June 01, 2016

ABA president conveys association efforts to combat money laundering

ABA President Paulette Brown expressed the association’s concerns last month over proposed legislation that would subject many lawyers to the anti-money laundering (AML) and suspicious activity reporting (SAR) requirements of the Bank Secrecy Act and thus undermine the attorney-client privilege, the confidential lawyer-client relationship, and state court regulation of lawyers.

Brown also outlined the many positive steps the ABA and the legal profession are taking to fight money laundering in ways that avoid these negative consequences.

“The ABA has for years worked diligently with the legal community, federal and international law enforcement authorities, and states to advance reforms to combat money laundering and terrorist financing,” Brown wrote in a letter for the record of a May 24 hearing convened by the House Financial Services Committee’s Task Force to Investigate Terrorism Financing. She emphasized that the ABA supports reasonable and necessary domestic and international efforts to combat these illicit activities and commended the  sponsors of pending legislation, H.R. 4450 and S. 2489, for their efforts.

She said, however, that the ABA opposes the legislation, known as the Incorporation Transparency and Law Enforcement Assistance Act, as “unjustified” and “counterproductive.”

Brown explained that under the legislation, law firms that help clients form corporations of limited liability companies (LLCs) would be considered “formation agents” and hence “financial institutions” under the Bank Secrecy Act. As a result, these law firms would be subject to the strict AML and SAR requirements of the act except when they use “paid formation agents.” However, this limited exemption is flawed, she said, because it requires lawyers to outsource important practice-of-law activities to non-lawyers who are often not legally authorized to perform these legal services.

Other provisions would impose burdensome, costly and unworkable new regulatory burdens on legitimate businesses and states by requiring all states to obtain beneficial ownership information about corporations and LLCs from those creating these entities, keep the information current, and make it available to law enforcement authorities. Under the provisions, many lawyers helping these clients would be deemed to be “formation agents” and subject to the reporting requirements, despite the partial lawyer exemption contained in the legislation.

Collecting beneficial ownership information would require state regulators to adopt significant and expensive hardware and software changes, and would impose onerous burdens on state authorities, legitimate businesses, and the businesses’ lawyers. 

“The burdensome and intrusive new reporting requirements in H.R. 4450 are unnecessary because in recent years the federal government, financial institutions, and the legal profession have developed other tools and taken other steps that are far more effective in fighting money laundering and terrorist financing that the bill’s mandates.” Brown said.

She highlighted the “Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing” (Voluntary Guidance), which was developed and adopted by the ABA in August 2010. Since then, the ABA has worked diligently to educate lawyers, judges, state and local bars, and the public about the problem of money laundering and the benefits of following the Voluntary Guidance, which has been endorsed by the Conference of Chief Justices.

In addition, the ABA, the International Bar Association, and the Council of Bars and Law Societies of Europe jointly published the “Lawyer’s Guide to Detecting and Preventing Money Laundering” in 2014, which provides practical tips to help lawyers around the world avoid inadvertently participating in money laundering activities.

Brown also pointed to other data collection rules adopted by the Internal Revenue Service in 2010 and by the Treasury Department’s Financial Crimes Enforcement Network in 2016 that make the proposed legislation unnecessary.

Brown emphasized that the ABA “will continue to support efforts by federal and international law enforcement agencies and the states to fight money laundering and terrorist financing in ways that minimize the impact on the lawyer-client relationship, state regulation of the business formation process and legal profession, and the U.S. economy.”

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