Yet Again the Question Is “Where Were the Lawyers?”

Jasminka Kalajdzic recently highlighted a New York Times column entitled Panama Papers Show How Lawyers Can Turn a Blind Eye. The column reported that Ramón Fonseca, one of the founders of the Panamanian firm Mossack Fonseca, “told The New York Times that the lawyers did nothing wrong in helping their clients set up shell companies”. Mr. Fonseca was quoted as saying:

We are like a car factory who sells its car to a dealer (a lawyer for example), and he sells it to a lady that hits someone. The factory is not responsible for what is done with the car

The New York Times columnist was highly critical of the American rules of professional conduct in similar contexts. He wrote:

Rather than seeking to keep clients from violating the law, it appears that some lawyers are willing to go right up to the line of legality in their representation. By keeping themselves ignorant about what may be going on, these lawyers have been able to maintain the facade that they are not involved in potentially illegal activities, even though they are often the prime enablers of misconduct. Has the legal profession lost its moral compass? The answer is that the ethical rules governing lawyers do not put much of a barrier in the way of helping clients engage in transactions that would appear questionable but do not violate any specific laws, so it is not clear whether lawyers pushing to the edge of the law are acting improperly.

The columnist noted the ABA Model Rules of Professional Conduct and said that the Model Rule 1.2(d) is seriously flawed in permitting lawyers to keep themselves ignorant in order to be compliant with the rule:

Model Rule of Professional Conduct 1.2(d), issued by the American Bar Association, says that a lawyer should “not counsel a client to engage, or assist a client in conduct that the lawyer knows is criminal or fraudulent.” Note how the rule is premised on the lawyer’s knowledge, and many lawyers are expert at keeping themselves ignorant about exactly what is taking place to maintain plausible deniability. Moreover, that same rule says that “a lawyer may discuss the legal consequences of any proposed course of conduct,” so exploring the limits of the law can be permissible.

Canadian professional conduct rules are quite different than those considered in New York Times column. Rule 3.2-7 of the Federation of Law Societies Model Code is somewhat broader than ABA Model Rule 1.2(d).

When acting for a client, a lawyer must never knowingly assist in or encourage any dishonesty, fraud, crime or illegal conduct, or instruct the client on how to violate the law and avoid punishment.

The Federation Model Rule refers to dishonesty and illegal conduct as well as fraud and crime. Whether dishonest and illegal conduct includes conduct that is not criminal or fraudulent is uncertain. Illegal conduct could include statutory breach ranging from quasi-criminal to breach of codification of private rights and obligations. Indeed, illegal conduct might arguably include civil misconduct. For a discussion in a somewhat similar context, see Dublin v. Montessori Jewish Day School of Toronto (2007), 85 OR (3d) 511 but also Blank v. Canada (Justice), 2015 FC 956.

More importantly, the concept of knowing assistance in the Canadian professional conduct rules has not been limited to actual knowledge. Canadian discipline cases have concluded that knowing assistance includes constructive knowledge as well as actual knowledge. As the Law Society Appeal Panel (as it then was) said in Purewal v. The Law Society of Upper Canada, 2009 ONLSAP 10:

[31] “Willful blindness” and “recklessness” are two states of mind that are tantamount to knowledge. Put another way, they serve as proxies for proving actual knowledge. But their meaning must be correctly understood: Sansregret v. The Queen (1985), 18 C.C.C. (3d) 223 (S.C.C.); Law Society of Upper Canada v. Steven Michael Mucha, 2008 ONLSAP 5. [32] “Willful blindness” means that a licensee actually suspects the dishonest activity, but deliberately refrains from making further inquiries for fear of confirming those suspicions. “Recklessness” means that a licensee is aware of the risk that the activities in which he/she is participating or assisting are dishonest, but continues on despite the risk.

The New York Times column cogently shows why rules of professional conduct permitting turning a blind eye to criminal or fraudulent client conduct would be inappropriate. Purewal and many other discipline cases come to the same conclusion.

