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Frequently Asked Questions about Client Identification and Verification

COVID-19 NOTICE: Virtual verification of identity by video conference is an emergency measure that is permitted by the Law Society of Ontario during COVID-19. The Law Society is continuing to monitor the situation and this practice and updates will be provided as the pandemic evolves. For updates and additional information, consult the Client Identification and Verification section of the Law Society’s Practice Management COVID-19 FAQs.

The following questions and answers have been prepared to assist licensees with understanding and complying with their obligations under By-Law 7.1 to identify and verify the identity of their clients and relevant third parties. Licensees should review the client identification and verification requirements under By-Law 7.1 and the additional resources and supports identified below. If after reviewing the by-law and these FAQs you have any unanswered questions or concerns about compliance with the identification and verification requirements, you should consider contacting the Law Society’s Practice Management Helpline.

  1. Terminology
  2. Overview and Purpose
  3. Identification
  4. Third Parties
  5. Verification
  6. Verification by Agent
  7. Source of Funds
  8. Monitoring
  9. Record Keeping
  10. Withdrawal Obligations
  11. Practice Area Specific Questions

Terminology

For the purposes of these FAQs, bolded terms have the meaning ascribed to them under By-Law 7.1 and the Law Society’s Glossary of Defined Terms for the anti-money laundering and terrorist financing requirements. Licensees should review the definitions in the by-law and the glossary prior to consulting these FAQs.

Overview and Purpose


Identification


Third Parties

  • 20. Who is a third party?
    A third party is an individual or organization who instructs another individual or organization to conduct an activity or financial transaction on their behalf. When determining whether a third party is giving instructions, it is not about who benefits from the activity or financial transaction, or who is carrying out the activity or financial transaction, but rather who gives the instructions to handle or conduct the activity or financial transaction.
     
    You should ask questions to determine if someone other than the client is pulling the strings. If you determine that the individual or organization who engages you is acting on someone else's instructions, that someone else is a third party for the purposes of the identification and verification requirements.  
  • 21. A third party is acting for or representing my client. What are my identification and verification obligations?
    If a third party is acting for or representing your client (e.g., an attorney acting under a power of attorney, litigation guardian, etc.), you must identify both your client and the third party. If the third party is providing instructions in relation to a financial transaction, you must verify the identity of both the client and the third party.
     
    When your client is represented by someone else, you must obtain the same information for that other person as you would if they were your client: their full name, home address and telephone number, their occupation, and, where applicable, their workplace or business address and telephone number. The same requirement applies if the third party is an organization; you must obtain all the information you would if you were representing the organization directly.
  • 22. Do I have an obligation to ask my client if they are acting for a third party?
    While not required, you should take reasonable measures to determine if a third party is involved and if they are authorized to instruct you on behalf of the client or if the client is acting for or representing a third party in respect of the matter for which you are retained.
  • 23. I have been retained by parents who are acting on behalf of their minor child. Do I have to identify the minor?
    Yes, unless an exemption applies. You are required to identify any client for whom you are retained to provide legal services. In ascertaining who your client is, you need to determine whose rights are being affected by the matter or transaction for which you have been retained. In this situation, the parents have approached you in a representative capacity on behalf of their minor child, the child is a client for whom you are rendering legal services. As a result, you must identify the minor client in accordance with the identification requirements. If the parents are authorized to provide instructions to you on behalf of the minor client, then you must also identify the parents.
     
    If there is a financial transaction, you must also verify the identity of the minor client. The verification requirements for minors differ depending on age (see the question “How do I verify the identity of a minor? below).
     
    Note, licensees retained to represent a minor must also comply with their professional obligations relating to clients with diminished capacity.
  • 24. What should I do if a third party is paying for legal services on my client’s behalf?
  • 25. My client is acting for a third party, but I will not be meeting that third party in person. How do I verify the identity of the third party?
    If the third party is an individual, you can use the credit file or dual process methods of verification, or you can use an agent to verify the individual’s identity. For information on the credit file and dual process methods, see the questions in the Verification section below or consult the Law Society’s Client Identification and Verification Flowchart. For information on using an agent, consult the Law Society’s Using an Agent for Verification of Identity resource.
     
    If the third party is an organization, you must obtain the documents, records, and information required to confirm the existence of the organization (see the question How do I verify the identity of an organization?, below). You are not permitted to use an agent to verify the identity of an organization.

Verification

  • 26. What does “verifying the identity of my client” mean?
    Verifying the identity of a client means actually looking at the documents, data, and information you must obtain under By-Law 7.1 to confirm that your client and any third party are who or what they say they are.
  • 27. In what circumstances do I have to verify identity?
    Subject to limited exemptions, you must verify the identity of your client and any third party whenever you are retained to provide legal services for the client or a third party that your client is acting for or representing, and you engage in or give instructions in respect of the receipt, payment, or transfer of funds.
  • 28. Does every financial transaction trigger the verification requirement?
    No. There are certain situations where you do not need to verify the identity of your client or third party even though you are retained to provide legal services that involve you engaging in or giving instructions in respect of the receipt, payment, or transfer of funds. These situations are summarized in the Law Society’s Client Identification and Verification Flowchart, and are limited to certain licensees, clients, or funds. Licensees should consult Sections 22(2) – (4) of By-Law 7.1 for a complete list of exemptions to the verification requirements. 
  • 29. Whose identity do I have to verify?
    You must verify the identity of any client or third party that your client is acting for or representing.
    Where you represent a client that is an organization, you must also verify the identity of each individual authorized to give instructions on behalf of the organization with respect to the matter for which you are retained.
  • 30. The by-law requires that I verify the identity of clients and third parties when I engage in or give instructions in respect of the receipt, payment, or transfer of funds. What does this mean?
    Funds is a defined term in By-Law 7.1. It means cash, currency, securities, negotiable instruments, and other financial instruments that indicate a person’s title or interest in them. Given this broad definition, there are many situations in which you may be required to verify the identity of a client or third party, including situations where you do not have control of the funds but are directing how those funds should be paid, received, or transferred.
     
