PublicationsMoney Laundering Legislation The federal Proceeds of Crime (Money Laundering) Act (PCMLA), died when Parliament prorogued last September, 1999, but it has been transformed as Bill C-22, which passed first reading December 22, 1999. It contains burdensome record-keeping and reporting obligations, which will have a significant impact on lawyers and their business clients, especially those in the financial and investment industries. However, it seems only to set out a general framework to control money laundering by recording and reporting "suspicious" transactions - mostly involving cash. When Bill C-22 was introduced, the Federal Government issued a consultation paper which fleshes out some of the regulatory details. At first, the bills's obligations appear to be relatively simple. The legislation is being driven by international efforts to curtail the conversion of cash from illegal operations into banking system credits, which can never be traced back to a criminal source. Under the auspices of the Paris-based Organization of Economic Cooperation and Development (OECD), 26 countries, including Canada, have been participating in the financial action task force (FATF), which has set certain standards on money laundering to be met by all its members. So far, Canada has enacted a 1991 statute, which requires only some financial institutions to know their clients and records, but not report suspicious transactions. Canada's banks, in conjunction with the Royal Canadian Mounted Police, have also worked out a voluntary program of recording and reporting, but there is no compulsion to do so. Canada is the only FATF member that does not require banks to report its suspicious transactions. Bill C-22 constitutes an attempt to "catch up" and Canada is under intense pressure from the international community to conform. Who is caught by Bill C-22?
Both institutions and persons have obligations to keep records and do the reporting, but the regulations will encompass "a list of activities and businesses that regularly involve the receipt of cash." The Bill C-22 consultation paper contains a list of "entities covered" including, on the "institution" side:
And on the "persons" side:
While s.5(j) of the bill permits certain "profession" to be regulated, the consultation paper states pointedly that "no proposals are put forward at this time." While the banks and trust companies have institutional responsibility under the statute, "persons" also have a parallel duty to record and report transactions. Even in brokerage and merchant banks which may be owned by a bank, it appears that every single broker will be the ones who are responsible for keeping records and reporting. And it does not appear that a large brokerage will have any liability under the act as an institution - it is only the individual broker within the organization that has that responsibility. This will place a huge amount of pressure on individual brokers and financial analysts to understand how records are being kept and how reports are being made by their own organization. Not only that, liability is not just limited to institutions and persons. It seems any officer, director or agent of anyone regulated under the act is also liable if they directed, authorized, assented, acquiesced in, or participated in the commission of the offence. Accordingly, this appears to extend the standard law on being a party to a criminal offence. What gets reported? Section 8 is a prohibition from disclosing to anyone the fact you have made a report and what was in the report when you have the intent of "prejudicing a criminal investigation." So if you have been obligated to make a report, you cannot tell your client or customer. But in order for reporting obligations to arise, the transaction must be a "financial" one - if it is non-financial, no matter how weird or suspicious it is, you do not need to report it. The transaction must also occur within the "course of activities of the person or institution", so if you are an insurance broker and are involved in a transaction that is completely outside the insurance area, you do not have to report it. The reporting person or institution must also have reasonable ground to "suspect that the transaction is related to a money-laundering offence." Those include sections under the Canadian Criminal Code, the Controlled Drugs and Substances Act, the Excise Act and the Customs Act (all federal statutes). What is a suspicious transaction? Suspicious transactions (called "prescribed transactions" in the bill C-22 consultation paper) are characterized by "primary" or objective indicators and "secondary" or subjective ones. Primary indicators include back-to-back deposit or loan transactions with entities in drug trafficking areas of the world. It is where the nature of the transactions itself makes it suspicious. Secondary indicators come from a transaction "in the context of the client," when there is a "conspicuous increase in the account balance, all out of proportion to previous activities. Or, "when there's a transaction with no apparent economic justification or financial advantage to the client." The Bill C-22 consultation paper sets out "prescribed transactions" which would be reportable to a new agency, the Financial Transactions and Reports Analysis Centre of Canada (called