Ontario lawyers and paralegals carry two distinct duties under Part III of the Law Society of Ontario's By-Law 7.1: identify every client, and verify the identity of a client when money moves. This article works through the by-law section by section, then turns to a point that trips up practitioners: the firm is not a reporting entity under the federal anti-money-laundering regime, but its client may be.

Identification: every retainer, every client

When a licensee is retained to provide professional services to a client, the licensee must comply with the identification requirements in section 23(1) (By-Law 7.1, s. 22(1)(a)). Those requirements are a list of information to obtain: the client's full name, addresses and telephone numbers; for an individual, occupation; for an organization (other than a financial institution, public body or reporting issuer), its incorporation or business identification number and place of issue and the general nature of its business, plus the name, position and contact information of each individual authorized to give instructions; and, if the client acts for a third party, the same information about the third party (s. 23(1)).

All of it must be recorded, with the date it was obtained (s. 23(12.1)).

Verification: when funds move

The second duty is triggered by a specific activity. When a licensee engages in or gives instructions in respect of the receiving, paying or transferring of funds, three further things are required (s. 22(1)(b)):

  • information from the client about the source of the funds being received, paid or transferred (s. 23(2));
  • where the client, or the third party it acts for, is an organization: the name of each director (other than for a securities dealer), and reasonable efforts to obtain the names and addresses of persons who own, directly or indirectly, 25% or more of the organization or its shares, the names and addresses of trustees, known beneficiaries and settlors of a trust, and information establishing the organization's ownership, control and structure (s. 23(2.1)); and
  • verification of the identity of the client, the individuals authorized to give instructions, and any third party, using the documents, data or information listed in section 23(7) (s. 23(4)).

"Funds" is defined broadly as cash, currency, securities, negotiable instruments and other financial instruments that indicate a person's title or interest in them (s. 20). A retainer that never touches funds, such as an opinion or a contract review, needs identification but not verification. A real estate closing, a share purchase with a trust-account deposit, or an estate distribution needs both.

The 25% ownership figure is the same threshold that Canadian corporate law uses for individuals with significant control (CBCA s. 2.1). A corporate client's ISC register, if it keeps one properly, is the natural starting point for the by-law's reasonable efforts.

The exemptions, and their limits

Part III has three sets of exemptions, and each is narrower than it first appears.

Licensees. A licensee acting on behalf of an employer, or as agent for another licensee or an out-of-province lawyer who has already complied, or for a client referred by such a person who has already complied, or as duty counsel or a summary-advice provider under the Legal Aid Services Act, 2020 (the last only for non-funds activities), is exempt from section 23 (s. 22(2)).

Funds. The funds-related identification and verification requirements do not apply to funds paid to or received from a financial institution, public body or reporting issuer; received from the trust account of another licensee or lawyer; received from a peace officer or public official acting officially; paid for a fine, penalty or bail; paid or received for the licensee's fees, disbursements or expenses; or paid, received or transferred by electronic funds transfer (s. 22(3)).

Clients. Where the client is itself a financial institution, public body or reporting issuer, the funds-related requirements do not apply (s. 22(4)).

Two cautions. First, the exemptions are not alike. The licensee exemptions in section 22(2) remove all of section 23, the basic identification duty included. The funds and client exemptions in sections 22(3) and 22(4) remove only the funds-related additions in sections 23(2), (2.1) and (4); under them, the identification duty in section 23(1) still applies. Second, the electronic-funds-transfer exemption turns on the definition in section 20; a wire whose record lacks the listed particulars does not qualify.

How to verify

For an individual, section 23(7) accepts three methods: a government-issued photo identification document, excluding one issued by a municipal government; information in the individual's credit file, located in Canada, that has been in existence for at least three years; or any two of the following, each from a different independent reliable source: the individual's name and address, the individual's name and date of birth, or the individual's name and confirmation of a deposit account, credit card or other loan with a financial institution.

For a corporation or other organization created by legislation, verification is a written confirmation from a government registry of the organization's existence, name and address, including the names of its directors where applicable, such as a certificate of corporate status or a copy of a record the organization is required to file annually. For an unregistered organization such as a trust or partnership, it is a copy of the constating documents; all of it must be authentic, valid and current (s. 23(8)).

Verification may be delegated to a firm employee, another licensee in the firm, or an outside agent under a prior written agreement (s. 23(11)); copies of every verification document must be kept (s. 23(13)).

Timing, records and monitoring

An individual's identity must be verified immediately after the licensee first engages in the funds activity (s. 23(5)). An organization's identity must be verified immediately and, in all cases, no later than 30 days after that point (s. 23(6)).

Records of the identification information and copies of verification documents must be retained for the longer of the duration of the client relationship and at least six years following completion of the work (s. 23(14)).

During a retainer involving funds, the licensee must periodically monitor the relationship to determine whether the client's activities, source of funds and instructions remain consistent with the purpose of the retainer, assess the risk of assisting fraud or other illegal conduct, and keep a dated record of the measures taken (s. 23.1). A licensee who, in the course of these requirements, knows or ought to know that they would be assisting a client in fraud or other illegal conduct must immediately stop, and if unable to stop, withdraw (s. 24).

Your firm is not a FINTRAC reporting entity. Your client may be.

The identification and verification duties described above come from the Law Society, not from the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). FINTRAC's own list of who must report to it names accountants and accounting firms carrying out certain activities, real estate brokers, sales representatives and developers, money services businesses, dealers in precious metals and stones, mortgage administrators, brokers and lenders, securities dealers, casinos, life insurance companies and agents, financial entities such as banks, credit unions and trust companies, British Columbia notaries, armoured car businesses, and, more recently, title insurers, factors, financing and leasing entities and cheque cashers (FINTRAC, who must report). Lawyers and law firms do not appear on that list.

The practical consequence runs the other way. When a client of the firm is on FINTRAC's list, that client has its own record-keeping, client-identification, reporting and compliance-program obligations under the PCMLTFA and its regulations (FINTRAC, the Act and regulations). A firm acting for a mortgage brokerage, a real estate developer, a securities dealer or a money services business should recognize when its client is inside that regime; the client's program, not the firm's, is what FINTRAC examines.

Beyond identification

Three neighbouring rules belong in the same procedure. First, By-Law 9 caps cash: a licensee shall not receive or accept from a person, in respect of any one client file, cash in an aggregate amount of more than 7,500 Canadian dollars (By-Law 9, s. 4(1)). The cap applies where, in respect of a client file, the licensee receives or pays funds, purchases or sells securities, real properties or business assets or entities, or transfers funds by any means (s. 5), with exceptions in s. 6 for cash received from public bodies, financial institutions and peace officers, cash received to pay a fine, penalty or bail, and cash received for fees, disbursements or expenses provided any refund is also made in cash. Second, where a licensee cannot obtain an organization's ownership information or confirm its accuracy, section 23(2.2) sets the alternate requirement: take reasonable measures to identify the most senior managing officer, determine and record whether the client's activities, source of funds and instructions are consistent with the purpose of the retainer, and assess and record whether there is a risk of assisting fraud or other illegal conduct. Third, when identifying an organization the licensee must take reasonable measures to confirm the accuracy of the ownership, control and structure information obtained under section 23(2.1), and record those measures and the date they were taken (s. 23(12.2)).

Misolla is building its client-identification workflow for Ontario firms around Part III of By-Law 7.1, with every identification record and verification step prepared for a lawyer's review.

This article is general information, not legal advice; a lawyer must review your specific situation.