OTTAWA—The Supreme Court of Canada has ruled a federal anti-money laundering law that forces lawyers to identify sources of their clients’ cash and allows federal investigators to conduct warrantless searches of law firms is unconstitutional.

In a ruling Friday, the high court settled a 15-year-long dispute between Canada’s legal profession and the federal government. The effect of the decision is to exempt lawyers, notaries and law offices from the law’s record-keeping, client-identification and disclosure obligations.

But the law still applies to other financial institutions, banks and accounting firms who must track their clients’ money trails and may be subjected to warrantless searches by government authorities.

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act was passed by the former Liberal government in 2000, part of an international movement to crack down on terrorist financing.

It required lawyers to identify and verify the source of any money in transactions over $3,000 that they handled on behalf of clients, to keep records for five years and produce them on demand. It empowered Ottawa’s financial intelligence agency, the Financial Transactions and Reports Analysis Centre of Canada — the body that tracks financing of terrorist activity and organized crime — to enter law offices, demand documents, and make copies of information in files or on computers. Lawyers who failed to comply were exposed to fines up to $500,000 or jail terms up to five years.

The Federation of Law Societies launched a constitutional challenge of the law in 2001 on behalf of the 14 self-governing bodies that oversee Canada’s lawyers, arguing it was an attempt to turn lawyers into “agents of the state” and their law firms into “archives for the police and prosecution.”

On Friday, the high court agreed.

It found the law breached lawyers’ Charter protections against unreasonable search and seizure, as well as the constitutional right not to be unduly deprived of liberty, and could not be justified.

All seven high court judges agreed with the federation that the law breached solicitor-client privilege, however, a majority of five judges went further than that. They enshrined a new privilege — known as the “duty of a lawyer to a client’s cause” — in the Constitution, calling it a basic principle of fundamental justice. It strengthens the guarantee of life, liberty and security of the person.

While Chief Justice Beverley McLachlin and Michael Moldaver agreed with the majority on the outcome, they stopped short of embracing any new constitutional principle of a lawyer’s “duty of commitment to a client’s cause,” saying that the privileged protection of solicitor-client communications — already a constitutional principle — was enough.

The end result is a victory for the 14 self-regulating law societies across Canada who moved to bring in their own tough rules governing law practices.

Tom Conway, president of the Federation of Law Societies which led the challenge, said those rules already ensure lawyers aren’t “dupes” of money-launderers or terrorists.

Justice Thomas Cromwell, writing for the majority, pointed to those rules of legal practice and ethical standards that ensure lawyers will not “unknowingly assist in or turn a blind eye to money laundering or terrorism financing.”

Conway said the ruling means that clients and the Canadian public “can have confidence that that information they impart to their lawyer will not be accessible to the state in pursuit of criminal sanctions.”

Conway said the federation had won injunctions against the application of the law against the country’s litigators and advocates while litigation and discussions with government were underway. But when consultations failed to reach a consensus, the litigation was revived about five years ago.

“We’re delighted,” said Fred Headon, past president of the Canadian Bar Association. “Courts often speak of our Constitution as a living tree, and I think today it sprouted a new branch.”

Headon said the ruling “recognizes an important element of (how) our democracy functions. Canadians need to have confidence in that system or else they won’t avail themselves of it.”

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“The duty of commitment to the client’s cause is not only concerned with justice for individual clients but is also deemed essential to maintaining public confidence in the administration of justice,” the ruling said.

That duty ensures that “divided loyalty does not cause the lawyer to ‘soft peddle’ his or her (representation)” and prevents the solicitor-client relationship from being undermined, Cromwell added.

The Conservative government said little Friday, other than that it would take time to review the decision, according to Nicholas Bergamini, spokesman for Finance Minister Joe Oliver.