This White Paper has been prepared by the FATF Task Force of the American College of Trust and Estate Counsel
The Canadian Court of Appeal for British Columbia (the “appellate
court”) recently held unconstitutional legislation
that applied anti-money laundering and counter terrorist financing statutes and
regulations to lawyers.
Federation of Law Societies of Canada v. Canada (2013 BCCA 147, April 4, 2013)
. The appellate court, while recognizing the
importance of legislation to deter money laundering and terrorist financing,
held that applying certain requirements to lawyers violated the liberties
guaranteed under Canadian Constitutional law. The Attorney General of Canada has appealed the appellate court’s ruling to the Supreme Court of Canada.
The law and regulations being examined
(referred to in the opinion and in this paper as the “Regime”) were enacted to
reduce money laundering and terrorist financing transactions. Among
other requirements, the Regime required lawyers (i) to collect certain information from their clients so that the information can be available for law enforcement officials if they wish to review it; (ii) to provide
confidential information of the client; and (iii) not to disclose any such actions to the client.
The records being maintained by
lawyers were subject to warrantless search, and the Regime subjected lawyers to
criminal penalties for failure to comply with these requirements.
The Supreme Court of British Columbia (the “lower
court”) found that the Regime violated the attorney-client
privilege. However, the appellate court stated that the safeguards built
into the Regime adequately protected against inappropriate violation of such
privilege. Instead, the appellate court held that the Regime
threatened the right to liberty granted to individuals and their lawyers and
violated the constitutional principle of independence of the Bar.
The appellate court found that model self-regulatory anti-money laundering and counter-terrorist
financing measures enacted by the governing bodies for Canadian lawyers were
sufficient to protect the government’s valid interest in reducing the incidence
of money laundering and terrorist financing activities without violating the
constitutionally protected rights of individuals and their lawyers.
Because of the similarity of Canadian
and U.S. law regarding matters of the independence of the Bar, the attorney-client privilege and the self-regulation of the legal profession, any attempt to apply similar mandates on U.S. lawyers may face similar scrutiny in the U.S. courts.
Analysis of the Case: Federation
of Law Societies of Canada v. Canada.
In 2008, the Canadian Parliament amended the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and Regulations
. This followed regulatory changes enacted in 2007.
These amendments made the requirements and restrictions contained in those
Acts applicable to lawyers.
The Regime imposed the following obligations
on lawyers who receive or pay funds on behalf of their clients, other than
funds received or paid in respect of professional fees, disbursements, expenses
or bail, to:
Perform client identification and verification;
Keep records of financial transactions; and
(c) Establish internal programs to promote compliance with the federal anti-money laundering regime.
The records required to be maintained
are subject to warrantless search. When the information
may be subject to attorney-client privilege, the Regime provides a procedure for asserting that privilege. However, client-identifying information is required to be reported even if the lawyer successfully asserts the privilege. When lawyers are required to reveal client records as prescribed to an independent agency created by the Regime (the “Financial Transactions and Reports Analysis Center of Canada
”, or FINTRAC
The Federation of Law Societies of Canada
) filed a petition challenging the application of certain parts of the Regime to lawyers. The lower court found the legislation violated the constitutionally protected attorney-client privilege, even though the legislation contained procedures for asserting a claim of privilege before the examination of the records required to be reported.
Both before and after the initial
enactment of the Regime, the FLSC had enacted model ethical rules known as the
“no cash rules” and the “know your client rules.” Under those rules, members
of the legal profession are prohibited from accepting $7,500 or more in cash from a client. A client who has given cash to a lawyer and who is owed a refund must be given the refund in cash. Strict know your client rules require that a lawyer exercise due diligence to ascertain the identity of all clients.
The appellate court agreed with the FLSC in its contention that “the Regime requires all lawyers to obtain and retain certain client information as a condition of advising clients,” and not just lawyers receiving and paying funds on behalf of a client.
This finding was made despite a specific provision of the Act (section 10.1), enacted in 2006, that provided that the reporting obligations do not apply to lawyers when they are offering only legal services. This is because all lawyers are required to maintain a “receipt of funds record” that includes records of the “purpose of the transaction.”
The appellate court rejected the government’s contention that the Regime is applicable only to lawyers who choose to act as financial intermediaries, and found that all lawyers could be subject to the Regime.
