the stakes are very high, and I suggest this is a storyline lawyers and Quebec notaries should watch closely between now and December 2025 when the next FATF audit of Canada’s AML regime begins.

To put this another way: “Grab a big bowl of popcorn, strap in and hold tight because this battle could be a doozy!”

 

This article was originally published on Law360TM Canada (www.law360.ca), part of LexisNexis Canada Inc.