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May 01, 2016

FinCEN final customer due diligence rule includes language to protect confidentiality of law firm clients

ABA helps to secure clarification in final rule

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a final rule May 11 that includes key language proposed by the ABA that will protect the confidentiality of law firm clients when new accounts are established at financial institutions on behalf of those clients.

The final rule – designed to combat money laundering, terrorist financing and other illicit financial activity by clarifying and strengthening customer due diligence (CDD) requirements for banks and other financial institutions – requires covered institutions to disclose the beneficial owners of entities opening new accounts. The term “beneficial owner” is defined in the rule as (1) each individual, if any, who directly or indirectly owns 25 percent or more of the equity interests of a legal entity customer and (2) a single individual with significant responsibility to control, manage or direct the entity.

The final language of the rule clarifies that when law firms open escrow and client trust accounts on behalf of their clients, those accounts will be deemed to be “intermediated accounts,” and the law firms will only have to disclose their own beneficial ownership, not the identity or beneficial ownership of their clients for whom the accounts were established.

The new language was included in the final rule in response to two separate ABA comment letters sent in May 2012 and October 2014 by Kevin L. Shepherd, then Chair of the ABA Task Force on Gatekeeper Regulation and the Profession. In the 2014 comments, Shepherd noted that under ABA Model Rule of Professional Conduct 1.15 and the similar binding ethics rules adopted by every state court system, lawyers are required to establish client trust accounts for many of their clients, and the lawyers have a professional and fiduciary obligation to avoid comingling their clients’ money with their own. Given the prevalence of these client trust accounts established by law firms, Shepherd explained, “…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 have been inconsistent with ABA Model Rule 1.6 dealing with “Confidentiality of Information” and with the many binding state rules of professional conduct that loosely track that 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 range of client information that lawyers are not permitted to disclose under Rule 1.6 without client consent is broader than that covered by the attorney-client privilege and includes many categories of non-privileged, but confidential, information related to the representation, including the identity of the client.

“The risk that the client’s identity − and other confidential beneficial ownership information about the clients − 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.

In the final rule, FinCEN agreed with the ABA, recognizing both the lawyers’ professional obligation to maintain client confidentiality under state law and codes of professional conduct, as well as the significant operational challenges facing lawyers and law firms in collecting the beneficial ownership information for escrow accounts. The agency also noted that state bar associations impose extensive recordkeeping requirements upon attorneys with respect to such accounts, generally including, among other things: records tracking each deposit and withdrawal, including the source of funds, recipient of funds, and purpose of payments; copies of statements to clients or other persons showing disbursements to them or on their behalf; and bank statements and deposit receipts.

For these reasons, FinCEN concluded that for the purposes of the final CDD rule, attorney escrow and client trust accounts will be treated like other intermediated accounts, and financial institutions should treat the intermediary law firm as its customer, not the law firm’s clients. As a result, financial institutions need only collect beneficial ownership information regarding the law firm establishing the new intermediated account, not the identity or beneficial ownership information of the law firm’s clients for whose benefit the accounts are established or maintained.

The CDD rule is one of several steps several steps taken this month by the Obama administration to increase transparency and disclosure requirements for combating money laundering, corruption and tax evasion.

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