FINTRAC Special Bulletin: How legal professionals may be vulnerable to money laundering and sanctions evasion schemes

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) recently released a Special Bulletin on the use of the legal profession in money laundering and sanctions evasion. The Bulletin aims to inform reporting entities of the risks of money laundering and sanctions evasions schemes that may be inadvertently facilitated by legal professionals. Reporting entities are encouraged to use this Bulletin to identify and assess potential risks, apply controls and measures to mitigate these risks, and effectively detect and report any suspicious transactions to FINTRAC.

FINTRAC’s Bulletin confirms that many money laundering schemes may be reliant on the legal profession. One reason for this is that legal professionals possess knowledge and skills that are beneficial to criminal actors, and they often assist customers in financial transactions where “high volumes of funds are potentially exposed.” For instance, legal professionals can hold and conduct monetary transactions held in trust accounts for clients, they can create legal entities (corporations and trusts), they can facilitate real estate and related transactions, and they can act as shareholders or directors for businesses providing them access to clients’ business structures, arrangements, and practices.

Another reason the legal profession may be targeted by criminal and illicit actors is because legal professionals add legitimacy and respectability to financial transactions, which may persuade financial institutions to not always question particular transactions. Further, solicitor-client privilege and professional secrecy in Quebec may be misused to prevent a legal professional from communicating with a financial institution that inquires into the details and source of funds for a transaction.

Most Canadian legal professionals are not reporting entities under Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime (exceptions include British Columbia notaries public and British Columbia notary corporations). For this reason, legal professionals are not subject to the same reporting obligations and direct supervision from FINTRAC, making the legal profession an attractive target for money launderers and organized crime groups.

Activities of primary concern for legal professionals

The Bulletin names three activities by legal professionals that have heightened risks of money laundering, terrorist activity financing, and sanction evasions: the misuse of client or trust accounts, real estate purchases, and the creation and management of trusts and companies.

Client or trust accounts may be misused when criminal or illicit actors place the proceeds of crime into this formal financial system, as it helps the proceeds gain legitimacy and may encourage financial institutions to ask less questions. Trust accounts also allow criminals to convert cash into less suspicious assets, permit criminals access to the financial system, let criminals hide ownership, and help facilitate money laundering. The Bulletin provides several red flags of potential misuse to be aware of, including cases where:

• a client pays a legal professional without requiring any legal work to be completed;
• the client uses a legal professional a far distance away when others are available and closer; or
• the client requests a transaction be completed within an unusually short amount of time.

Real estate is an attractive sector for money laundering and terrorist financing schemes because money passing through law firm accounts to be exchanged for the ownership of property has the appearance of being legitimate. Rental income and the profit from a sale of property can also appear legitimate regardless of where the funds initially came from. Common methods that criminal actors use for money laundering sanctions evasion include:

• investing the proceeds of crime in real estate;
• transferring money through quick successive sales of property to inflate it’s value; and
• concealing property ownership through purchasing under a false name.

Lawyers can create companies and trusts, which criminal and illicit actors often use to control their criminally derived assets and to hinder the ability of law enforcement to trace the origin and ownership of the assets. Complex corporate structures, such as shell and front companies, are also used to hide the origins and ownership of the proceeds of crime. Criminals then want legal professionals to manage the companies and trusts to give a greater respectability and legitimacy to the entity and its activities. Some potential red flags for legal professionals and reporting entities to be aware of in this regard include:

• as above, a client who uses a legal professional located a far distance away when there are other options;
• the execution of the transaction is unusual;
• a legal professional is also a director at numerous companies that are seemingly unrelated; or
• a complicated corporate structure is used without reason.

This Bulletin reminds all business subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and its Regulations to submit certain threshold transaction reports and suspicious transaction reports to FINTRAC if there are any reasonable grounds to suspect a financial transaction is related to the commission of a money laundering, terrorist activity, or sanctions evasion offence.

For further information on this Bulletin and the potential risks to your business, please contact a member of our Financial Services team.