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American Bar Association - Defending Liberty, Pursuing Justice

WINTER 2010

Vol. 6, No. 2

 

REAL ESTATE

 

Attempts to Impose Regulation and/or Voluntary Guidelines on Lawyers: An Update on the FATF Guidance for Legal Professionals

By Kathleen J. Hopkins

Lawyers involved in any of the following activities may soon be subject to state and/or federal regulation and/or adopting voluntary good practice guidelines as part of an international effort to combat money laundering and terrorism financing. The international community has cast its net quite broadly to include lawyers who are engaged in:

  • buying and selling of real estate,
  • managing client money, securities, or other assets,
  • management of bank, savings, or securities accounts,
  • organization of contributions for the creation, operation, or management of companies, and
  • creation, operation, or management of legal persons or arrangements, and the buying and selling of business entities.

Lawyers in all practice settings, whether engaged in consumer and commercial matters, may be caught in this broad net and could soon be required to conduct enhanced client due diligence, institute internal controls, and be subject to governmental oversight and monitoring.

Background
In 1989 the G-7 ministers issued an economic declaration covering numerous issues concerning international monetary developments. In connection with this declaration, the leaders agreed to the creation of the Financial Action Task Force on Money Laundering (FATF). which was tasked with coordinating efforts to prevent money laundering in both domestic and international arenas. The FATF has 34 members: 32 countries and territories and 2 regional organizations.

FATF Recommendations
In 1990 and 2001, the FATF issued recommendations to provide a set of countermeasures against money laundering and terrorism financing. The recommendations covered a wide range of topics, including an effective criminal justice system, structure for a country’s regulation of its financing system, and international cooperation. The recommendations are not a binding international convention, but many countries (including the United States) have committed to implementing them to combat money laundering.

Of particular interest to lawyers are Recommendations 33 and 34, which address the exploitation of “ legal persons” (i.e., legal entities such as trusts, LLCs, corporations, partnerships and the like) and legal arrangements by money launderers. In addition, legal professionals should be aware of Recommendations 13 through 16, which deal with suspicious transaction reporting (STR) and the no tipping off rule (NTO). The latter set of recommendations is applied to financial institutions and the application of the STR and NTO recommendations to the legal profession is controversial and is subject to continued discussion.

The FATF also issued guidance on the FATF Recommendations, including its recommendation to apply antimoney laundering regulations to nonfinancial businesses and professions, such as lawyers. This included recommendations that certain antimoney laundering measures be extended to lawyers including (1) increased regulation and supervision of the profession, (2) increased due diligence requirements on clients, (3) new internal compliance and record keeping requirements for lawyers and firms, and (4) new STR requirements mandating that lawyers report to a government enforcement agency or a self regulatory organization information that triggers a “suspicion” of money laundering relating to client activities. It also recommended enforcement through criminal, administrative or other sanctions. The ABA, through its Task Force on Gatekeeper Regulations and the Legal Profession, provided formal comments to this paper, including criticism about the absence of input from the legal profession on the roles and work of the legal profession. In addition, in February 2003 the ABA House of Delegates passed a resolution opposing any mandatory STR obligation that would compromise the confidentiality of client information or adversely affect the attorney-client relationship in the U.S. justice system.

FATF Evaluation of United States
In 2006 the FATF evaluated the United States and found United States noncompliant with Recommendation 33. Its conclusions included: (a) there were no measures in place to ensure adequate, accurate, and timely information on the beneficial ownership and control of legal persons that can be accessed in a timely fashion by competent authorities; (b) there were no measures taken by those jurisdictions that permit the issue of bearer shares to ensure bearer shares are not misused for money laundering; and (c) a general criticism of the United States’s lack of available information of private companies registered within its borders.

FATF Guidance for Legal Professionals
Meanwhile, the FATF also finalized recommendations encourage countries to develop a risk-based approach to antimoney laundering and to combating terrorism financing. This approach envisions that limited resources will be employed to address the greatest risks. In 2007 the FATF issued the Financial Institution Guidance and in October, 2008 issued its Guidance for Legal Professionals (the Lawyer Guidance). The can be reviewed in full at www.fatf-gafi.org/dataoecd/5/58/41584211.pdf.