When addressing the constitutional issues, the appellate court first determined that the Regime threatened the right of liberty, a constitutionally protected interest. The liberty interest of a client is deprived as a result of (i) the Regime’s authorization of a warrantless search of the lawyer’s records, and (ii) the required disclosure of the lawyer’s records to FINTRAC. Because confidential information may be used by law enforcement for any purpose, including criminal prosecution, the client’s right to liberty is potentially deprived. Since the appellate court found that the lawyer could be criminally liable, it applied the same analysis and outcome to lawyers as to the
clients. Once the appellate court determined the potential for deprivation of
a basic right, it addressed the issues of independence of
the Bar, privilege, and a lawyer’s duty of undivided loyalty to the client.
Independence of the Bar
The appellate court held that the independence of the Bar “is fundamental to the way in which the legal system ought to operate”
and that without a constitutionally protected Bar, the right of liberty granted to individuals by the Canadian constitution could be violated. Regulation of the Bar must be designed to protect the legal profession from
state interference, in the political sense: “The public interest in a free
society knows no area more sensitive than the independence, impartiality and
availability to the general public of the members of the Bar and through those members, legal advice and
The appellate court found that the Regime interacts with the liberty interests of clients and lawyers in a way that violates the independence of the Bar because it “imposes conflicting interests and corresponding obligations on the lawyer, regarding clients’ interests, state interests, and Lawyers’ liberty interests.”
The lower court held that the Regime violated the attorney-client privilege. The lower court found that “any information that must be collected by a lawyer as a condition of providing legal advice and is solely for potential use by the state interferes to an unacceptable degree with the solicitor[attorney]-client relationship.”
The appellate court, while agreeing that the attorney-client privilege is a “principle of fundamental justice,”
found that the protections in the legislation providing for an opportunity to assert the privilege were sufficient. The appellate court did, however, state its concern that the identity of the client was revealed as part of the procedure to determine the applicability of the privilege in any given situation.
As a result of its determination that the Regime was unconstitutional, the appellate court specifically did not address the issue of whether the Regime violated the lawyer’s recognized duty of loyalty owed to his or her client. The lower court, however, held that the duty of loyalty owed by lawyers to their clients is a fundamental right; a regulatory process, such as the Regime, puts lawyers in an impossible situation in trying to balance that duty of undivided loyalty with the statutory duty to gather evidence against those clients.
Measures of the Canadian Bar
The appellate court acknowledged that the measures taken by the FLSC were sufficient to protect against the use of lawyers to facilitate money laundering and terrorist financing.
Applicability of the Case in the United States
The holdings of both the lower court and the appellate court found the Regime was unconstitutional for different reasons. The lower court found the Regime not in accordance with the “principle of fundamental justice” because it offended the attorney-client privilege pursuant to Section 7 of the Canadian Charter of Rights and Freedom
, Part 1 of the Constitution Act, 1992.
The appellate court, in reaching the same conclusion regarding the unconstitutionality of the Regime, based its decision instead primarily on the principles of “liberty interests” and the “independence of the Bar.”
In addition, each court addressed other important principles relating to the attorney-client privilege, the lawyer’s duty of undivided loyalty to the client, and self-regulatory measures of the Canadian Bar, which were significant in both courts’ analyses. No U.S. state bar has enacted similar self-regulatory
provisions as were enacted in Canada.
If the United States Congress enacted a similar statutory scheme, the same challenges would likely be made in the state and federal courts of the United States as were made in Canada, since the United States
and Canadian constitutions and common law rest on the same traditional
principles of law. An individual’s right to liberty, the independence of the judiciary and the Bar, the attorney-client privilege, and a lawyer’s duty of
undivided loyalty to his or her client are each as much of a principle of
fundamental justice in the United States as they are in Canada.
The Independence of the Bar
The United States Supreme Court has not specifically recognized a separate constitutional right to an independent Bar in the same manner that the appellate court did. It is clear, however, that lawyers are generally regulated by the judicial branch of the federal and state governments, as it relates to the rules of practice before the courts and the ethical rules applicable to lawyers. The ability of lawyers to represent adequately their clients would be significantly hampered if the executive or legislative branches of government were in charge of lawyer regulation. The independence of the Bar is necessary to insure that the individual rights of those represented are not violated by a Regime similar to that enacted in Canada.
