Overview

The ABA supports reasonable and necessary domestic and international measures designed to combat money laundering and terrorist financing. However, the Association opposes legislation and regulations that would impose burdensome and intrusive gatekeeper requirements on lawyers, including bills that would subject the legal profession to key anti-money laundering compliance provisions of the Bank Secrecy Act. If adopted, these measures would undermine the traditional role of state courts in regulating lawyers, the attorney-client privilege, and the confidential lawyer-client relationship, while imposing excessive new federal regulations on lawyers engaged in the practice of law.

Status

Congress currently is considering several gatekeeper bills, including: the “Incorporation Transparency and Law Enforcement Assistance Act” (S. 1465, sponsored by Sen. Carl Levin, D-MI; and H.R. 3331, sponsored by Rep. Carolyn Maloney, D-NY); the “Stop Tax Haven Abuse Act” (S. 1533, Sen. Levin; and H.R. 1554, Rep. Lloyd Doggett, D-TX); and the “Cut Unjustified Tax Loopholes Act” (S. 268, Sen. Levin).  All five of these measures contain provisions that would regulate many lawyers and law firms as “formation agents” (and hence, “financial institutions”) under the Bank Secrecy Act and subject them to the Act’s anti-money laundering (AML) and suspicious activity reporting (SAR) requirements when they help clients establish companies, trusts or certain other entities.  S. 1465 and H.R. 3331 also would require lawyers, businesses and state secretaries of state to gather and maintain extensive “beneficial ownership” information on the companies they help create and make the information available to federal law enforcement authorities.

S. 1465 was referred to the Senate Judiciary Committee while H.R. 3331 was referred to the House Financial Services Committee.  In addition, S. 1533 and S. 268 were referred to the Senate Finance Committee and H.R. 1554 was referred to the House Ways & Means and Financial Services Committees. In December 2011, the ABA sent a detailed letter to all members of the Senate Homeland Security & Governmental Affairs Committee expressing its strong opposition to the previous version of the “Incorporation Transparency and Law Enforcement Assistance Act,” (S. 1483, 112^th Congress).  So far during the current 113^th Congress, no committee hearings or markups have been scheduled on any of the five pending bills.

The ABA also has expressed concerns over a recent proposal by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) that would establish new due diligence requirements for financial institutions.  In its May 4, 2012 comment letter to FinCEN, the ABA objected to language in the agency’s Advance Notice of Proposed Rulemaking that would require law firms to disclose confidential information about their clients’ identities and beneficial ownership whenever they receive advance legal fees from their clients and deposit those funds in the firms’ trust accounts, or if they establish new bank accounts on behalf of clients.  In its comments, the ABA expressed concerns that the FinCEN proposal, if adopted, could impose unreasonable and excessive burdens on many lawyers and law firms with client trust accounts and could undermine both the confidential lawyer-client relationship and traditional state court regulation of lawyers.

Key Points

The ABA opposes gatekeeper legislation like the proposed “Information Transparency and Law Enforcement Assistance Act,” “Stop Tax Haven Abuse Act,” and “Cut Unjustified Tax Loopholes Act” and urges Congress not to enact such measures into law because:

• Ongoing legal profession, international and state reforms are the most effective means of combating money laundering.  The ABA and other bars have worked hard to develop and promote the Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing, which encourages lawyers to fight these problems by taking prudent risk-based steps tailored to the individual situation rather than the burdensome and costly rules-based approach of the proposed bills.  The ABA also has worked closely with the Financial Action Task Force (FATF) to help update and refine its international risk-based AML standards and reached out to the states’ secretaries of state, the Treasury Department and other entities on effective, alternative solutions that would not require new federal legislation or regulations.

• The legislation would subject many lawyers and law firms to the AML and SAR requirements of the Bank Secrecy Act and undermine the attorney-client privilege, the confidential client-lawyer relationship and traditional state court regulation of the legal profession.  Under the legislation, lawyers and law firms that help clients to form companies, trusts or certain other entities would be considered “formation agents” (and hence “financial institutions”) under the Bank Secrecy Act, and therefore would be subject to the strict AML and SAR requirements of the Act.  These SAR requirements could compel lawyers to disclose certain confidential client information to government officials, a result plainly inconsistent with their ethical duties and obligations established by the state supreme courts that license, regulate and discipline lawyers.  Requiring lawyers to report such information to the government—under penalty of harsh criminal sanctions—also would seriously undermine the attorney-client privilege and the confidential client-lawyer relationship by discouraging the full and candid communications between clients and their lawyers that are essential to the lawyer being able to provide the client with effective legal representation.

• The proposed “Information Transparency and Law Enforcement Assistance Act” also would impose burdensome, costly and unworkable “beneficial ownership” reporting requirements on lawyers, their clients, businesses and states.  These bills would require all states to obtain extensive beneficial ownership information on literally millions of legitimate businesses throughout the country, keep that information current, and make it available to law enforcement authorities.  Many lawyers and law firms that help clients to form companies would be deemed to be “formation agents” under the legislation, and hence would also be subject to these beneficial ownership reporting requirements. This new federal regulatory regime would be very costly and cannot be justified, particularly at a time when the nation’s economy is under severe stress.  The legislation’s vague and unworkable definition of “beneficial ownership” also would sow confusion into the formation process and would not be effective in fighting money laundering and terrorist financing.

• The limited attorney exemption in the legislation is inadequate and would harm clients.  While each of the bills would exempt lawyers from the AML and SAR requirements of the legislation when they use paid formation agents to form companies, trusts or other entities for their clients, the proposed “Information Transparency and Law Enforcement Assistance Act” would still subject lawyers to its costly and burdensome beneficial ownership reporting requirements despite the limited exemption.  The exemption in each bill is also flawed because it requires lawyers to outsource certain important practice of law activities—i.e., company, partnership, and trust formation services—to non-lawyers who often are not legally authorized to perform these services, and it also would impose excessive new costs on clients.

ABA Policy

Although the ABA supports reasonable and balanced initiatives to combat money laundering and terrorist financing, the ABA opposes any law or regulation that would compel lawyers to disclose confidential information to government officials or otherwise compromise the attorney-client privilege, the lawyer-client relationship, traditional state court regulation of lawyers, or the independence of the bar. This policy, crafted by the Task Force on Gatekeeper Regulation and the Profession, was first adopted by the ABA in 2003 and later reinforced and expanded in 2008 and 2010.