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B.C., feds struggle to close money laundering loophole

Lawyers cite solicitor-client privilege in opposing efforts to compel them to report suspicious transactions
House Canadian cash money

While criminal money laundering charges against the proprietors of Richmond-based Silver International Ltd. were stayed late last year, court documents filed in mid-February reveal a former suspect in that case is facing a tax evasion investigation and fighting the Canada Revenue Agency (CRA) to keep her banking records secret.

Caixuan Qin filed an application in the Federal Court of Canada to quash CRA requirements to produce banking records from the Bank of Montreal, the Bank of China, the Canadian Imperial Bank of Commerce, Royal Bank of Canada, TD Canada Trust and Canadian Western Bank.

She claims the minister of national revenue is wrongfully seeking the records “for the improper purpose of compelling evidence in relation to the Applicant as part of a criminal investigation.”

In BC Supreme Court, Silver International, Qin and her partner, Jian Ju Zhu, also remain embroiled in civil forfeiture cases for millions in cash and assets tied to Silver International’s alleged massive international money laundering operation.

Matthew Nathanson, the company’s lawyer, declined comment. Qin’s lawyer in Federal Court, Greg DelBigio with Thorsteinssons LLP, did not respond to requests for comment on this story.

As the call grows for a public inquiry into money laundering in British Columbia, the collapse of the criminal case against Silver International struck at the heart of the struggle for policy-makers and law enforcement to tackle a problem of virtually unknowable size and scope.

Moreover, the legal profession’s exemption from the country’s anti-money laundering regime remains a “significant loophole,” according to the international Financial Action Task Force, and efforts to close it face an obstacle in the Canadian Constitution.

On February 13, 2015, the Supreme Court of Canada ruled that anti-money laundering regulations for lawyers were unconstitutional because they forced them to become “unwilling state agents” under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

Since then the profession has been left to police itself under the opaque veil of solicitor-client privilege, occupying a highly specialized space and uniquely positioned to facilitate money laundering not necessarily directly, but through services such as company incorporation or real estate conveyance.

In November 2018, the standing committee on finance released a report recommending “that the Government of Canada bring the legal profession into the [anti-money laundering/anti-terrorist financing] regime in a constitutionally compliant way.” Confronting Money Laundering and Terrorist Financing: Moving Canada Forward also recommended Canada adopt a model similar to the U.K.’s Office for Professional Body Anti-Money Laundering Supervision, which would require a Supreme Court of Canada reference case to determine “whether solicitor-client privilege exists when a client requests advice on how to either launder money or structure finances for the purposes of illegal activity.”

The committee heard Royal Canadian Mounted Police testimony about an audit of 51 financial crime cases between 2013 and 2017 showing that more than “75% involved lawyers as either a direct suspect or someone identified during the investigation.”

However, resistance by the Canadian legal profession to government efforts to bring them into the anti-money laundering fold goes back decades.

“While they recognized how useful lawyers are to the laundering process, the most bitter and sustained criticism of the legislation came from Canada’s legal profession,” wrote professors Margaret E. Beare and Stephen Schneider in their 2007 book, Money Laundering in Canada: Chasing Dirty and Dangerous Dollars.

“At the core of their opposition was the inclusion of lawyers under the mandatory reporting requirements of the legislation, which they contended would contravene the sacrosanct principle of solicitor-client privilege.”

Beare, a professor at York University’s Osgoode Hall Law School, told Business in Vancouver in an email that lawyers in Canada “are not only excused from mandatory suspicious reporting but are entitled to take their professional fees from dirty money. Advantages go to the lawyers and make it very difficult for law enforcement to target their activities.”

Schneider, a criminology professor at Saint Mary’s University in Halifax, said the shift away from organized crime enforcement to terrorism financing after 9/11 “took the winds out of the sails of using proceeds of crime enforcement to attack drug trafficking.”

“There’s a relatively small amount of terrorist financing in Canada compared to drug money. With drug money you’re shooting fish in a barrel; with terrorist financing, you’re trying to find a needle in the haystack.”

Schneider added that the legal profession’s exemption remains a major gap in Canada’s anti-money laundering regime, but he also cautioned against focusing too much on small players as opposed to, say, major international financial institutions.

“Obviously, not all lawyers are crooked and shady, but there’s certainly a significant amount of wilful blindness going on to the funds that are coming in,” he said. “Every major bank in the world now has been implicated in major money laundering operations.

“When you’re studying money laundering in the world, you have to also look at the complicity of these large corporations. Until we get the big financial institutions on board and serious about addressing money laundering and all the crimes that they facilitate, then the smaller real estate companies or law firms or casinos, why should they comply?”

One leading voice for the Law Society of BC was the late Jack Giles, whose storied legal career spanned five decades. Giles warned that requiring lawyers to report suspicious transactions made it “a crime for every lawyer in this country to fail to act as a secret agent for the government.” He even raised the spectre of Nazi Germany as he railed against the legislation in court.

Another outspoken voice in the fight was DelBigio, now acting for Qin in her bid to dodge the CRA’s audit efforts, who was on the front lines for the Canadian Bar Association in the fight, which began in BC Supreme Court.

“The protection of a client’s interest is incompatible with the demand that a lawyer also act as an arm of the state,” DelBigio told the National Post in 2001. “It forces a lawyer to have one eye on the client’s interests and one eye on his or her own interests, knowing he or she might go to jail if there’s a problem.”

In 2004, when an analysis by Schneider of 149 money laundering cases solved by the RCMP between 1993 and 1998 found 74 involved lawyers, DelBigio told the National Post that “there has been, in recent years, a great deal of awareness with the public and profession on the money laundering issue.

 “The vast majority of lawyers are conscientious and law abiding, and they are going to do their very, very best to stay away from the proceeds of crime.”

Jason Kuzminski, director of communications for the Law Society of BC, told BIV in a phone interview that anti-money laundering rules governing lawyers are “stringent” and go beyond even federal regulations, including a $7,500 cap on accepting cash, strict client identification procedures and a rule requiring lawyers to cease acting for clients at any sign of a suspicious transaction.

The Law Society of BC also raised its 2019 practice fees, anticipating “an increase in the number of discipline cases expected to go to hearings this year, [and] the additional work necessary to support anti-money laundering monitoring and enforcement,” according to its website.

“I think we’re ahead of the curve compared to other industries in terms of monitoring and compliance,” Kuzminski said. “We have a pretty robust regime that has a track record of discipline results. We have active review and enforcement of those rules, and I think that we’re ahead of the other industries in being able to discover, detect and discipline. So I’m not sure what the loophole is that they’re referring to in terms of actual substantive action to protect the public.”

According to figures provided by the society, it conducted an average of 458 audits of its members’ trust accounts between 2014 and 2018. The society said it aims to audit each firm – there are 3,718 law firms (including sole practitioners) in B.C. – once every six years..

Kuzminski said the society in 2018 identified higher-risk areas of practice to focus the regulator’s audit efforts, while making efforts to work with government on potential reforms.

“At the end of the day, you have to uphold the Supreme Court of Canada’s law and ruling, but that doesn’t mean that there aren’t other ways to move this initiative forward,” he said. “We’re prepared to work on what can be done to close the gap and close whatever loopholes there are.”