Financial crime, terrorist financing, money laundering and China - What BC Lawyers Need to Know
By Christine Duhaime, BA, JD, Duhaime Law
If there is one area of law that seems to be the least understood among members of the profession, it is financial crime. Financial crime involves, among other things, money laundering, terrorist financing, tax evasion, insider trading, corruption, illegal gambling, drug trafficking and prostitution. We call these financial crimes because of the financial transactions associated with the criminal activity.
For example, we refer to tax evasion as a financial crime that involves money laundering because the unpaid taxes are proceeds of a crime. That tax money should be chilling in the bank account of the CRA and may instead be in a bank account in the Cayman Islands. On a smaller scale, a night club worker who is paid in tips and doesn’t declare it to CRA or pay taxes on the income can be as much a money launderer as the gangster trafficking in illegal drugs.
Applicable Legislation and its Impact on Lawyers
Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (inelegantly known as the PCMLTFA), certain financial sector participants, such as banks, realtors and casinos, are required to monitor and report certain financial transactions, including suspicious transactions, to FINTRAC, the federal financial intelligence unit. In addition to reporting to FINTRAC, those gatekeepers are required to undertake identity verification procedures before they take a client on, called on boarding.
In Canada, lawyers were initially designated as gatekeepers under the PCMLTFA, but were exempted from its requirements as the result of constitutional challenges. The argument for an exemption was partially on the position that we have our own gatekeeping requirements in place. Lawyers do have gatekeeping requirements in place to protect the financial system but those requirements are more relaxed than what is required under the PCMLTFA. That has become an issue in the media such that the federal government is considering re-drafting part of the PCMLTFA to be applicable to lawyers across Canada. Australia is in the process of doing the same. But bringing lawyers under the PCMLTFA has issues – it can potentially undermine privilege and confidentiality; it would give the federal government jurisdiction over the legal profession that it currently does not have; and impose compliance requirements that could force some small firms out of business. Compliance with the PCMLTFA is expensive and averages about $1 million a year. I believe a compromise is possible whereby if law societies strengthen our anti-money laundering regime and require that all lawyers be trained on the strengthened regime, the public pressure to legislate lawyers will abate.
Lawyers’ Terrorist Financing and Sanctions Reporting Obligations
Although lawyers do not have to report financial transactions under the PCMLTFA, we do have to report certain other financial transactions to the RCMP and CSIS. Those are transactions involving a terrorist, a terrorist group, a listed person, a listed group, a sanctioned entity or a sanctioned person. The one area where, without fail, one gets a blank stare among lawyers when advising them on financial crime, is the topic of terrorist financing and sanctions. Most law firms seem to be unaware that they are obliged, as a matter of criminal law, to ensure they do not facilitate such financial transactions. On the Public Safety Canada1 website there are multiple lists of terrorists and sanctioned persons for whom it is illegal to transact, and whose accounts must be frozen. Those obligations arise irrespective of the exemption for lawyers from other reporting requirements under the PCMLTFA.
China, Financial Crime and Its Impact Locally
A hot topic in Vancouver when it comes to financial crime is proceeds of corruption from China that is affecting the real estate market. Comments to the effect that the movement of money from China to Vancouver sometimes involves proceeds of crime are true. The BBC2 reported that the Central Bank of China stated in 2011 that between the mid-1990s and 2008, over US$120 billion in proceeds of corruption was removed from China illegally and moved to just four countries, including Canada.
Whether it is proceeds of corruption or proceeds of crime, much of the money that escapes from China illegally unwittingly lands in the trust accounts of lawyers because we close real estate deals, set up companies and trusts, create beneficial ownership structures or advise on M&A deals.
Treatment of Suspicious Foreign Actors by Law Firms
We have had requests for legal advice from Chinese nationals who are on an Interpol wanted list for serious criminality. While we declined to advise them for various reasons, in every case they owned mansions in Vancouver, had used law firms for corporate and trust services and had multiple banks accounts, despite being on an Interpol wanted list.
By way of comparison, large law firms in the US exercise more caution than we do in Canada. It is our experience that they will not on-board individuals or corporations from China where identity, including beneficial ownership, cannot be ascertained; not only because of the reputational risks associated with doing that but, more importantly, if a law firm cannot ascertain the identity of a person or the beneficial owners of an entity, it cannot possibly fulfill its legal obligation to verify that it is not dealing with a terrorist or a sanctioned entity. If they cannot on-board them, then they don’t accept funds from them. Although we have similar terrorism and sanction laws in Canada, we have not seen the same approach here among law firms.
The profession would greatly benefit from enhanced education on the requirements imposed upon us from multiple federal statutes when dealing with financial transactions to ensure that we are not seen to be the facilitators of money laundering.
Christine Duhaime is a financial crime lawyer in Vancouver at Duhaime Law with a specialized practice in anti-money laundering and counter-terrorist financing law and foreign asset recovery, and is the founder of the Digital Finance Institute. She litigated the China CITIC Bank case to recover assets for a state-owned bank in China in Vancouver.
- Public Safety Canada “Currently Listed Terrorist Entities,”
https://www.publicsafety.gc.ca/cnt/ntnl-scrt/cntr-trrrsm/lstd-ntts/crrnt-lstd-ntts-en.aspx | ↩
- “Chinese Officials Stole $120 Billion, Fled Mainly to US,” BBC News http://www.bbc.com/news/world-asia-pacific-13813688 | ↩