Law Times

Law Times • OcTOber 5, 2015 Page 9 www.lawtimesnews.com Decision highlights need to check source of client funds BY JUDY VAN RHIJN For Law Times awyers receiving money from known con artists to pay restitution and le- gal fees is a controversial area that has entered the spot- light due to a recent Court of Appeal decision. Unlike the United States, where prosecutors can seize lawyers' fees under forfeiture legislation, Canada protects an economic criminal's right to pay for counsel. However, there are ethical questions and a real risk of criminal liability for those firms that accept money without ques- tioning its source. The Court of Appeal has just considered Healthy Body Ser- vices Inc. v. 1261679 Ontario Ltd. (Raytek Communications), a case dealing with Utpal Patel, a book- keeper who used the funds of his second employer to pay restitu- tion for the money he had stolen from the first. In 2005, Patel was charged with embezzling $670,000 from Raytek Communications, of which it had recovered only $70,000. Having promised to re- pay the missing funds with the as- sistance of a rich uncle in America and other relatives, he obtained a restitution order that deferred and reduced his imprisonment. With the conviction not published pub- licly, he was able to obtain another job with Healthy Body. He used $490,000 of its money to pay resti- tution totalling $390,000, sending cheques or bank drafts through his defence lawyers to the Crown. With the discovery of the sec- ond fraud and Patel's deportation, Healthy Body sued Raytek for re- covery of the money based on the tort of knowing receipt. Raytek's principal, Milton Ramsawak, became aware of the fraud after receiving the payments but still used some of the money to pay the tax bill he had incurred as direc- tor. Raytek had by then gone out of business because of the fraud. At the trial level, the judge found that the money Patel had stolen from Healthy Body couldn't be traced to the funds received by Raytek and that, in any case, the company and Ram- sawak weren't in knowing receipt of the funds. On July 9, the Court of Appeal decided that while the money could be traced, there was no knowing receipt and it dis- missed the appeal. Norm Groot, a fraud re- covery lawyer at Investigation Counsel PC, says there are two key aspects to the case: "The fail- ure of Healthy Body to protect itself and the exposure of the law firm to liability. In respect to Healthy Body, it looks like they did almost no due diligence be- fore hiring this accountant." Crime and risk consultant Chris Mathers notes reference checks can be a tricky area for employers. "We have all heard of wrongful dismissal," he says. "Think about the concept of wrongful hiring. There are cases of this when employers don't call the previous employer or even when they do, everyone's so afraid of the privacy legislation they are reluctant to say anything. They may just confirm employment." Mathers notes employers can also face difficulties in conduct- ing criminal reference checks. He tells of a recent case where a man started a job after a criminal record check came up clean and then killed someone at work. It subsequently came to light that the RCMP was 56 weeks behind in updating conviction informa- tion and that in this case, the man had a conviction from 52 weeks earlier. "In my business, we find that one in 15 people we investi- gate has some perturbing history. Attorneys need to tell their clients to do due diligence when they hire and then to develop a lottery system, draw a certain number of names from the employee pool, and check them again." Employers aren't the only ones at risk from reoffending fraud- sters. Groot believes the case highlights the problem of lawyers taking money from fraudsters for the purposes of their retainers or for facilitating restitution. "It's really embarrassing for the Crown and police to have dirty money go right under their noses, but the Crown and police are not really under any duty to check the source of funds. Our argument is that there should be a duty on defence lawyers repre- senting fraudsters to ascertain the source of funds they receive. If the fraudster pays in cash, they should be obtaining an affidavit swearing to the source of the funds. That's how a lawyer protects himself from being duped." Mathers agrees. "Don't delude yourself," he says. "They will choose to defraud you given the chance. When you take money from a known fraud- ster and put it in trust and take your fees out of it, you are essen- tially assisting a person to launder the funds." Mathers believes that at the very least, it's bad form. "Many attorneys think they are totally exempt from the proceeds of crime act, but if you are com- mitting a criminal offence, that doesn't matter. If a known criminal brings you money, you really need to think about the source for the sake of your own reputation. All fiscal criminals are very charismatic. That's how they do their crimes." Groot believes the risk of lawyers serving as a conduit for fraudulently obtained restitu- tion money is preventable with appropriate regulation. "There is information in the Rules of Pro- fessional Conduct with respect to conduct about retainers but there is no specific rule dealing with this," he says. Healthy Body didn't sue the lawyers in this case, but Groot says actions against counsel have arisen in the past. "The test is not actual knowledge but construc- tive knowledge. When should you be put on alert? The rich uncle story sounds pretty hokey to me." The trial judge held, as a gen- eral principle, that recipients of funds aren't expected to be unduly suspicious of the source of them and aren't liable unless they went ahead without fur- ther inquiry in circumstances in which an honest and reasonable person would have realized that the money was the proceeds of a fraud. LT FOCUS Wondering what else you can do with your law degree – besides practice law? Whether you're a law student or a practising lawyer, at some point you might have questioned whether a traditional legal career is right for you. Out of Practice: Exploring Legal Career Paths in Canada offers practical strategies for exploring new career options, along with real world advice from lawyers who made changes to their own careers. You'll benefit from an insightful discussion of the current state of the Canadian legal profession and the common types of careers outside of traditional legal practice. Law students will find advice on creating career development goals. Practising lawyers will find insight on the pros and cons of leaving practice, ideas on career options, and strategies for changing the way they work in their current position. Out of Practice: Exploring Legal Career Paths in Canada is filled with practical tips and advice that will help you turn your Canadian law degree into a rewarding career designed for you. New Publication Out of Practice: Exploring Legal Career Paths in Canada Amy Kaufman and Leeann Beggs Get expert guidance on non-traditional careers for lawyers Order # 986669-65203 $55 Softcover approx. 240 pages May 2015 978-0-7798-6669-4 Shipping and handling are extra. Price(s) subject to change without notice and subject to applicable taxes. 00230ZJ-A51008 Available risk-free for 30 days Order online: www.carswell.com Call toll-free: 1-800-387-5164 In Toronto: 416-609-3800 L When you take money from a known fraudster and put it in trust and take your fees out of it, you are essentially assisting a person to launder the funds.

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