When the appellate court upheld the independence of the Bar
as a constitutional right, it emphasized the need to protect the liberty
interests of the attorney and the client.
The independence of the Bar is an inherent aspect of a free and democratic
system, and any impingement of it would be harmful and intrude on the
traditional role of state bar associations and state judiciaries to regulate and monitor the legal profession.
The Attorney-Client Privilege in the United States
Although the appellate court found that the Regime adequately protected against encroachment of the attorney-client privilege, the provisions of the Regime would violate the principles of the attorney-client privilege if they were adopted in the United States.
The attorney-client privilege is one of the oldest and most protected principles in the United States legal system.
The privilege is considered inviolate, a bedrock principle of American jurisprudence.
The attorney-client privilege is based on the premise that effective representation requires full disclosure by a client of the client’s problems. Full disclosure is attainable only if the client believes that his
or her communications will be kept confidential.
Promoting “full and frank” communication between the attorney and the client serves compelling public interests by safeguarding the administration of justice.
The United States Supreme Court has uniformly and consistently protected the attorney-client privilege, even after the death of a client.
In general, an attorney must respect and judiciously guard the confidentiality of information relating to the representation of a client.
Specifically, an attorney is obligated to take “reasonable efforts to prevent the inadvertent or
unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.”
This protective duty extends to any communication that is made in confidence between an attorney and the client for the purpose of obtaining legal advice.
To fulfill an attorney’s professional duties and responsibilities, he or she must be able to learn
all relevant facts and thereafter determine which facts are important to a given legal issue. Without open and free communication with the client, an attorney cannot provide proper advice or adequately represent the interests of the client.
As the ABA and the United States Supreme Court recognize, the attorney must have full and complete information to represent the client effectively; and given that clients most often follow their lawyer’s advice about complying with the law, accuracy and frankness in the attorney-client relationship are essential to ensuring that the law is upheld.
It needs to be emphasized that the privilege applies equally to both criminal and civil cases.
Thus, when a client communicates with his or her attorney, all confidential information should be covered by the attorney-client privilege.
Although the privilege endorses open communication, some courts note that the privilege must not be invoked to hinder discovery of the truth.
Regardless of such caution and admonishment, the core rationale for the privilege remains uncompromised.
The attorney-client privilege is elemental to the functioning of the legal system, and any limitation on it is only appropriate to prevent abuse.
The Model Rules of Professional Conduct
, which are created by the ABA to define the legal and ethical responsibilities of all attorneys, underscore the importance of the attorney-client privilege. Rule 1.6
emphasizes the responsibility
of an attorney to protect all confidential communications made by the client. The ABA acknowledges that trust “is the hallmark of the
Without adequate safeguards to the attorney-client privilege, attorneys will not be able to represent their clients effectively. This privilege also has implications for an individual’s right to representation under the Sixth Amendment
of the federal Constitution because the lack of unconditional and free communication between a client and his or her
attorney will prevent an attorney from properly representing his or her client.
Educational and Regulatory Efforts
Although the U.S. Congress has not formally adopted international monitoring measures like the Regime or the FATF Recommendations applicable to lawyers, it is not necessary to do so because in circumstances of serious criminal activity, attorneys may report the same to the authorities.
In the jurisdictions that have adopted the Model Rules of Professional Conduct, an attorney cannot counsel a “client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent.”
If an attorney intentionally partakes in criminal activity, such as using his or her trust account to hide (or launder) the proceeds of a crime, he or she is subject to disciplinary sanctions like disbarment, together with other penalties under both the criminal and civil law.
An attorney is also under an ethical obligation to “maintain the integrity of the profession” and a violation of the law or a state’s rules of professional conduct exposes the attorney to similar sanctions and penalties.
Many professional efforts are now underway in the United States to educate attorneys about potential problems in this area, including the “voluntary good practices guidance” developed by the ABA Task Force and promoted by state and local bar associations.
These efforts aim to make U.S. attorneys aware of the need to be vigilant, to conduct due diligence when establishing an attorney-client relationship, and to continue to
remain informed about the client’s activities.
Because of the similarities of Canadian and U.S. law concerning the rights of individuals under the constitutions of each country and the independence of the judiciary in each country, the holding of The Federation of Law Societies of Canada v. Canada should be instructive in identifying the pitfalls in
enacting a similar Regime in the United States.