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 attorney-client privilege, the confidential lawyer-client relationship, and traditional state court regulation of the legal profession, while also imposing excessive new federal regulations on lawyers engaged in the practice of law.

Status

Last year, Congress considered but declined to enact several gatekeeper bills, including: the “Incorporation Transparency and Law Enforcement Assistance Act” (S. 2489, sponsored by Senator Sheldon Whitehouse, D-RI; and H.R. 4450, sponsored by Representative Carolyn Maloney, D-NY); and the “Stop Tax Haven Abuse Act” (S. 174, Senator Whitehouse; and H.R. 297, Representative Lloyd Doggett, D-TX). All four 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. 2489 and H.R. 4450 would also 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. 2489 was referred to the Senate Judiciary Committee while H.R. 4450 was referred to the House Financial Services Committee. Meanwhile, S. 174 was referred to the Senate Finance Committee, and H.R. 297 was referred to the House Ways & Means and Financial Services Committees. On May 24, 2016, the House Financial Services Task Force to Investigate Terrorism Financing held a hearing on “Stopping Terror Finance: A Coordinated Government Effort.” In connection with the hearing, the ABA sent a letter to the Task Force expressing the Association’s strong opposition to H.R. 4450, S. 2489, and other similar measures and outlining some of the other more effective actions the ABA is taking to fight money laundering in ways that avoid the negative consequences of the legislation. Although H.R. 4450, S. 2489, and the other related bills failed to advance during the 114^th Congress, the sponsors are expected to introduce similar legislation early in the 115^th Congress.

The ABA has also expressed concerns over a proposal by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to establish new customer due diligence requirements for financial institutions. In its initial May 4, 2012 comment letter to FinCEN, the ABA objected to language in the agency’s Advance Notice of Proposed Rulemaking that would have required 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. The ABA comments also expressed concerns that the FinCEN proposal could have imposed unreasonable and excessive burdens on many lawyers and law firms with client trust accounts and could have undermined both the confidential lawyer-client relationship and traditional state court regulation of lawyers.

On October 3, 2014, the ABA submitted a second comment letter to FinCEN in response to the agency’s updated customer due diligence proposal. In those comments, the ABA urged FinCEN to include language in its final rule clarifying that when lawyers or law firms open escrow or client trust accounts on behalf of their clients, they need only disclose their own beneficial ownership information, not the identity or beneficial ownership of their clients for whom the accounts were established. On May 11, 2016, FinCEN issued its final rule that includes the ABA-proposed language designed to protect client confidentiality.

On December 1, 2016, the intergovernmental regulatory body known as the Financial Action Task Force (FATF) released its Mutual Evaluation Report on the United States’ AML and combatting the financing of terrorism (CFT) measures. The FATF report took the position that although the AML and CFT regulatory framework in the U.S. is “well developed and robust,” the framework has some significant gaps, including the lack of strict federal AML and SAR regulations on lawyers, accountants, and other non-financial businesses and professions. The new FATF report—combined with recent media stories alleging that certain law firm client trust accounts have been used to launder money and criticizing the concept of lawyer-client confidentiality—could lead to renewed efforts to advance new gatekeeper legislation in the 115^th Congress.

Key Points

The ABA opposes gatekeeper legislation like the proposed “Incorporation Transparency and Law Enforcement Assistance Act” (S. 2489 and H.R. 4450; 114^th Congress) and the “Stop Tax Haven Abuse Act” (S. 174 and H.R. 297; 114^th Congress) and urges Congress not to enact such measures into law because:

• All four bills would undermine the attorney-client privilege, the confidential lawyer-client 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 a new category of “financial institution”) under the Bank Secrecy Act and thus 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—under penalty of harsh criminal sanctions—would also seriously undermine the attorney-client privilege and the confidential lawyer-client relationship by discouraging full and candid communications between clients and their lawyers.

• S. 2489 and H.R. 4450 would also 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 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 bills and hence would also be subject to these 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 continuing stress. The legislation’s vague and unworkable definition of “beneficial ownership” would also sow confusion into the formation process and would not be effective in fighting money laundering and terrorist financing.

• The burdensome and intrusive new reporting requirements in the legislation are unnecessary because the Federal Government, financial institutions, and the legal profession have developed other more effective tools. The Internal Revenue Service (IRS) and financial institutions already collect entity-related information needed to fight money laundering and terrorist financing—through IRS Form SS-4 and the Treasury Department’s new Customer Due Diligence Rule, respectively—and that information is available to law enforcement authorities. In addition, the ABA developed and is actively promoting the “Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing,” which is designed to help lawyers fight these problems by taking prudent, proportional, risk-based steps tailored to the individual situation rather than the burdensome and costly rules-based approach of the proposed legislation. 

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 client 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.

Updated January 2017