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Receiving or transferring funds at the direction of a new or mysterious client carries serious risks. For real estate lawyers, these risks may arise regularly. If a lawyer is not careful, their trust account can become a vehicle for money laundering, fraud, and other nefarious activities by malicious clients and third parties. Sometimes it is the lawyer that is the target of these fraudulent transactions, leading to potential trust shortfalls and reported malpractice claims.

Even when the lawyer is not the target of the fraud, they have professional obligations to avoid representing a client engaged in criminal activity, such as the laundering of funds through a trust account. One of the most important steps a lawyer can take to ensure their services are not abused is to properly identify and verify the identity of their client or a third party that is instructing the client. Knowing the client is who they say they are can help avoid the risk of inadvertently facilitating fraudulent activities.

In many circumstances, verifying the identity of the client may be as simple as requesting and making copies of a driver’s licence and other reliable photo ID. Less simple, however, is verifying the identity of a client that is not within Canada and where a face-to-face meeting is not practical. In these circumstances, an agent may be used to verify identity. In many situations in Ontario involving the receipt or transfer of funds, the use of an agent to verify identity is explicitly required by the Law Society of Ontario, and certain steps must be taken to ensure compliance with the LSO’s by-laws. Other provincial and territorial law societies have similar requirements.

The LSO identity verification requirements for clients and third parties abroad

Sections 22(1)(b) and 23(4) of LSO by-law 7.1 state that before a lawyer engages in or gives instructions in respect of the receipt, payment or transfer of funds, the lawyer must take reasonable steps to verify the identity of their client, and any third party the client is representing, using reliable and independent documents, data, or information. Certain funds, such as those being paid, received, or transferred electronically, are exempted from this obligation (see s. 22(3)). When the client is an organization and is not a reporting issuer, additional verification obligations may apply (see ss. 22(4) and 23(3)).

When the client or third party is outside Canada and a face-to-face meeting to verify identity is not practical, the by-law permits the use of an agent to conduct the verification (s.23(11)(b)). However, the lawyer must first have an agreement with the agent in writing, outlining the steps that the agent will take to comply with the by-law’s verification requirements.

The LSO has provided a sample agreement between agent and lawyer, which can be found in Appendix 5 of by-law 7.1. Although this exact form is not required, it includes language suggesting the agent should examine at least one, and possibly more, original and unexpired identity documents, such as driver’s licence or passport; reproduce a copy of said documents; and, to the best of the agent’s ability, confirm the documents are valid.

Additional questions and answers about the LSO’s client and third party identification and verification requirements can be found on the LSO website. Lawyer’s should familiarize themselves with the circumstances in which particular steps are required by the Law Society of Ontario when verifying identity, and should always ensure they know the identity of their client or an instructing third party, and the client is, in fact, who they say they are.

You can consult the provincial and territorial law society websites below for additional guidance.

Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland & Labrador
Northwest Territories
Nova Scotia
Nunavut
Ontario
Prince Edward Island
Québec
Saskatchewan
Yukon

Categories: Fraud, Real Estate, TitlePLUS