How are You Paying for That?
“How are you paying for that?” It’s a question often heard when you are at a fast-food restaurant or standing at the check out at your favourite retailer.
Since 2020, it’s also a question every lawyer who is acting on a financial transaction must ask their client.
However, unlike restaurant or retail situations, it’s a much deeper question for lawyers, and sometimes confusing.
Financial transaction? You need to know the source of funds.
Ask it. Document it. Request more information if there are inconsistencies. Satisfy yourself before you proceed.
What is it?
As per Law Society Rule 5-120(a), when engaged in or giving instructions in regard to a financial transaction on behalf of a client, lawyers must obtain and record, with the applicable date, information about the source of funds. Source of funds is the economic activity or action generating the funds and you need to document it for every financial transaction. This applies to both individual and organizational clients, and requires the lawyer to inquire about the origin of the funds in cases where it is not apparent from the information obtained from the client for the retainer.
For example, if you are representing a client who is selling the home they have lived in for 20 years and purchasing a new one, use of the sale proceeds to purchase the new home is information that is readily apparent. However, what if your client is instead buying their first home and when you ask about the source of funds, it turns out they are borrowing most of the cash to mortgage from a friend?
Where do you record it?
The source of funds is most often recorded within a firm’s client identification and verification system. This can be a separate system, integrated with the firm’s software platform, or in the client file.
The purpose of this requirement is to assess whether there is anything that suggests the proposed transaction is inconsistent with the client’s apparent means or the circumstances of the transaction. To satisfy themselves that the funds are not the proceeds of crime, lawyers may need to question the client, consider whether someone other than the client provided the funds, request supporting documents and/or conduct their own search. Lawyers also should retain supporting documents to show how they arrived at this determination.
Remember: when it comes to anti-money laundering, lawyers are gatekeepers. The source of funds is just one piece of the puzzle when it comes to your client’s profile. It is to be used together with other due diligence requirements, such as verifying your client’s identity as well as the totality of the information in the matter in order to assess your client relationship. Any red flags must be addressed before you can continue to act.
Unsure what might be red flags for suspicious sources of funds? In the resource material entitled “Risk Assessment Case Studies for the Legal Profession”, found both on the Federation’s website as well as in the Anti-Money Laundering section of the Law Society of Manitoba’s Education Centre, you will find various scenarios which demonstrate the red flags that should cause you to be on the alert for potential money-laundering and the due diligence you can undertake.
What it’s not
It’s also important to know what the source of funds isn’t, as there are several terms that seem similar but have different meanings, which can cause confusion.
Source of Funds is not Form of Receipt “Form of receipt” is the way in which you received the money. Did your client bring in a bank draft or send the money by wire transfer? This information is the form of receipt, and must be recorded in your firm’s accounting records for money received in your trust account (in accordance the requirements for a book of original entry in Rule 5-41) or general account (Rule 5-48(1)(a)).
Source of Funds is not Receipt Payor “Receipt payor” closely resembles “source of funds” and can be easily confused. A “receipt payor” is the person or entity paying. In every instance that money is received, you need to ask and record whose money it is, even where you do not need to record the source of funds (such as payments for retainers or fees and disbursements).
Consider these examples:
i) Your client is purchasing a home and bank ABC is providing mortgage funds for the purchase:
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- When your client provides cash to mortgage, “receipt payor” is your client.
- When the bank provides mortgage proceeds, “receipt payor” is bank ABC.
- There are two sources of funds. One source is a bank loan from bank ABC and the other (cash to mortgage) – should be answered by your own assessment and inquiring of the client – is it consistent with the client’s means?
ii) You have been retained to defend your client on criminal charges:
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- If your client provides a retainer, “receipt payor” is your client.
- If your client’s sister provides a retainer, “receipt payor” is your client’s sister. You must record both names “sister name for client name”
- Because it is a retainer, you do not need to record the source of funds.
Like “form of receipt”, receipt payor is a concept for your accounting records, to be recorded in your book of original entry (for your trust or general account) and your client trust ledger.
If you have support staff or other members of the firm not familiar with the file who are responsible to receive payments from clients, communication is key. All staff handling receipts must be familiar with these concepts and requirements. If, based on your meeting with your client, you are a expecting a bank draft with your client’s name on it as the draft purchaser yet instead receive a wire transfer from a foreign bank, this must be flagged by your staff for your attention.
In summary, remember that the source of funds is the economic activity or action generating the funds, and that you need to document it for every financial transaction. Examples include savings from salary, insurance proceeds, inheritance or bank loan.
Each and every time someone gives you trust money you must know and record:
- Which way did someone provide funds to you? (form of receipt)
- Whose money is it? (receipt payor) And…. If it’s a financial transaction:
- What economic activity or action generated the funds? (source of funds)
For more information visit the Anti-Money Laundering Resource Library:
