February 8, 2018

Client ID and verification

February 8, 2018

Law Society Rules 3-98 to 3-109 require lawyers to follow client identification and verification procedures when providing legal services. Failure to comply with the rules can have significant disciplinary, insurance and financial consequences.

The rules are a key part of the Law Society’s efforts to combat money laundering and terrorist financing. They contain basic due diligence obligations that help reduce the risk of lawyers facilitating dishonest or illegal activity. Lawyers must comply with the rules whether or not suspicious circumstances are present.

Recently, the Discipline Committee has considered several cases arising from lawyers breaching the rules. This advisory is intended to provide guidance to the profession in an effort to ensure compliance with the rules.

Identification vs. verification

Identification and verification are separate, but related, concepts in the rules. The client identification rules require a lawyer to make reasonable efforts to collect basic identification information about a client upon being retained. There are different obligations for individuals and entities.

The client verification rules apply when a lawyer receives, pays or transfers money on behalf of a client, or gives instructions on behalf of a client in respect of the receipt, payment or transfer of money. The verification rules require a lawyer to take reasonable steps to verify the identity of a client using what the lawyer reasonably considers to be reliable, independent source documents, data or information. The requirements for verifying individuals and entities vary according to the type of transaction and entity.

Lawyers should note that the rules use a number of defined terms, including “client,” “financial institution,” “financial transaction,” “interjurisdictional lawyer,” “money,” “organization,” “public authority” and “reporting issuer.” Lawyers should pay close attention to the definitions, as they are in some cases broader than the common usage (especially “client,” “financial transaction,” and “money”).

Non-face-to-face transactions

Financial transactions on files where the lawyer and client never meet in person represent the highest risk of fraud or lawyer facilitation of other dishonest or illegal activity. It is imperative that lawyers familiarize themselves with and follow the requirements set out in Rule 3-104 for such transactions.

Where the non-face-to-face client is located elsewhere in Canada, Rule 3-104(2) requires the lawyer to obtain an attestation from a commissioner of oaths or a guarantor to verify the client’s identity.

Where a lawyer is retained by a client located outside of Canada who they do not meet in person, Rules 3-104(5) and (6) require the lawyer to enter into a written agreement or arrangement with an agent to verify the client’s identity and to obtain the information gathered by the agent under the agreement or arrangement. Simply asking the client to take the relevant documents to a foreign notary or equivalent of their choice is not sufficient. Fraudsters can and have used the names of real lawyers and notaries — who are not party to the scam — to produce phony attestations. Lawyers must satisfy themselves, through direct contact with the agent, that the agent is who the agent claims to be.

There have been a number of recent Discipline Committee decisions involving non-face-to-face transactions where lawyers did not have a written agency agreement or arrangement. In one, a lawyer acting for a new client outside of Canada on a real estate transaction sent the client a package of documents, including an “Identification and Verification Document,” for the client’s review and signature before a notary. The lawyer did not know to whom the client would take the documents, had no direct contact with the notary apart from receiving the signed documents by email and did not enter into a written agreement or arrangement with the notary. The lawyer was required to attend a conduct review. Conduct reviews form part of a lawyer’s professional conduct record.

In another case, the lawyer acted for an existing, but never verified, client who at all material times was outside Canada. The lawyer’s office sent a package of documents to be notarized, had telephone contact with the foreign notary and received the signed and sealed identifying documents; however, the lawyer did not have a written agreement or arrangement with the notary. The lawyer was required to attend a conduct meeting.

No exemption for family and friends

Obtaining client identification information and verification documents may seem unnecessary in the case of family, friends or long-term acquaintances or business associates, but there is no exemption for such clients.

While client identification and verification usually only has to be done once for a client, a lawyer who has not previously complied with the rules for the client must do so regardless of who the client is or the nature of the client’s relationship with the lawyer.

Lawyers have been directed to attend conduct meetings and conduct reviews for failing to identify or verify the identity of clients, even where the lawyers have known the clients for decades. In one recent decision, a lawyer was directed to attend a conduct review after failing to verify the identities of clients who were the brother and sister-in-law of the lawyer’s former law partner.

Exemptions

Rule 3-101 contains exemptions to the verification requirements. There appears to be a perception among some lawyers that blanket exemptions exist for entire practice areas, such as personal injury or criminal defence. No such exemptions exist, nor is there an exemption for pro bono work that involves a financial transaction.

Each client and financial transaction must be considered separately; an exemption that applies to the lawyer’s receipt of money may not apply to the lawyer’s payment of money. Both receipt and payment would need to be exempt for the lawyer not to be required to verify the client’s identity. If in doubt about the application of an exemption, a lawyer should verify the client’s identity.

If a lawyer considers that an exemption applies and verification does not need to be conducted, the relevant exemption and the basis for the lawyer’s conclusion should be recorded in the file.

Record keeping and retention

The record keeping and retention obligations are central to the rules. In two recent Discipline Committee decisions, lawyers were directed to attend conduct reviews after verifying their clients’ identities but failing to retain copies of the documents used to do so.

Rule 3-107 requires a lawyer to retain a record of the information and any documents obtained for the purposes of client identification, and for identifying directors, shareholders and owners. In addition, a lawyer must retain a copy of every document used to verify the identity of any individual or “organization” (as defined in the rules). The records and documents must be retained for the longer of the duration of the lawyer-client relationship or six years following the completion of the work for which the lawyer was retained.

Rule 3-102 requires a lawyer providing legal services in respect of a financial transaction to take reasonable steps to verify the client’s identity using what the lawyer reasonably considers to be reliable, independent source documents, data or information.

If the lawyer is unable to obtain reliable, independent source documents, but has, for example, obtained reliable, independent information, and believes it is still reasonable to act for the client in the circumstances, the lawyer should expressly note that fact, the basis for that conclusion and the information relied on in the file. Absent exceptional circumstances, a client’s identity should be verified by reliable, independent source documents.

Practice checklist and FAQs

For more information, refer to the Client Identification and Verification Procedure Checklist in the Practice Checklists Manual and the extensive list of FAQs on the topic available on the Law Society website. The checklist includes a sample attestation form for verification of a client’s identity in Canada (Appendix I) and a sample agreement with an agent for verification of identity if a client is outside of Canada (Appendix II). A free online course is also available. For advice, contact Barbara Buchanan, QC, Practice Advisor, at 604.697.5816 or bbuchanan@lsbc.org.