Three U.S. Responses to the FATF Recommendations

1.          Proposed Federal Legislation
In 2007 Senators Levin, Coleman, and Obama proposed S. 681 (Stop Tax Haven Abuse Act), which proposed subjecting persons involved in formation of companies to the antimoney laundering requirements of the Bank Secrecy Act (which is similar to the approach adopted and challenged in Canada). The definition of those covered by the proposed legislation was broad enough to include lawyers and others involved in the process. In response, the ABA and other groups began to work with the U.S. Departments of Justice and Treasury to, hopefully, resolve law enforcement’s information-gathering concerns other than through federal legislation. An newer version of the same proposal, S.569, surfaced in 2009 and was last discussed in committee in November 2009, with the ABA, the National Association of Secretaries of State, and the U.S. Treasury Department representatives testifying that it needed to be substantially revised. After the 2007 attempt to federally regulate such lawyer activities, the ABA House of Delegates also passed a resolution that, inter alia, urged Congress to refrain from enacting legislation that would regulate lawyers in the formation of business entities and defer to the states as they consider amendments to their various entity formation laws.

2.         Uniform State Law for Entity Formation Information
On October 9, 2009 the National Conference of Commissioners on Uniform State Laws finalized the Uniform Law Enforcement Access to Entity Information Act (the Uniform Act). The text and commentary can be found at
http://www.law.upenn.edu/bll/archives/ulc/roba/2009final.pdf.

For the most part, the Uniform Act lies dormant in the states, awaiting the resolution of the federal legislative attempts. The Uniform Act would provide a process for law enforcement to gain access to information concerning the natural persons behind legal entities such as corporations, LLCs, partnerships, trusts, and the like. It will impose requirements on such entities to designate a natural person within the jurisdiction who will have to maintain complete and updated records on the legal and beneficial owners of the entities. For lawyers trying to maintain the relative confidentiality of the actual entity owners, it will be important to encourage their jurisdictions to adopt “optional” Section 15 on confidentiality in the Model Act.

3.         Voluntary Guidelines Initiative
The ABA’s Task Force on Gatekeeper Regulation and the Profession worked with legal professionals within and without the Association and with the U.S. Department of Treasury to develop “Good Practices Guidelines” to respond and preempt federal legislation. The task force finalized the guidelines late 2009. Since then, several ABA Sections, the American College of Real Estate Lawyer, the American College of Mortgage Attorneys, and the American College of Trusts and Estates Lawyers have already approved the Good Practices Guidelines and are undertaking efforts to educate and encourage their members to voluntarily adopt the guidelines. For reference, the guidelines are posted on the Division’s Real Estate Committee’s website:
http://new.abanet.org/divisions/genpractice/GP315000/Pages/default.aspx.

Please note, however, that the guidelines have not been endorsed by the Division, and the posting on the website is for reference only.

The guidance provides a multilevel risk based process for initial client intake and subsequent inquiry regarding source of client funds. Included as an appendix is a sample client intake process that might be implemented where there is only a “standard” level of risk concerning the source of funds.

For risk assessment, the guidelines instruct the lawyer to consider (1) the country/geographic risk, (2) the service risk, and (3) the client risk. The domicile of the client, the location of the transaction and the client’s sources of funds are included in these considerations. Under each category there are enumerated questions to be answered so that the lawyer can appropriately determine whether there are high, low, or standard risk that her efforts will be used for money laundering or terrorism financing purposes. The guidelines also instruct the lawyer to conduct her assessment both prior to and during the course of the attorney-client relationship.

Of course, if a lawyer does apply the guidelines and concludes her efforts are likely to be used for money laundering or terrorism financing, then it is recommended that the lawyer reference the applicable Rules of Professional Conduct (RPC 1.16 in the model rules) concerning the attorney’s rejection or withdrawal from representation.

What Affected Lawyers Can Do

  • Read the guidelines and decide whether and how you might implement them in your practices.
  • Monitor the status of the Uniform Act in your jurisdiction and encourage adoption of optional Section 15.
  • Monitor federal regulatory efforts, decide whether you could adapt your practice to comply and at what cost, and, perhaps, contacting your representatives to express your concern over such impact.
  • Read more about the FATF and the work of the task force in an article by Kevin L. Shepard entitled “Guardians at the Gate: The Gatekeeper Initiative and the Risk Based Approach for Transaction Lawyers,” in the Real Property, Trust & Estate Journal, Vol. No. 43, Issue No. 3 (Winter 2009); and also in the report accompanying ABA Resolution 300, which the ABA House of Delegates passed at its August 2008 session.

Kathleen J. Hopkins is a founding member of the Seattle firm Real Property Law Group, PLLC ( www.rp-lawgroup.com). She is also chair of the GPSolo Division’s Real Estate Committee. She can be reached at khopkins@rp-lawgroup.com or 206-625-0404.

 

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