originally published in Lawyers Weekly
Do you know your clients well enough to say that they don’t launder money or finance terrorism?
To combat these and other criminal activities, upcoming federal regulations will codify the information lawyers must learn about their clients should they receive $3,000 or more for a legal service. Provincial law societies have also prepared “know your client” rules of their own.
“Many of the know-your-client regulations are intuitive,” says Melissa Babel, a Toronto-based associate at Green & Spiegel, LLP. “I would think that most firms had processes in place to identify clients well before it became a rule.”
But the new codified processes are puzzling some lawyers, many of whom are turning to their law societies for guidance.
“Sometimes we really had to think it through and take more steps than we initially thought we would,” says Trina Fraser, a partner at Ottawa-based business law firm BrazeauSeller.LLP. “If we act on behalf of a trust that has dozens of beneficiaries, do we have to verify just the trustees who are entrusting us or do we include the identity of each beneficiary?”
“Suppose a company acts in trust to purchase property,” Fraser continues. “It’s clear in the bylaw that if somebody acts in trust for someone else, you have to identify and verify both parties. When those entities are businesses, you have to find out about the directors and majority shareholders of each of those companies.”
“You suddenly realize there’s a lot of information that you must collect to make sure you’re really in compliance,” Fraser says. “It’s like a tree branching out. It can get pretty cumbersome.”
In her immigration practice, Babel claims familiarity with know-your-client principles. “Documentation is always a big issue with immigration and refugee clients,” she says. “In order to open a file, we need copies of passports and all sorts of reliable documentation.”
“The real issue is not clients we meet in the office, where they fill out forms and we see original documentation,” Babel continues. “The issue for us is with overseas clients and implementing the rules for people we don’t meet in person.”
“Many of our clients are applying for permission to come to Canada, so it’s impossible to meet with them face to face,” Babel adds. “We have clients meet with lawyers in other countries who confirm that they review documentation.”
Still, challenges that pre-date know-your-client rules continue to plague Babel’s clients. “If people live in remote areas and don’t have easy access to lawyers or agents, that adds a layer of complexity,” she says. “Certain people are in Canada preparing applications who don’t yet have status. Some of them work without authorization or study without permission and are trying to rectify their status.”
Matters like these will spur the evolution of know-your-client rules. Wire transfers, for instance, were not mentioned in the Law Society of Upper Canada’s initial bylaw. “We knew there wouldn’t be a problem between banks in Canada, because they are also subject to know-your-client requirements,” Fraser says. “They would have already identified and verified their clients, so why should we?”
This thinking didn’t cover transfers from banks outside Canada, where due diligence might not meet Canadian standards. Facing questions on this matter, the Law Society of Upper Canada now exempts identity checks if banks are based in countries that claim membership in the Financial Action Task Force on Money Laundering (FATF).
“That’s worked out for the most part,” Fraser says. “We’re pretty fresh into this, so I’m sure other things will come up. The drafters of this bylaw did the best they could, but novel and unique situations will arise that have to be addressed.”
Adoption of know-your-client rules can take several forms. Fraser’s firm downloaded and customized sample forms published by the Law Society, then placed templates on its computer network. Lawyers complete the forms and keep both digital and hard copies.
“Our office administrator keeps a central spreadsheet with every client whose identity we verified, with a link in the spreadsheet to the actual, scanned copy of identification,” Fraser says, adding that the spreadsheet contains columns for things like document expiry dates. “That’s how we’re muddling though right now.”
Some lawyers look to practice management software to eliminate the muddling. Ravi Puvan empathizes. “If you maintain client information in one system for billing purposes and another system for verification purposes, it doubles the work required to maintain and reconcile client records,” says the product manager, practice management for LexisNexis Canada Inc. (Full disclosure: LexisNexis also owns The Lawyers Weekly.)
“If you have more than one lawyer, are others in the firm complying with those rules? Using manual processes, it’s easier to go off-script.”
Jack Newton concurs. “It makes a lot of sense to have this kind of process integrated into the client intake workflow that you see in many practice management software products, or any customer relationship management product,” says the president of Vancouver-based practice management system provider Themis Solutions Inc.
The good news, according to Newton: “Know-your-client rules shouldn’t require a big software upgrade or a significant change to software lawyers already use – just some changes in workflow.”
But some things are beyond software’s ability to help. “To me, the most cumbersome part comes when we deal with longstanding clients and we suddenly have to say ‘we need to see your passport, we need to see your drivers license.’” Fraser says. “They may have to make a trip to our office, or if they’re not in town they have to have their identity verified by a lawyer wherever they are.”
“We may know who they are, but there are no exemptions for that. You still have to do it.”
“Clients tend to understand,” Fraser continues. “Most people are accustomed to proving their identity to bankers, but it’s still a little bit annoying to clients.”
Babel’s concerns reach beyond mere annoyance. “It’s important to make sure we comply with regulations,” she says, “while ensuring that people have the same level of access to justice whether or not they’re documented.”
To download a PDF of the article, click KnowYourClient.