    For example, unless an exemption applies, you would be required to comply with the verification requirements where you
     
    • give instructions on behalf of a client to transfer shares stocks, debentures, bonds, or other securities or financial instruments, regardless of whether monies are being paid for the securities or transfer
    • receive a bank draft or certified cheque from a third party for monies owing to your client
    • pay or provide instructions to the other side’s lawyer on behalf of your client for fees relating to an agreement of purchase and sale
    • transfer or direct the transfer of monies on behalf of your client pursuant to the terms of a separation agreement

     In every situation, you must exercise your judgment in determining whether the legal services you are providing include engaging in or giving instructions in respect of the receipt, payment, or transfer of funds. If you are unsure of whether the verification requirements apply, contact the Law Society’s Practice Management Helpline for guidance.  
  • 31. The by-law requires that I verify the identity of an individual “immediately after first engaging in the activities described in clause 22(1)(b)”. What does this mean?
    You are required to verify the identity of an individual immediately (i.e., as soon as possible) after engaging in or giving instructions in respect of the receipt, payment, or transfer of funds. As a best practice, however, you should verify an individual’s identity before or when you first engage in such activity.  
  • 32. When do I have to verify identity?
    For an individual client or third party, or individuals authorized to instruct on behalf of an organizational client or third party, you must verify the identity of the individual immediately after first engaging in or giving instructions in respect of the receipt, payment, or transfer of funds.

    For an organizational client or third party, you must verify the identity of the organization within 30 days after first engaging in or giving instructions in respect of the receipt, payment, or transfer of funds. As a best practice, however, you should verify identity before or when you first engage in such activity.
     
  • 33. I work in a law or legal services firm. Can another licensee or employee of the firm verify the identity of my clients?
  • 34. How do I verify the identity of an individual?
    You are permitted to verify the identity of an individual using one of the following methods:
     
    • Government-issued photo identification
    • Credit file method
    • Dual process method
    • By retaining an agent to verify the individual’s identity

    See the below questions for information on how to verify identity using the government-issued photo identification, credit file, or dual process methods. For information on using an agent, see the Law Society’s Using an Agent for Verification of Identity resource. Licensees should note that there are different verification requirements for individuals younger than 15 years of age (see the question “How do I verify the identity of a minor?”, below) and organizations.

    All documents and records used to verify identity must be authentic, valid, and current and all other information used must be valid and current. You must also maintain a dated record of the information obtained and retain copies of all documents or records used. To comply with these Record Keeping requirements, consider using the Law Society’s Client Verification Form (Individual) (.docx).

    Where you are required to verify the identity of an individual, you must also comply with the source of funds and monitoring requirements.
  • 35. I am using the credit file method of verification. Do I need to obtain my client’s consent to obtain the file?
  • 36. How do I verify an individual’s identity using the government-Issued photo identification method?
    To verify identity using the government-issued photo identification method you must view a valid, original, and current government-issued photo identification document containing the individual’s name and photograph. Photo identification documents issued by any municipal government are not acceptable. Note that privacy laws in Ontario prohibit you from collecting, recording, using, or making a note of an individual’s health card number for identification or verification purposes. For more information, visit the Information and Privacy Commissioner of Ontario’s website.

    For a list of acceptable government-issued documents that can be used to verify identity, see the Law Society’s Examples of Government Issued Photo Identification.

    You must view the government-issued photo identification document in the presence of the individual you are verifying to ensure that the name and photograph match. You must also keep a dated record of your compliance with these requirements. To assist you in this regard, consider using the Law Society’s Client Verification Form (Individual) (docx).
  • 37. How do I verify an individual’s identity using the credit file method?
    To verify identity using the credit file method, you must obtain the individual’s credit file directly from a Canadian credit bureau or a third-party vendor authorized by a Canadian credit bureau. To rely on an individual’s credit file to verify identity, the credit file must have been in existence for at least three years. In addition, you must ensure that the identification information provided by the individual (e.g., name, date of birth, address) matches the information in the individual’s credit file.
     
    The individual does not need to be physically present for you to verify their identity using the credit file method. However, you must request and obtain the credit file information at the time you are verifying the individual's identity. An individual cannot provide you with a copy of their credit file, nor can you rely on a previously obtained credit file.
  • 38. How do I verify an individual’s identity using the dual process method?
    To verify identity using the dual process method you must obtain any two of the following pieces of information from two different reliable sources:
     
    • information from a reliable source that contains the individual’s name and address
    • information from a reliable source that contains the individual’s name and date of birth
    • information containing the individual’s name that confirms they have a deposit account or credit card or other loan account with a financial institution.
     
    The information may be found in documents from a reliable source or may be information that the reliable source is able to provide. In all cases, the documents must be originals that are authentic, valid, and current, and the information used must be valid and current. Photocopies, faxes, and electronic images are not acceptable.
     
