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February 01, 2012

ABA Opposes Incorporation Transparency Legislation

ABA President Wm. T. (Bill) Robinson III expressed the ABA’s concerns recently about S. 1483, incorporation transparency legislation that the association maintains would impose burdensome federal mandates on state incorporation practices and subject many lawyers to the anti-money laundering and suspicious activity reporting requirements of the Bank Secrecy Act when they help clients establish companies.

The bill, according to sponsor Sen. Carl Levin (D-Mich.), is intended to combat terrorism, money laundering, tax evasion and other wrongdoing by U.S. corporations with hidden owners. The measure would require states to obtain a list of the beneficial owners of each corporation or LLC formed under their laws, maintain the information for a period of years after a corporation is terminated, and provide the information to law enforcement upon receipt of a subpoena or summons.

Robinson, in a Dec. 16 letter to the Senate Committee on Homeland Security and Governmental Affairs, explained that the ABA supports all reasonable and necessary domestic and international efforts to combat money laundering and terrorist financing and has worked diligently with the rest of the legal community, federal and international law enforcement authorities and the states to advance these reforms. He stressed, however, that federal legislation such as S. 1483 is unjustified and would be counterproductive.

Robinson explained that the ABA particularly opposes the proposed regulatory approach in S. 1483 that would superimpose new federally mandated requirements on existing state company formation practices and regulate many practicing lawyers and law firms as part of a new class of “formation agents” subject to the bill’s beneficial ownership mandates. The association also opposes provisions that would regulate lawyers and law firms as “financial institutions” under the Bank Secrecy Act.

“By subjecting lawyers to new federal anti-money laundering (AML), combating the financing of terrorism (CFT), and suspicious activity reporting (SAR) requirements under the Bank Secrecy Act, the bill would undermine the attorney-client privilege, the confidential client-lawyer relationship and traditional state court regulation of lawyers,” Robinson wrote.

He also pointed out that a limited attorney exemption in the bill is inadequate and would harm clients. Section 4(b)(3) would exempt attorneys and law firms from the definition of “formation agent” for AML and CFT purposes, but only when they agree to use paid formation agents operating in the United States to form corporations or LLCs for their clients. As a result, this would require lawyers to outsource an important practice of law activity to non-lawyers, which may cause the lawyers to violate their ethical duties by aiding non-lawyers in the unauthorized practice of law. In addition, regardless of whether lawyers are exempt from the AML and CFT requirements of Section 4, they would still be deemed to be formation agents under Section 3 of the bill and still subject to the costly and burdensome beneficial ownership reporting requirements in that section.

Robinson said that the association and a number of specialty bar associations, in an effort to fight money laundering and terrorist financing in ways that minimize the impact on the client-lawyer relationship, have developed and are promoting the “Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing.” The Voluntary Guidance, he said, allows U.S. lawyers to combat money laundering and terrorist financing by taking prudent, proportional risk-based steps tailored to the individual situation rather than adhering to a burdensome and rigid one-size-fits-all approach.

He also noted the ABA’s efforts to engage with the Financial Action Task Force on Money Laundering (FATF), an intergovernmental body working to update and refine the existing international anti-money laundering and counter terrorist financing standards. Most recently, the ABA filed its fourth comment letter encouraging the FATF to preserve the risk-based approach of the existing standards.


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