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February 28, 2018

Anti-money laundering bill raises concerns over burdensome regulations and impact on attorney-client privilege

ABA President Hilarie Bass expressed concerns to the Senate Judiciary Committee this month about key provisions in legislation that, while intended to fight money laundering, would undermine the attorney-client privilege and impose burdensome and intrusive regulations on many small businesses, their lawyers, and the states.

In a Feb. 1 letter for the record of a Feb. 6 Senate Judiciary Committee hearing on “Beneficial Ownership: Fighting Illicit International Financing Networks Through Transparency,” Bass expressed the ABA’s opposition to S. 1454, which was introduced by Sen. Sheldon Whitehouse (D-R.I.). Bass also emphasized that there are other more effective actions that the ABA and others are taking to fight money laundering in ways that avoid the negative consequences of the legislation.

Under the bill, known as the True Incorporation Transparency for Law Enforcement (TITLE) Act, law firms that help clients form small corporations or limited liability companies (LLCs) would be considered “formation agents” and thus regulated as “financial institutions” under the Bank Secrecy Act. As a result, the law firms would be subject to the strict anti-money laundering (AML) and suspicious activity reporting (SAR) requirements of the act and would be required to submit confidential client information to the government, except when they use “paid formation agents.” However, this limited exemption is flawed, Bass 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.

“Such aggressive reporting requirements may be appropriate for banks or certain other financial institutions, but requiring lawyers to report confidential client information to the government under penalty of harsh civil and criminal sanctions is plainly inconsistent with the ethical duties and obligations established by the state supreme courts that license, regulate, and discipline lawyers,” Bass wrote.

Other provisions in the bill, she explained, 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 small business clients to create new companies would be deemed to be “formation agents” and subject to the reporting requirements, despite the partial lawyer exemption contained in another part of the legislation.

Bass emphasized that the beneficial ownership reporting requirements are unnecessary because the Internal Revenue Service and financial institutions already collect − or will soon be collecting − useful entity-related information needed to fight money laundering and terrorist financing and that information is currently available to law enforcement. 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” to help lawyers fight these illicit activities while still complying with their existing court-imposed ethical duties and other legal obligations. The ABA, the International Bar Association and the Council of Bars and Law Societies of Europe also jointly published the “Lawyer’s Guide to Detecting and Preventing Money Laundering,” which provides practical tips to assist lawyers around the world.

In addition to submitting the letter for the Senate Judiciary Committee hearing, Bass submitted a separate letter to the House Financial Services Committee last November opposing a similar House draft bill that was the subject of a hearing held by the committee. S. 1454 and the House bill are updated versions of legislation that was introduced during each of the past several Congresses.

During the Senate hearing, Brian O’Shea, testifying on behalf of the U.S. Chamber of Commerce, echoed many of the ABA’s concerns about the legislation. He said the current version of S. 1454 “does not include any fundamental changes that mitigate our serious longstanding concerns over this vast expansion of government authority that would add unnecessary costs and burden to small and medium-sized businesses.” He concluded that the legislation would have “far more harmful consequences for the ability of small businesses to provide job creation and economic growth than it would on illicit actors seeking to us harm.”

In addition to the ABA and the U.S. Chamber, other groups opposing the legislation include the National Association of Criminal Defense Lawyers, National Association of Secretaries of State, National Federation of Independent Business, National Association of Manufacturers, and The Real Estate Roundtable.

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