The Financial Transactions and Reports Analysis Centre of Canada ("FINTRAC") is a government agency tasked with facilitating the detection, prevention, and deterrence of money laundering and the financing of terrorist activities. FINTRAC operates under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, S.C. 2000, c. 17 (the "Act") and collects information on financial transactions relying upon certain provisions of the Act.
The Act creates a list of persons and entities that must, among other things, maintain detailed records in respect of all transactions of $3,000 or more. These persons and entities must also report directly to FINTRAC in certain circumstances and their offices are subject to searches, without the need of a warrant.
Lawyers are included in the list of such persons, with respect to the requirement to maintain detailed records and being subject to warrantless searches. However, around the time that the Act was brought into force, the Federation of Law Societies of Canada challenged the provisions relating to lawyers on constitutional grounds. Interlocutory injunctions prevented the Act from applying to lawyers from that time until the constitutional challenge was finally adjudicated upon. In a judgment1. dated February 13, 2015, the Supreme Court of Canada sided with the Federation of Law Societies of Canada, holding that the contentious provisions of the Act relating to lawyers are unconstitutional. Accordingly, the Court read down certain of the offending provisions to exclude lawyers from their ambit and declared others to be of no force and effect.
The Court looked at two separate elements of the Act: FINTRAC's power to search offices without a warrant and the requirement of lawyers to verify client identity and maintain records for review by FINTRAC. It found both of these to be unconstitutional because they jeopardized the maintenance of solicitor-client privilege over information or documents belonging to lawyers' clients.
With respect to the government's ability to search a lawyer's office, the Court upheld the principle from Lavallee, Rackel & Heintz v. Canada (Attorney General), 2002 SCC 61 – the leading case on this issue – that "solicitor-client must remain as close to absolute as possible if it is to retain relevance." In Lavallee, the Court set out ten general principles that govern the legality of law office searches as a matter of common law. These principles are also meant to guide Parliament in its drafting of legislation concerning law office searches.
The Court noted a couple of examples of how the regime proposed under the Act failed to comply with those principles. Specifically, before searching a law office, the government must satisfy a judge that there is no reasonable alternative to the search and all documents in possession of a lawyer must be sealed before being examined or removed from the lawyer's possession. Given that warrantless searches are presumptively unreasonable, and the regime under the Act failed to comply with the principles in Lavallee, it is not surprising that the Court held that such regime violates the right to be safe from unreasonable search and seizure as guaranteed by section 8 of the Canadian Charter of Rights and Freedoms (the "Charter").
The Court also noted that the name of the client may itself be subject to privilege in certain circumstances. The regime proposed under the Act requires the lawyer to breach that privilege (i.e. to provide the client's name) in order to claim the privilege attaching to the material sought by the government while executing a search. It is hardly surprising that such a regime is unacceptable.
Client verification and record keeping
With respect to the requirement to verify client identity and maintain records for review by FINTRAC, the Court found that it violated section 7 of the Charter, also for reasons related to the sanctity of solicitor client privilege.
Section 7 of the Charter guarantees the right to life, liberty, and the security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice. The Court held that a lawyer's duty to provide a client with committed representation is a principle of fundamental justice (this issue has not previously been considered).
The Court found that clients would view the regime as forcing lawyers to collect and retain information that they (lawyers) do not consider to be required to provide representation and for which there are inadequate protections for solicitor client privilege. Accordingly, clients would reasonably perceive that lawyers were acting on behalf of the government under circumstances in which privileged information might be disclosed to the government without the client's consent. The Court held that this would reduce "to an unacceptable degree" clients' confidence in their lawyer's ability to provide them (the clients) with committed representation.
The Court held that the client identity verification and record maintenance requirements are thus contrary to section 7 of the Charter because they threaten lawyers' liberty (failing to comply with them would subject lawyers to prosecution and imprisonment) and the deprivation thereof is not accordance with the principles of fundamental justice. This latter point flows from the holding that lawyers' commitment to their clients' cause is now recognized as a principle of fundamental justice.
Of course, the various law societies that govern the practice of law in each Canadian jurisdiction require that lawyers abide by client verification procedures and track trust fund transactions. However, as the Act does not apply to lawyers, these records are not easily available to FINTRAC and, even if they were, they would likely not contain the level of detail that FINTRAC would like.
The last word?
Interestingly, the Supreme Court of Canada left a window for
Parliament to try to make the proposed regime under the Act, or at
least some elements of it, compliant with the Charter. The Court
dismissed the appeal and generally approved the decision of the
British Columbia Court of Appeal except that it
removed sections 5(i) and (h) from the enumerated provisions that
were read down to exclude their applicability to lawyers and law
firms. Sections 5(i) and (h) are the provisions that empower the
governor in council to prescribe by regulation the people or
entities to which the information gathering and search provisions
will apply. By leaving those two sections as potentially applicable
to lawyers and law firms, it appears that the Court has left
Parliament an opening to reconsider its approach to these proposed
rules. These sentiments are also captured in the following
quotations of Cromwell, J for the majority of the Court. The first,
in relation to the record-keeping requirement:
However, it seems to me that if, for example, the scheme were to provide the required constitutional protections for solicitor-client privilege as well as meaningful derivative use immunity of the required records for the purposes of prosecuting clients, it would be much harder to see how it would interfere with the lawyer's duty of commitment to the client's cause.2.
And the second, in relation to searches (although this seems,
appropriately, more remote):
Moreover, the judicial pre-authorization requirement is, in itself, an important protection against improper search and seizure of privileged material. However, I do not foreclose the possibility that Parliament could devise a constitutionally compliant inspection regime without a judicial pre-authorization requirement.3.
With this judgment, the Court has sent a strong message that solicitor client privilege is a sacrosanct component of Canadian law and an essential element of the provision of lawyers' services to their clients. Any information that the government wants to gather from lawyers or law offices is going to have to respect solicitor client privilege. Should Parliament choose to amend the Act to try to gather information on clients' financial transactions from lawyers and law offices, such amendments will have to carefully account for the protection of solicitor client privilege.
What does this mean for law firm clients?
This judgment maintains the status quo: Lawyers and law firms do not have to report to FINTRAC under the Act. In the narrow, technical sense, this case means that funds flowing through your lawyer's trust fund are not going to be reported to FINTRAC. In the broader, policy sense, this case means that the law recognizes the importance of maintaining solicitor client privilege and that you should feel confident that privileged communications you have with your lawyer can be kept from government review.
Moreover, with this judgment Canada remains one of the only G8 countries without anti-money laundering legislation that is directly applicable to lawyers. The only other such G8 country is the United States.
Footnotes1. Canada (Attorney General) v. Federation of Law Societies of Canada, 2015 SCC 7.
2. Ibid., at paragraph 112.
3. Ibid., at paragraph 56.
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