October 01, 2014

ABA urges Treasury Department to clarify beneficial ownership disclosure rule to protect client confidentiality

The ABA urged the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) last month to add additional clarifying language to a proposed rule in order to protect the confidentiality of law firm clients.

The proposed rule − designed to combat money laundering, terrorist financing and other illicit financial activity by clarifying and strengthening customer due diligence requirements for banks and other financial institutions − includes a new regulatory requirement to identify the beneficial owners of legal entity customers opening new accounts. The term “beneficial owner” is defined in the proposal as each individual who, directly or indirectly, owns 25 percent or more of the equity interests of a legal entity customer and an individual with significant responsibility to control, manage or direct the entity.

In an Oct. 3 comment letter to FinCEN, Kevin L. Shepherd, chair of the ABA Task Force on Gatekeeper Regulation and the Profession, expressed ABA support for portions of the proposed rule that establish only limited disclosure requirements for “intermediated accounts,” which are those accounts that bank customers open and maintain for the benefit of their own underlying clients. He urged FinCEN to clarify in the final rule that accounts established by law firms or lawyers on behalf of their clients would be deemed intermediated accounts and that, when such new accounts are opened, disclosure of clients’ identities and beneficial ownership would not be required.

According to the ABA comments, lawyers and law firms should only be required to disclose their own beneficial ownership information when they establish new bank accounts on behalf of clients, not confidential information about their clients’ identities or beneficial ownership.

“In our view,” Shepherd said, “the considerable time, effort and expense that would be required for lawyers and law firms to collect and report beneficial ownership information for the large percentage of their clients for whom they establish trust accounts is excessive and clearly disproportionate to any marginal…benefits that the information might be expected to provide to FinCEN and other federal agencies.”

Shepherd also warned that requiring lawyers and law firms that establish client trust accounts to disclose their clients’ identities and beneficial ownership information would be inconsistent with Rule 1.6 of the ABA Model Rules of Professional Conduct dealing with “Confidentiality of Information” and with the many binding state rules of professional conduct that loosely track the ABA model rule. Rule 1.6 states that, except for certain narrow exceptions, “a lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent….”

“The risk that the client’s identity − and other confidential beneficial ownership information about the client − could be divulged by the lawyer or law firm could discourage a client from retaining a lawyer or law firm and entrusting funds with the lawyer or law firm, thereby substantially interfering with a client’s fundamental right to counsel,” Shepherd emphasized.

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