the Centre), which is also created by the bill. These include "transactions involving five or more $1,000 dollar bills" or "two or more transactions entered into on the same day and resulting in a total amount of cash received by a person or entity of $10,000 or more, where the person or entity knows that the transactions are conducted by, or on behalf of, the same client." An exemption for lawyers Further, the proposed regulations do not contain definitions of professional or professional services. As well, the receipt of $10,000 or more in cash for transfer to a third party is also not reportable when made in payment for, or on account of, professional fees or services, or to be paid as bail. The consultation paper earmarks specific prescribed transactions in connection with various businesses including casinos, currency exchanges, institutions taking deposits, life insurance companies, i.e. money service businesses (i.e. check cashiers, money order vendors, money transmitters), and persons dealing in securities. In most cases, these businesses must report cash transactions of $10,000 or more. Client identification requirements These regulations could well apply to lawyers who keep minute books on behalf of clients. In essence, this requires the lawyer to look at the certificate of incorporation and to verify the address and names of directors. This may not be a significant change, as most lawyers will usually do some kind of due diligence to determine the actual identity of corporate clients. But this does tighten the due diligence requirement for lawyers who in the past may not have taken pains to assure themselves about the identify of the clients they were dealing with. In essence, therefore Bill C-22 makes due diligence a legal requirement rather than a mere professional standards or competency question. Record-keeping requirements
Records must be retained for five years and be readily accessible, i.e. retrievable within 10 working days. While lawyers may not be required to report large cash transactions paid as professional fees, it is possible that such payments would have to be logged in a large cash transaction record. There are big issues of privilege which attach to the record-keeping obligation. It is possible that those records at some point might be subpoenaed or somehow be accessed. Even though a lawyer might not have to disclose the records because of privilege, if a lawyer did not keep records the lawyer could end up having some form of liability under the act. Seizure and sealing procedure If the authorities are about to examine a document in possession of legal counsel who claims solicitor-client privilege, then the seizing authority is not supposed to look at it and legal counsel is to place the documents in a package, seal and identify it, then retain it and ensure it is preserved until it is produced for a judge to determine whether privilege attaches. An application must be made to a judge within 14 days, with notice to the deputy attorney general of Canada. The fact that the lawyer or client has to assert the solicitor-client privilege in the document may make the provisions constitutionally suspect in light of rulings striking down similar sealing procedures in the Criminal Code. Financial Transactions and Reports Analysis Centre of Canada ("the Centre") Additionally, s.54 of Bill C-22 allows the reported information to be disclosed if the police have reasonable grounds to suspect that the information could be relevant to investigating or prosecuting a money-laundering offence. The Center can pass its information along to local or regional police, the Royal Canadian Mounted Policy, the Canada Security Intelligence Service, Canada Customs and Revenue Agency (formerly Revenue Canada) and Citizenship and Immigration. Further, international disclosure is also allowed, provided Canada has an agreement for the exchange of information with the other country, i.e. reciprocity. The Centre also has extremely wide powers of search and seizure. They cannot come into a private home without a search warrant, but they can come into any business without one. Record-keeping obligations under Bill C-22 will extend know-your-client rules for anyone regulated by the act. The minister must consult with stakeholders before enacting regulations. They have to be published in the Canada Gazette at least 90 days before they become effective in order to give those affected a chance to comment. There are rigorous penalties of fines and/or imprisonment under Bill C-22 offences for failing to file a suspicious transaction report, filing a false or misleading report, making an unauthorized disclosure of information, or alerting a suspected money launderer of a suspicious transaction report. Lesser offences include failing to keep proper records or failing to give the Centre reasonable assistance in its audit procedures. The smallest maximum fine is $500,000 and some fines go up to $2 million plus two years in jail. We await the final version of the PCMLA together with enacted regulations.
The foregoing comments are of a general nature, and are not intended nor should they be used as a substitute for legal advice or opinions which can be rendered only when related to specific fact situations. Back to main Publications page Close this window to return to the site. |