    The individual does not need to be physically in your presence at the time you verify their identity using the dual process method.
  • 39. My client is a minor under 12 years of age. The by-law requires that I verify the identity of my client’s parent or guardian. Am I also required to verify or confirm the parent-child or guardian-child relationship?
    Although you are not required to do so under the by-law, to reduce the risk that you may be assisting in or encouraging fraud or illegal conduct, it is a best practice to obtain information or records that confirm the existence of the child-parent/guardian relationship. This may include, for example, requesting a copy of the minor client’s birth certificate, adoption order, or religious records (e.g., baptismal certificate).
  • 40. What is the “reliable source” standard referred to in the by-law?
    A reliable source is an originator or issuer of information that is well known and considered reputable. For the purposes of the verification requirements, the reliable sources cannot be the individual whose identity you are verifying, you as the licensee, or an individual acting on your behalf (i.e., an agent). For a list of reliable sources of information and documents that can be used to verify identity using the dual process method, see the Law Society’s Examples of Reliable Sources of Information.
  • 41. Can I rely on an electronic image of a document for verification?
    No. You cannot rely on an electronic image (e.g., digital photograph, screen capture or scanned copy) of a document to verify identity using any of the available verification methods for verifying the identity of an individual (i.e., government-issued photo identification, credit file, or dual process method). Note, however, that an electronic image of a document, which is not an original, is distinct from an original electronic document, the latter of which may be used to verify identity.
  • 42. How do I verify the identity of a minor?
    The verification requirements for minors depend on the age of the individual.
     
    For individuals younger than 12 years old, you must verify the identity of the individual’s parent or guardian using the government-issued photo identification method, credit file method, or dual process method. You can also use an agent to verify the identity of the parent or guardian.  See the questions above for information on these methods of verification or consult the Law Society’s Client Identification and Verification Flowchart. For information on using an agent, see the Law Society’s Using an Agent for Verification of Identity resource.
     
    For an individual 12 years or older, but younger than 15 years, you may verify identity by obtaining information from a reliable source that contains the name and address of the individual’s parent or guardian and confirming that the address of the parent or guardian matches the individual’s address. 
     
    For individuals 15 years or older, you can verify identity using any of the available methods of verification for individuals as set out in By-Law 7.1. For more information see the question “How do I verify the identity of an individual?above.
  • 43. I am a licensee in Ottawa and my client is an individual in Calgary. I am required to verify the identity of my client, but I will not be able to meet with the client in person. How do I verify my client’s identity?
    When your client is an individual and is in Canada, but you cannot meet with them in person, you can use any one of the following methods to verify their identity:
     
    • Credit file method
    • Dual process method
    • By retaining an agent to verify the individual’s identity
     
    For information on the credit file and dual process methods of verification, see the questions above or consult the Law Society’s Client Identification and Verification Flowchart; for information on using an agent, consult the Law Society’s Using an Agent for Verification of Identity resource.
  • 44. How do I verify the identity of an organization?
    The verification requirements for an organization depend on the type of organization.
     
    For an organization that is created or registered pursuant to legislative authority (e.g., a corporation or society), you must obtain written confirmation from a government registry of the organization’s existence, name, and address, as well as the names of the organization’s directors, if applicable. Such written confirmation may include, for example, a certificate of corporate status or a record filed annually under provincial securities legislation. 
     
    If the organization is not registered in any government registry (e.g., a trust or partnership), you must obtain a record confirming the organization’s existence. This could include, for example, a copy of the organization’s constating documents or articles of association.
     
    In all cases, the documents and records you rely on must be authentic, valid, and current. You are also required to maintain a dated record of the verification information you obtain and retain a copy of every document used to verify the identity of the organization. To assist you in this regard, consider using the Law Society’s Client Verification Form (Organization) (docx).
     
    Note, where you are required to verify the identity of an organization, subject to an exemption, you must also
     
    • verify the identity of each individual authorized to instruct the organization (see, “How do I verify the identity of an individual?”)
    • comply with the source of funds and monitoring requirements
    • obtain information about the directors, beneficial owners, control, and structure of the organization (for more information, see the question below).
  • 45. By-Law 7.1 talks about obtaining additional identification information about directors, beneficial owners, and the organization’s ownership, control, and structure. What is required?
    When you are required to verify the identity of an organization, you must also
    • obtain and keep a dated record of the name of each director of the organization (unless the organization is a securities dealer), and
    • make reasonable efforts to obtain the names and addresses of all beneficial owners, and information establishing the ownership, control, and structure of the organization.
       
    You are also required to take reasonable measures to confirm the accuracy of the above information and keep a dated record of the information and the measures taken. All documents relied on must be authentic, valid, and current, and information obtained must be valid and current.
     
    To assist you in documenting compliance with these requirements, consider using the Law Society’s Client Verification Form (Organization) (.docx).
  • 46. Where can I find information establishing beneficial ownership as well as information on the control and structure of the organization? How do I confirm the accuracy of this information?
    You can obtain information establishing beneficial ownership and the ownership, control, and structure information from the organization directly, either verbally or in writing. For example, the organization can provide you with official documentation or advise you on the beneficial ownership which you can then document for record keeping purposes (for example, the Law Society’s Client Verification Form (Organization)(docx)). It is not sufficient to identify only the owners of an organization or those who control it; you must make reasonable efforts to identify both.
     