The Rules of Professional Conduct in Ontario go further. Rule 3.2-7.1 prohibits negligent facilitation of dishonesty, fraud, crime or illegal conduct. Rule 3.2-7.2, requires lawyers to “make reasonable efforts to ascertain the purpose and objectives of the retainer and to obtain information about the client necessary to fulfill this obligation”. Of course, knowing assistance is a more serious ethical breach than negligent facilitation. But both are contrary to the Rules of Professional Conduct.

So all is well! Canadian Codes and Rules of Professional Conduct do not permit “lawyers to keep themselves ignorant in order to be compliant with the rule”.

But not so fast. How did the Panama Papers case arise? Was it by client complaint? Of course not. Tax haven clients want secrecy. The facts of the Panama Papers were disclosed by unlawful hacking. Assuming unlawful client conduct, why would any client complain about lawyer assistance unless the secret was already out?

Much has been written about the Law Societies’ complaints-driven and reactive approach to regulating professional conduct. As the Panama Papers case (and the GM, Volkswagen, Enron, Watergate and other cases) makes clear, this reactive complaint-driven regulatory approach simply does not work where lawyers facilitate unlawful client conduct. Where client misconduct is somehow found out, the question is often “Where were the lawyers?” Our reactive complaint-driven regulatory approach increases the risk that, time and time again, we will have to ask the same question.

There is a second point that may be made. In Canada, we have robust protection of lawyer-client communications. Canadian solicitor-client privilege is as robust as it can be and more robust than comparable privileges in many (if not all) other countries. As the Supreme Court of Canada has made clear, solicitor-client privilege in Canada is as close to absolute as possible. This heightens the importance of effective Law Society regulation as only Law Societies can hold effectively lawyers to account as they are entitled to examine (and are required to protect) privileged communications.

This leads to a third point. In Canada, there are two exceptions and one exclusion to solicitor-client privilege. The “innocence at stake” and “public safety” exceptions are irrelevant in cases involving client misconduct in the commercial sphere. The “crime-fraud” exclusion may relevant as Alice Woolley discusses in her column Volkswagen Legal Advice and the Criminal Communication Exclusion to Confidentiality and Privilege.

In Descôteaux et al. v. Mierzwinski, [1982] 1 SCR 860, the Supreme Court described the crime-fraud exclusion in terms which would seem to avoid the risk of shielding crimes and frauds facilitated by lawyers:

Communications made in order to facilitate the commission of a crime or fraud will not be confidential either, regardless of whether or not the lawyer is acting in good faith.

However, the exclusion is of limited application in fact as it is necessary that there be prima facie proof of fraud before the crime-fraud exclusion applies. See Laquerre c. Société canadienne d’hypothèques et de logement, 2013 QCCA 95.

If lawyer misconduct only surfaces if and when the clients complain to the Law Society, or when there is otherwise prima facie proof of facilitated crime or fraud, then there is a high degree of protection of client misconduct facilitated by lawyers and a much reduced risk of lawyers being called to account for wrongful facilitation.

While somewhat heretic, this examination suggests that the scope of Canadian solicitor-client privilege may be too broad given its vigour. Solicitor-client privilege is justified by the need for clients to be able to reveal their deepest and darkest secrets in order to obtain effective legal assistance. This is undoubtedly the case where, for example, a lawyer defends an accused person. But it is not so clear that the same robust protection is required, or even appropriate, in the context of a residential real estate transaction, an internal corporate investigation or perhaps even tax planning. Other than where life, liberty and the security of the person are involved, it is not obvious why the nearly absolute version of solicitor-client privilege is genuinely required as opposed to a lesser protection as applies, for example, to protect the adversarial process (litigation privilege) or settlement discussions (settlement privilege).

While Canadian law and legal ethics is not vulnerable to the same attack as made in the New York Times column, it is difficult to have confidence that there is full compliance with our professional conduct rules. There is real incentive to cloak unlawful activity with the nearly absolute protection of solicitor-client privilege. A reactive primarily complaint-driven regulatory process will rarely examine that which the client, protected by a nearly absolute privilege, does not want examined.

I wonder when the next “where were the lawyers” column will be published. Given recent history, it won’t be long. But more importantly, I wonder how many articles will never get to be written.