Should lawyers be required to investigate their own clients?
September 2017 | LEGAL & REGULATORY | FRAUD & CORRUPTION
Financier Worldwide Magazine
September 2017 Issue
In a world where fraud and money laundering risks are growing more dangerous and law enforcement is scrambling to stay ahead, the idea of requiring attorneys to determine the source of the funds they accept is gaining traction. Such rules have already been imposed in the UK, and similar rules are being considered in the US. But despite popular support, anti-money laundering (AML) regulations for lawyers raise serious ethical and constitutional concerns.
The criminal money laundering laws prohibit any person – whether an attorney or otherwise – from knowingly conducting a financial transaction for the purpose of concealing the criminal nature or source of the money. Under 18 U.S.C. § 1957, any person who “knowingly engages” in a monetary transaction involving over $10,000 of “criminally derived property” can be charged with money laundering. Thus, it is impermissible for a lawyer to knowingly receive stolen property as payment for legal services. Two years after this statute was enacted, Congress passed an amendment defining the term “monetary transaction” to exclude “any transaction necessary to preserve a person’s right to representation” under the Sixth Amendment, effectively creating a safe harbour for criminal defence attorneys. However, this safe harbour is only applicable in criminal cases, and generally after indictment.
Last year, the Supreme Court held in United States v. Luis that the pre-trial restraint of untainted assets needed to retain counsel of choice violates the Sixth Amendment. Although Luis was widely lauded as a positive development for criminal defendants, it had little practical effect. In most cases, the government seizes assets before trial by alleging that they are traceable to the criminal offence. The opportunity to challenge a pre-trial restraint on assets in these circumstances is limited, and can be particularly difficult at the outset of a criminal case before the government’s evidence is even revealed, let alone tested. These concerns, already familiar to most white-collar criminal practitioners, are now complicated by a new twist. With AML at the forefront of regulators’ (and often the general public’s) minds, many are asking what, if any, obligation attorneys should have to determine whether payments from a client are ‘clean’.
Today, there are no laws in the US that require attorneys to screen their clients or affirmatively determine that client funds are not derived from criminal activity, but the American Bar Association (ABA) recommends lawyers voluntarily take steps to ensure that they are not handling criminal proceeds. In 2010, the ABA issued ‘Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing’, where it recommended enhanced client due diligence and transaction monitoring for high risk clients. The ABA recommends that lawyers verify the true identity of each client, as well as the beneficial owner, and obtain information to understand the client’s circumstances and business. This guidance applies to lawyers who conduct specific activities, including buying and selling real estate, managing client money, securities or other assets or financial accounts, and attorneys who organise the creation, operation or management of companies and certain other business entities. In any case, the ABA advises that when lawyers ‘touch the money’ they should satisfy themselves as to the ownership and the source of the funds. The ABA also identifies certain risk categories including country and geographic risk (for example, a nation subject to a US government sanctions programme), client risk (such as political exposed persons (PEPs)) and service risk (such as providing services to conceal beneficial ownership).
Regulators in the UK have gone one step further, imposing AML screening requirements on attorneys. Under recent amendments to the UK’s Money Laundering Regulations, attorneys are required to apply various levels of scrutiny, described as customer due diligence (CDD), enhanced due diligence (EDD) and simplified due diligence (SDD), depending on the risk factors raised by the client. The regulations spell out specific factors that attorneys should consider when deciding whether a client is high risk (warranting EDD), or low risk (warranting SDD). CDD requires attorneys to identify and verify their client, and when suitable, identify and verify the beneficial owners of the client, ensuring they understand its structure and ownership. Attorneys must also identify and verify anyone who wishes to act on behalf of a client and certify that they are authorised to do so. Similarly, when representing corporate entities, attorneys must obtain and verify the company name, its company number and the address of its registered office. They must also know the names of all of senior individuals responsible for the corporate entity’s operations.
Recently, many people have suggested that as ‘gatekeepers’ of our financial system, attorneys in the US should similarly bear a heightened responsibility to ensure that the funds they handle are not derived from criminal activity. Critics of the US’ voluntary approach have argued that recent events have raised serious questions about the role of law firms in secreting criminal proceeds, and whether lawyers are turning a blind eye to clients engaging in money laundering, evading taxes and avoiding sanctions.
For example, in January 2016, 60 Minutes aired an episode in which an investigator from Global Witness, a public advocacy group that exposes corruption in the developing world, posed as a representative of a government official from an unnamed but allegedly poor African nation, who wanted help moving millions of dollars in suspicious funds into the US. The undercover investigator met with lawyers from more than a dozen New York firms with experience in private asset protection and intentionally raised red flags signalling that the source of the money was ill-gotten gains and purportedly received advice on how to get the money into the US anonymously from numerous attorneys. Just a few months later, in April 2016, the ‘Panama Papers’ scandal erupted, when over 11 million documents leaked from the offshore law firm Mossack Fonseca. Most recently, in several civil forfeiture cases against assets that are alleged to have been obtained through fraud and foreign corruption, the US Department of Justice took the virtually unprecedented step of naming law firms which received some of the funds, even though the complaint contained no allegation of wrongdoing by the lawyers involved.
Lawmakers have also jumped on the bandwagon. In February 2016, the Incorporation Transparency and Law Enforcement Assistance Act was introduced in both the House and the Senate. This law would require formation agents, who are defined as a person who, for compensation, assists in the formation of a corporation or limited liability company, and which may include attorneys, to gather and maintain extensive beneficial ownership information (BOI) on the companies they help create and make that information available to state and federal law enforcement authorities. The law would impose penalties for providing false BOI or failing to provide BOI. Another key piece of legislation, the ‘Stop Tax Haven Abuse Act’, was introduced in January 2015. It proposes to extend an array of AML requirements to formation agents, including those under the Bank Secrecy Act (BSA), such as Know Your Customer (KYC), due diligence procedures and the filing of suspicious activity reports (SARs).
The ABA wisely opposes such legislation. In particular, the ABA has noted that AML requirements for lawyers may compromise attorney-client confidentiality, thereby discouraging attorneys from asking questions and clients from being as open. For example, requiring a lawyer to file SARs on her client, or requiring a lawyer to gather and maintain BOI, may deter attorneys from undertaking the level of investigation necessary to vigorously defend their clients. An attorney’s knowledge that assets are tainted may undermine an attorney’s ability to wage a fee forfeiture defence, and potentially lead to personal liability under money laundering laws. This, in turn, may undermine the competency of an attorney’s representation. An attorney’s failure to sufficiently investigate certain facts may breach ethical standards or render the assistance of counsel ineffective.
At their core, AML regulations are premised on the idea that financial institutions have a duty to ensure that criminals cannot access the financial system to launder their money. While it may seem appealing to impose the same obligations on lawyers, lawyers and financial institutions owe vastly different legal and ethical obligations to their clients. AML regulations for attorneys raise a host of legal and ethical problems, and would have a chilling effect, discouraging attorneys from representing criminal defendants and likely impact those defendants who have limited resources to pay for lawyers in the first instance. For these reasons, the best AML framework for lawyers is voluntary, where lawyers hew to the general rules of professional conduct, where a lawyer ‘may discuss the legal consequences of any proposed course of conduct’, but ‘shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent’.
Seetha Ramachandran is a partner and Mari S. Dopp is an associate at Schulte Roth & Zabel. Ms Ramachandran can be contacted on +1 (212) 756 2588 or by email: email@example.com. Ms Dopp can be contacted on +1 (212) 756 2049 or by email: firstname.lastname@example.org.
© Financier Worldwide
Seetha Ramachandran and Mari S. Dopp
Schulte Roth & Zabel