    If you are relying on documents or records, it may be possible to rely on such documents or records to satisfy both the requirement to obtain information about beneficial ownership, and the ownership, control, and structure of the organization, and to confirm the accuracy of such information. In all cases, you must use your judgment to assess whether the documentation is appropriate. Where possible, official documents should be used to confirm beneficial ownership information. If no official document exists, consider having the client sign an attestation that includes the ownership, control, and structure information obtained.
  • 47. What is the “reasonable efforts” standard referred to in the by-law?
    The reasonable efforts standard requires you to apply sound, sensible judgment about the measures you take to identify beneficial owners and the ownership, control, and structure of the organization.
     
    In making reasonable efforts to determine beneficial ownership, it is important to understand that the names on legal documentation may not be the actual owners of an organization. You must assess and determine what is appropriate for each situation to ensure the accuracy of the information obtained, while also considering the risk associated with providing legal services to the client.
  • 48. I am engaged in or giving instructions in respect of the movement of funds. However, the funds involved are nominal. Is there a de minimis exception to verification?
    No. You must verify the identity of a client or third party whenever you are engaged in or giving instructions in respect of a financial transaction regardless of the amount of funds being received, paid, or transferred.
  • 49. Under the by-law, funds that are paid, received, or transferred by electronic funds transfer are exempt from verification. Does a phone transfer, Interac e-transfer, or a wire transfer constitute an electronic funds transfer?
    Electronic funds transfer is a defined term under the by-law. For a funds transfer to constitute an electronic funds transfer for the purposes of an exemption to the verification requirements, all of the following conditions must be met:
     
    • The transfer of funds must be from one financial institution or financial entity to another
    • The transfer must be initiated by the transmission of instructions for the transfer of funds through any electronic, magnetic or optical device, telephone instrument, or computer.
    • There must be a record of the transfer that contains
      • a reference number
      • the name of the financial institution or financial entity sending the funds and receiving the funds
      • the date the funds were transferred
      • the amount and currency of the funds transferred
      • the name of the holder of the account from which the funds transferred are drawn, and the name of the holder of the account from which the funds transferred are deposited

    Funds transferred by phone, Interac e-transfer, or wire transfer do not typically meet the above requirements. Accordingly, you must exercise your own judgment and assess on a case-by-case basis whether the funds transfer satisfies the above criteria. If it does not, then the funds transfer is not an electronic funds transfer for the purposes of the by-law and, unless another exemption applies, you must verify the identity of your client.
  • 50. What should I do if I am unable to obtain information on the directors and beneficial owners?
    If you are unable to obtain the information required about the directors and beneficial owners of the organization, or you are unable to confirm the accuracy of such information you must
     
    • take reasonable measures to ascertain the identity of the most senior managing officer of the organization
    • determine whether the client’s information in respect of their activities, source of funds, and instructions are consistent with the purpose of the retainer and the information obtained about the organization, and prepare a dated record of your determination, and
    • assess the organizational client’s activities in the context of any risks that the financial transaction may be used to facilitate dishonest, fraudulent, criminal, or other illegal activity.
     
    To assist you in identifying and assessing risks associated with the client, matter, or transaction, consider using the Law Society’s Worksheet: Red Flags of Fraud, Money Launder, Terrorist Financing, and Illegal Activity. You may also use the Law Society’s Client Verification Form (Organization) (.docx) to record the reasonable measures taken to ascertain identity and document your risk assessment.
  • 51. My client is a partnership that is unable to provide me with a copy of the partnership agreement. What should I do?
    If you are required to verify the identity of an organization that is a partnership, you must obtain a record that confirms its existence as an organization. Obtaining the partnership agreement is only one way to verify the client’s identity. Other examples may include conducting a partnership registration search or confirming the GST/HST number of the partnership.
     
    In all cases, the records used must be authentic, valid, and current and you must retain a copy of them in your file in accordance with your record keeping obligations. If the client refuses to provide a copy of the partnership agreement and you are unable to obtain information from other reliable sources, you must decline to act or stop acting for the client.
  • 52. I am acting for a trust. How do I verify its identity?
    To verify the identity of a client or third party that is a trust, you must obtain a copy of a record that confirms the existence of the trust as an organization. The type of record will vary depending on the nature of the trust. Examples of appropriate documentation may include a trust agreement or other documents establishing the trust, documents amending the trust, and documents identifying the trustees. You are also required to verify the identity of all individuals authorized to give instructions on behalf of the trust (see the question “How do I verify the identity of an individual?” above).
     
    If you are required to verify the identity of an organization that is a trust, you must also comply with additional identification requirements. For more information on these requirements see the Law Society’s Client Identification and Verification Flowchart.
  • 53. My client’s matter involves more than one financial transaction. One of the financial transactions is exempt from the verification requirements. Do I have to comply with the verification requirements for the others?
    Yes. When a client’s matter involves more than one financial transaction, you are required to look at each financial transaction separately.  If an exemption from the verification requirements applies to one of those transactions, the other transactions will be subject to the verification requirements unless there are exemptions that apply to those as well.
     
