This Discipline Advisory highlights the decision of the Review Board in relation to the application of Rule 3.58.1(1) and the repercussions for lawyers if they allow their trust accounts to be used improperly. The Law Society takes its role in combatting money laundering and other illegal activity seriously.

Law Society Rule 3-58.1(1) states:

3-58.1 (1) Except as permitted by the Act or these rules or otherwise required by law, a lawyer or law firm must not permit funds to be deposited to or withdrawn from a trust account unless the funds are directly related to legal services provided by the lawyer or law firm.

Legal services generally mean the application of legal principle and legal judgment to the circumstances or objectives of a person or entity. If funds are deposited into trust, the lawyer or law firm must provide legal services that are directly related to those funds.

LSBC v. Wang (2024 LSBC 42)

R Inc. retained the Respondent lawyer in September 2017 to continue R Inc. into British Columbia for a tax advantage in relation to the sale of the company’s condominium. The lawyer understood that R Inc. was a special purpose vehicle, registered in Nevis, to hold a residential condominium in Toronto, Ontario. R Inc. had received or was about to receive a cheque from an insurance company in payment for damage to the condominium resulting from a 2016 flood. R Inc. did not have a bank account in Canada or elsewhere. The lawyer did not ask why R Inc. did not have a bank account in Canada nor why it could not open one in order to deposit the insurance cheque. The insurance company would only issue the cheque in the insured’s name. After having agreed to deposit the insurance cheque in his trust account, the lawyer received the cheque in November 2017. The client R Inc. instructed him to deposit the cheque, render his account and to wire the balance to B Inc. The lawyer deposited the cheque and wired $43,265.26 to B Inc. The lawyer did not know nor ask R Inc. and B Inc. if they had the same beneficial owner nor did he make inquiries as to the nature of B Inc.’s business. He relied on R Inc.’s instructing individual informing him that B Inc. pays expenses for the condominium. The lawyer did not verify the identity of his client R Inc., and made no attempt to obtain from a government registry, independent documents concerning its existence, directors or its ownership structure.

The Review Board considered the following issues:

(a) What are legal services?

(b) Did Rule 3-58.1 create a new prohibition on the use of trust accounts?

(c) Did the Respondent breach the standard that governed between August 2017 and August 2018 by allowing funds to be transacted through his trust account?

(d) Did the respondent make reasonable inquiries and make a record of them?

Legal services

The Review Board found that the Respondent did not provide any legal services in relation to the deposit of the insurance cheque and wiring the funds. It stated the following as to what constitutes legal services:

[49] We do not agree that “the facilitation of efficient commerce” is the appropriate standard by which to determine whether certain conduct constitutes legal services. It is far too broad and vague. While facilitating commerce may be the result of providing legal services it does not aid in defining legal services. Commerce can be facilitated in many ways that do not include legal services. Accountants, bankers, consultants and many others also facilitate commerce. Legal services must be defined in a manner that distinguishes them from services provided by people who are not lawyers.

[50] The Federation of Law Societies in its February 19, 2019 Guidance to the Legal Profession (proposing what became Rule 3-58.1 in British Columbia) noted that the term “legal services” was not defined but said it generally means “the application of legal principle and legal judgement to the circumstances or objectives of a person or entity.” We adopt this definition. 

[51] We find that the Respondent did not provide any legal services related to the trust funds. He merely deposited the cheque and paid out the funds (minus his account for the continuation) as instructed. This did not involve the application of legal principle or legal judgement to the problem R Inc. had in cashing the cheque.

Rule 3-58.1 – a bright line

Rule 3-58.1 (1) was adopted by the Law Society in July 2019.The Review Board discussed some background to the Rule, based on the model rule developed by the Federation of Law Societies. The Review Board found that the Rule created a bright line: 

[72] It is clear that the new Rule did create a bright line. If a lawyer deposits funds into their trust account and no legal services are directly related to the transaction, then the Rule is breached. Prior to the addition of Rule 3-58.1, and the amendment to the definition of “trust funds” in Rule 1, in July 2019; however, such a bright line did not exist. Importantly, this bright line did not exist when the Respondent engaged in the activity that is the subject of allegation 3.

Reasonable inquiries and making a record

[77] As stated in Gurney, a lawyer may only use their trust account where it is objectively clear the transaction is legitimate, and “…it is professional misconduct to become involved until such time as inquiries have been made to satisfy the member on an objective test that the transaction is legitimate [emphasis in original]” and a lawyer’s “duty to make inquiries is triggered prior to the lawyer becoming involved in the transaction...”

[84] Based on the evidence outlined in paras. [81], [82] and the Board’s findings referred to in para. [35] [including no attempt to comply with the identification and verification rules at the time], we find that the Respondent did not make reasonable inquiries regarding the insurance funds he deposited into his trust account on behalf of R Inc. (which were then paid out to B Inc.). The Respondent was obligated to make these inquiries because these trust transactions were unrelated to the legal services he was providing to continue R Inc. into BC.

Professional Misconduct

The Review Board found that the request to use the lawyer’s trust account for purposes unrelated to the legal services that he was providing created a suspicious circumstance. The lawyer was required to make inquiries about the circumstances of the transaction and make a record but he did not do so. The lawyer’s conduct was a marked departure from what is normally expected of lawyers.

[85] We have found that the request to use the Respondent’s trust account for purposes unrelated to the legal services he was providing created a suspicious circumstance. The Respondent was required to inquire about the circumstances of the transaction but did not do so. There is no record of inquiries. We must next determine whether the Respondent’s conduct is a marked departure from that normally expected of lawyers.

[86] In Elias, which was quoted by the panel in Gurney, the Court of Appeal held: “… it is professional misconduct to become involved until such time as inquiries have been made to satisfy the member on an objective test that the transaction is legitimate.” It is clear that the duty to make inquiries is triggered prior to the lawyer becoming involved in the transaction, and the lawyer must be satisfied on an objective basis that the transaction is legitimate.

[87] The insurance funds were unrelated to the legal services the Respondent was providing to his client. In the absence of related legal services, the Respondent had a professional obligation to make reasonable inquiries to satisfy himself on an objective test that the transaction was legitimate, which he failed to do.

[88] We find that the Respondent’s failure to make reasonable inquiries given the red flags referred to in paras. [80], [81] and [82] was a marked departure which constitutes professional misconduct.

With respect to client verification, the Review Board found that the lack of attempt to comply with the obligation to verify R Inc.’s identity was a marked departure and thus professional misconduct. With respect to these obligations, lawyers can refer to the Discipline Advisory – Client ID and Verification, August 6, 2024 and the Client ID & Verification and Anti-Money Laundering Risk Management webpage.