    For example, if you are acting for a client and receive funds from the client and you later pay out the funds to another party, you must consider the receipt and payment of monies separately. Both transactions would need to be exempt for you not to be required to verify the identity of your client.
  • 54. What is caught by the funds exemption “paid to or received from a financial institution”?
    This exemption is only meant to cover a financial institution’s own funds, for example those advanced pursuant to a mortgage or loan agreement. Cheques, whether regular or certified, bank drafts, or other forms of payment that are provided by anyone other than from the financial institution directly on its own behalf, are not included in the exemption.
  • 55. Are funds received from the trust account of a lawyer licensed to practise law in another part of Canada exempt from the verification requirements?
    Yes. There is an exemption for funds received from the trust account of an individual who is authorized to practise law in a province or territory of Canada outside Ontario. The exemption does not, however, apply to funds received from the trust account of a lawyer licensed in a foreign jurisdiction.
  • 56. I received settlement monies for my client after sending a demand letter, but before commencing a proceeding. Are the settlement monies exempt?
    No. Funds paid or received as a settlement, regardless of whether they were paid or received in the context of a proceeding are not exempt from the verification requirements. Accordingly, if you pay or receive settlement monies, you must verify the identity of your client. You must also comply with the source of funds requirement unless another exemption applies
  • 57. I am acting for a client in a matter where money is being paid pursuant to a court order. Is the payment exempt?
    No.  There is no longer an exemption for monies paid pursuant to a court order. You will have to verify the client’s identity and any third party that your client is acting for or representing. You must also comply with the source of funds requirement unless another exemption applies.
  • 58. My client has come to me for legal representation in connection with some monies owing to another person. Is this a situation in which I must verify my client’s identity?
  • 59. A licensee or lawyer referred a client to me that they already identified, but I have now learned that the matter will involve a financial transaction. Do I have to verify the client’s identity?
    Yes, unless the referring licensee or lawyer has also verified the client’s identity in accordance with the current verification requirements as set out in By-Law 7.1.
  • 60. I have acted for a client in the past and have already verified the client’s identity. Do I have to do it again?
    It depends. If the verification you conducted complied with the current requirements and you believe that the information is accurate and current, you are not required to verify identity again. If the verification did not comply with the current requirements or you believe that the information may no longer be accurate or current, you must verify identity again.
     
    Regardless of whether you are required to verify identity again, because you are engaged in or giving instructions in respect of the receipt, payment, or transfer of funds, you must ensure you obtain information about source of funds. In addition, if the matter is ongoing, you must periodically monitor the professional business relationship with the client throughout the retainer. For more information on your source of funds and monitoring obligations, see the Source of Funds and Monitoring sections below.     
  • 61. My client is a corporation or a partnership. Do I have to verify its identity again if I have already done so?
    It depends. If the verification complied with the current requirements and you believe the information is current and accurate, you are not required to verify identity again. If the verification did not comply with the current requirements or you believe that the information may no longer be accurate or current, you must verify identity again.
     
    In all cases, it is recommended that you exercise due diligence in ascertaining whether there has been any change in the identity, ownership, control, or structure of the organization and in determining that the instructing individual is still authorized to act in that capacity.
     
    In addition, because you are engaged in or giving instructions in respect of the receipt, payment, or transfer of funds, you must ensure you obtain information about source of funds. If the matter is ongoing, you must periodically monitor the professional business relationship with the client throughout the retainer. For more information on your source of funds and monitoring obligations, see the Source of Funds and Monitoring sections below.
  • 62. I have acted for a corporate client on several matters and have complied with the identification and verification requirements. Someone new is now giving me instructions on behalf of the client. Do I have to verify that person’s identity?
    Yes. In every case where you are engaged in or giving instructions in respect of the receipt, payment, or transfer of funds, you must verify the identity of each individual who is authorized to give you instructions on behalf of the organization in respect of the matter for which you have been retained. You may, however, be exempt from this requirement if you previously verified the identity of that individual and have no reason to believe the information or the accuracy of the information has changed.

Verification by Agent


Source of Funds

  • 69. What is the source of funds requirement?
    If you are retained to provide legal services that involve a financial transaction and none of the exemptions to the client identification or verification requirements of By-Law 7.1 apply, you must obtain information from the client about the source of funds being received, paid, or transferred. 
     
    Source of funds means the economic activity that generated the funds or the origin of the funds for the financial transaction.

    You must also record this information and the date on which it was obtained.  The record must be maintained as required by By-Law 7.1. For more information see the Record Keeping section below.
  • 70. Is this a new requirement?

    As part of existing obligations to know their clients, understand the nature of their retainers, and avoid assisting in or encouraging illegal conduct, licensees already look for red flags and ask their clients questions about their financial transactions.

    The Rules of Professional Conduct (“Rules”), Paralegal Rules of Conduct, (“Paralegal Rules”), Paralegal Professional Conduct Guidelines (“Paralegal Guidelines”) have reflected these requirements for some time. See, for example, Rules 3.2-7 to 3.2-8 of the Rules, Rules 3.02(4) to (6) of the Paralegal Rules, and Guideline 7, ss. 4 to 7 of the Paralegal Guidelines.

    Only the specific requirement to obtain information about the source of funds is new.

  • 71. When do I need to obtain source of funds information?
    While the by-law does not prescribe the timing for obtaining source of funds information, because the source of funds requirement is triggered when you engage in or give instructions in respect of the receipt, payment, or transfer of funds, you should obtain information from your client about the source of funds at the time you are verifying the client’s identity and within the prescribed time for complying with the verification requirements. The timing for verification of a client’s identity depends on whether the client is an individual or organization. For more information see the question, When do I have to verify identity?, above.
  • 72. What information should I obtain and record about the source of funds?
    For every retainer involving a financial transaction, you should obtain and record:
     
    • The client’s explanation for the source of funds
    • If the payor is not the client, the reason that the client is not paying and the payor’s full name, address, occupation, relationship to the client, and explanation for the source of fund, and
    • The date the source of funds information was obtained
     
    If appropriate in the circumstances, you should also record
     
    • Follow up inquiries made, and responses received, if any
    • Supporting document(s) reviewed, if any, and where copies are stored, and
    • Date(s) inquiries made and/or documents reviewed, if applicable
     
    To assist with recording the information about the client’s source of funds, the Law Society has included source of funds sections in each of the following  file forms for licensees
     
     
    You must also comply with your recordkeeping obligations under By-Law 9 as you would in the normal course. For more information see the Record Keeping section below.
  • 73. Can I just accept a client’s explanation for the source of funds without asking further questions or reviewing supporting documents?

    In many cases, yes. In the absence of inconsistencies or other red flags about the client or transaction, you may accept a client’s explanation about the economic activity or action that generated the client’s source of money. In such cases, you need not make further inquiries or obtain copies of source of funds documents.

    However, at any time where a client’s explanation for the source of funds is unusual or inconsistent with what you know of the client or the retainer, you should ask more questions, consider obtaining documents from the client that support the client’s explanation of the source of funds, and assess the risk of participating in a financial transaction with the client.

  • 74. What are some examples of red flags that should prompt me to make further inquiries and/or request supporting documents for source of funds?

    For examples, review the Law Society’s Red Flags of Money Laundering, Terrorist Financing, and Other Illegal Activity Worksheet.  

    For more detailed information about practice area specific red flags and risks, see the Law Society’s Risk Assessment Case Studies and the Federation of Law Societies of Canada’s Risk Advisories for the Legal Profession (December 2019).

    Ultimately, whether you should make further inquiries about the source of funds or request supporting documents depends on the circumstances of each matter. It depends on whether the source of funds explanation provided by the client aligns with what you know about the client and the transaction, and whether there is information that makes you suspicious or ought to make you suspicious.
  • 75. What are some examples of source of funds supporting documents?
    The following is a non-exhaustive list of examples of documents that you may request from a client, depending on the client’s source of funds explanation:
     
    • Employment pay statements or other proof of earnings
    • Tax return
    • Agreement of purchase and sale
    • Bill of sale
    • Loan agreement
    • Court judgment
    • Minutes of settlement
    • Will or gift letter
    • Life insurance pay out statement
    • Lottery or gambling win documentation
    • Share or asset purchase agreement
    • Partnership agreement
    • Capital raise or contribution documentation
    • Debt instrument documentation
  • 76. What steps should I take if I choose to review source of funds supporting documents?

    1.      Review the documents for consistency with the client’s explanation and/or resolution of your concerns: Look at the document(s) to see if they are consistent with the client's explanation of the source of funds and whether your concerns about unusual circumstances, inconsistencies with client profile, or the retainer are resolved by the documents.

    2.      Ask more questions, if necessary: If the document(s) do not resolve your concerns about unusual circumstances or inconsistencies with the client profile or the retainer, or if the document(s) do not align with the client’s explanation of the source of funds, ask more questions.

    If you are satisfied with the documents and/or responses:

    3.      Record the documents reviewed and your assessment; consider making copies for your file: If the documents confirm the client’s explanation and you do not have other concerns about the source of funds, make a record of the documents you reviewed and your assessment in the client file. Consider making copies of the supporting source of funds documents for your file.  

    4.      Assess risk for the purposes of ongoing monitoring: For more information on this process, see the Monitoring section below.

    5.      Proceed: You may proceed with the matter in the normal course. 

    If you are not satisfied with the documents and/or responses:

    6.      Withdraw from representation: If you know or ought to know that you would be assisting a client with fraud or illegal conduct by taking on the retainer, you are required to decline or withdraw from representation.

  • 77. I am receiving funds from the other side’s legal representative in respect of a real estate, loan, or other financial transaction. What source of funds information must I obtain?
  • 78. What happens if my client cannot provide documents to support source of funds?
    It depends. Remember that you are not required to review source of funds documents if there is nothing unusual or inconsistent about the financial transaction. Moreover, there can also be situations where a client cannot produce any source of funds documents. This does not necessarily mean that the client is involved in money laundering or another illegal activity. A client may, for example, not be diligent in maintaining financial records generally or the funds may have originated some time ago. You need to assess the totality of the circumstances to determine whether and how to proceed.

    Where in the course of gathering information about source of funds a licensee knows or ought to know that they are or would be assisting a client with fraud or illegal conduct, they must withdraw from representation.
  • 79. What do I need to do to comply with the source of funds requirement if a third party is paying for legal services on my client’s behalf?

    If the person paying your legal fees and/or disbursements is not your client, you should record the following information:

    • the reason that the client is not paying
    • the payor’s full name, address, occupation, and relationship to the client, and
    • an explanation for the source of funds


    You should also ensure that the payor of the funds is not under the impression that you will protect their interests or share confidential information about the matter with them without the client’s consent. It is also critical that the payor understands that you act exclusively in the interests of the client and, as a result, take instruction only from the client. To mitigate risk, consider sending a non-engagement letter to the payor that confirms the above information with the payor.


Monitoring

  • 80. What is the monitoring requirement?

    During an ongoing retainer involving a financial transaction, you must periodically

    • determine whether the information obtained about your client’s activities, the source of funds used in the transaction, and the instructions in the financial transaction are consistent with the purpose of the retainer and the information about the client; and
    • assess whether there is a risk that you may be assisting in or encouraging fraud or other illegal conduct.
     

    You must also record the measures taken to comply with the monitoring requirements, the date on which the measures were taken, and the information obtained. The record must be maintained as required by By-Law 7.1. To assist you in complying with these obligations, consider using the Law Society’s Sample Monitoring Record (.docx).

  • 81. How often do I need to monitor?
    It depends. While periodic monitoring is required, the degree and frequency of monitoring will depend on the nature and duration of the retainer, the type of legal services being provided, and your assessment of whether there are any red flag indicators or risks associated with the matter, the client, or the transaction. Once you have completed this assessment, you must exercise your judgement in determining how frequently you need to check in with the client. To assist you in identifying and assessing risks, consider using the Law Society’s Worksheet: Red Flags of Fraud, Money Launder, Terrorist Financing, and Illegal Activity.
     
    Generally, less frequent monitoring will be required for clients that you identify as posing a low risk, whereas those in your high-risk category will require that you take enhanced measures, which include conducting more frequent monitoring activities. Once you have determined the degree and frequency of monitoring, each time you check in with the client you must remain alert to new red flags or risk factors that may impact your original risk assessment and how often you monitor the professional relationship going forward. You should consider using the Law Society’s Sample Monitoring Record to document your monitoring efforts.
  • 82. I have determined that I am exempt from the verification requirements, including the source of funds requirement. Do I have to comply with the monitoring requirements?
    Yes, if the matter is ongoing. The monitoring requirement is not tied to the requirement to verify the identity of your client. In other words, whenever you are engaged in or giving instructions in respect of the receipt, payment, or transfer of funds you must periodically monitor the professional relationship with your client irrespective of whether you are required to verify the client’s identity or obtain source of funds information. However, while periodic monitoring is required, where an exemption to verification applies, the degree and frequency of monitoring will be limited. For example, it may not involve obtaining, reviewing, and confirming the source of funds.
  • 83. Do I need to record compliance with the monitoring requirement? If so, what should be included in the record?
    Yes. The by-law requires that you keep a dated record of the measures taken and information obtained to comply with your monitoring obligations. This record should be retained in accordance with the record keeping requirements in By-Law 7.1. For assistance in complying with these requirements, consider using the Law Society’s Client Verification Form (Individual or Organization) to conduct your initial monitoring assessment and the Law Society’s Sample Monitoring Record to document compliance with the monitoring requirement. 
  • 84. Is this a new requirement?

    As part of existing obligations to know their clients, understand the nature of their retainers, and avoid assisting in or encouraging illegal conduct, licensees already look for red flags or other concerns that may present problems during the retainers. This is monitoring their professional relationship with clients and the activities for which they have been retained.

    The RulesParalegal Rules, and Paralegal Guidelines have reflected these requirements for some time. See, for example, Rules 3.2-7 to 3.2-8 of the Rules, Rules 3.02(4) to (6) of the Paralegal Rules, and Guideline 7, ss. 4 to 7 of the Paralegal Guidelines.

    Only the specific requirement to engage in monitoring is new.

  • 85. Does the monitoring requirement apply to all client relationships?

    This requirement applies to all clients where you are retained in a matter involving a financial transaction, including long-standing clients.

  • 86. What steps should I take to comply with the monitoring requirement?
    • In general
    • For each matter that involves a financial transaction
      • Assess whether there are red flags present and conduct a risk assessment for the matter
        At the outset of and throughout a retainer, you should consider whether there are red flags present and conduct a risk assessment based on the nature of your practice, the level of risk associated with the client, and the level of risk associated with the matter:

        A. What is the level of risk of your practice?

        Consider whether you provide legal services that are susceptible to being used for money laundering, such as
         
        • Purchase and sale of real estate
        • Establishing, purchasing, and selling business entities
        • Arranging for financing for the purchase and sale of or operation of business entitles or assets, or
        • Enforcing contracts involving transfers of funds between entities.

        Although this list is not exhaustive, legal services susceptible to being used for money laundering may require increased monitoring of the professional relationship to ensure that you are not being used for an improper purpose.

        B. What is the level of risk related to this client? 

        Consider asking yourself, for example:
         
        • Is the client excessively secretive or obstructive?
        • Is the client a politically exposed person?
        • Are you able to establish the beneficial owners of the client?
        • Is the client in a country that presents a high risk for money laundering?
        • Did you meet the client face-to-face?
        • Is the client a regulated person or entity?
        • What is the business structure of the client?
        • Is your client acting on behalf of someone else?
        • If a client is geographically far away from your office, why is this client retaining you?

        If there are elevated risks that are associated with the client, you may want to ask additional questions to satisfy yourself that you are being retained for a legitimate purpose.

        C. What is the level of risk of this matter?

        Consider asking yourself, for example:
         
        • Is the transaction based in a high-risk country?
        • Is the transaction unusually complex or unusually large for the parties or transaction?
        • Is there an unusual pattern of transactions?
        • Is there an apparent legal or economic purpose for the transaction?
        • If a client is retaining you for a matter that is out of your practice area, why are they doing so?

        Note: The above lists for practice, client, and matter risk assessment are illustrative, not exhaustive.
         
      • Determine the appropriate nature, degree, and frequency of monitoring for the client and matter
        Based on your risk assessment of your practice, the client, and the subject matter of the retainer, decide how frequently to do a check in with the client.  Periodic monitoring is required, but the nature, degree, and frequency of monitoring will depend on what is reasonable in each case.
         
        Generally, you must check in occasionally with clients with whom you have longer-term relationships. Clients identified as posing a low risk will require less frequent monitoring, whereas those in your high-risk category will require that you take enhanced measures, which include conducting more frequent monitoring activities. If the professional relationship is short-term in nature, the monitoring requirement may not be triggered.
         
        For example:
         
        • If you act for the buyer of multiple properties over 20 months, you must make periodic inquiries about the source of funds for each transaction and should check in with the client.
        • If you act for the seller of their $500,000 condominium and the sale closes in three weeks, the monitoring requirement may have limited or no applicability.
      • Remain alert to new red flags or risk factors that emerge at any time throughout your retainer, engage in increased monitoring, if necessary; and record the steps taken
        If your periodic monitoring reveals changes or heightened risk, monitoring may include:
         
        • Obtaining updated information about the client (e.g., occupation, assets)
        • Collecting information about the source of funds or the source of wealth of your client
        • Asking about the reason for intended or conducted transactions
        • Gathering additional documents, data, or information or taking additional steps to verify the documents obtained
        • Flagging certain activities that appear to deviate from expectations
        • Reviewing client transactions relevant to the legal work for which you are retained against your usual processes and procedures for similar matters
      • Monitor the relationship based on red flags and risk, and record the information

        The Law Society has created a Sample Monitoring Record (.docx) to assist licensees in complying with this requirement.

  • 87. What happens if, through monitoring, I conclude that I may be assisting a client with money laundering, terrorist financing, fraud, or other illegal conduct?
    If at any point while retained, including in the course of obtaining the required information and taking the steps under the monitoring requirements, you know or ought to know that you are or would be assisting a client in fraud or other illegal conduct, you must immediately cease to and not engage further in any activities that would assist the client in fraud or other illegal conduct and/or withdraw from representation of the client.
     
  • 88. What should I do if I am unsure about red flags or my risk assessment?
    The Practice Management Helpline is available to assist. Contact the Helpline at practicehelpline@lso.ca or 416-947-3315 or 1-800-668-7380 and select the Helpline option.
     
    If you are a lawyer who suspects that you are being targeted by a client in a fraud or your client may be attempting to use you to launder money or for another illegal purpose, consider contacting LawPRO®’s Avoid a Claim for direction. Similarly, paralegals should consider contacting their insurers.
     

Record Keeping

  • 89. Do I have to document the information I obtain to identify and verify the identity of my client or third party?
    Yes. Unless an exemption applies, you are required to retain
     
    • a record of all identification and verification information you or your agent obtained
    • a record of the source of funds information you obtained
    • a record of the measures taken to comply with the monitoring requirement, and
    • copies of all documents you or your agent used to verify the identity of your client.
     
    If you are required to verify the identity of an organization, you must also retain a dated record of the measures taken to confirm the accuracy of the additional identification information that you are required to obtain about the directors and beneficial owners of the organization.
     
    For assistance with complying with the above record keeping obligations, consider using the Law Society’s file forms.
  • 90. Do I have to keep identification and verification information in a separate file, or can I keep it with my client files?
    There is no requirement that this information be maintained in a separate file. However, regardless of where the information is stored, you must ensure that it can be readily produced, if required. You must also ensure that the documents and information you obtain as part of the identification and verification process is property stored and safeguarded. 
  • 91. Can I keep identification and verification information in electronic form?
    Yes, documents, records, and information obtained for the purposes of complying with the client identification and verification requirements may be kept in a machine-readable or electronic form, if a paper copy can be readily produced from it. In all cases, you must ensure that the documents and information you obtain as part of the identification and verification process are properly stored and safeguarded. 
  • 92. How long do I have to retain client identification and verification information?
    You must retain a record of the information you or your agent obtain, including copies of all documents used to verify your client’s identity for the longer of
     
    • the duration of your professional relationship with the client and for as long as is necessary to provide service to the client, and
    • at least six years following completion of the work for which you were retained.
  • 93. What do I need to record when I am relying on an exemption to the identification or verification requirements?
    There is no requirement under the by-law that you document or make a record of any exemption(s) to the identification or verification requirements you are relying on. However, as a best practice, you should make a note somewhere in the client file identifying the exemption you are relying on and explaining how you determined the exemption applies.

Withdrawal Obligations

  • 94. My client was evasive when I tried to get the necessary information and documents to identify and verify their identity. What should I do?
    This type of behaviour should raise suspicions that your client may be trying to get you to assist them with something illegal or dishonest. You have an obligation to ensure that you are not participating in, or facilitating any dishonesty, fraud, crime or illegal conduct by a client or any other person. Accordingly, in situations where your client is being evasive, you should make reasonable inquiries of the client to determine if there are any risks or concerns of illegal conduct before agreeing to act or continuing to act for the client. If you know or ought to know that you would be assisting the client in fraud or other illegal conduct, you must refuse to act for the client in the matter and withdraw from representation in accordance with your professional obligations.
     
    If your client is unable to provide the identification or verification information because it does not exist, you should record these facts as part of the identification and verification process and exercise your own judgment in assessing risk and determining your withdrawal obligations in the circumstances. For assistance in making this determination, consider contacting the Law Society’s Practice Management Helpline.
  • 95. I have been retained by a client, but I just realized I may be assisting my client in illegal conduct. What should I do?
    If you know or ought to know that continuing to assist your client would facilitate the client or other persons in dishonesty, fraud, crime, or other illegal activity, you must immediately cease to engage in such activities, and if unable to do so, cease from providing further legal services to the client in accordance with your obligations to withdraw from representation under the Law Society’s rules.

​Practice Area Specific Questions

Last Updated: January 28, 2022
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