GPSolo Magazine - March 2005
International Regulation Of The Legal Profession: An Impending Possibility?
Revised anti-money-laundering recommendations issued by the Financial Action Task Force (FATF) have significant ethical implications for the legal profession. The FATF is an intergovernmental policy-making organization that focuses on the development and promotion of national and international policies to fight money laundering. Pursuant to this mission, the FATF issues and periodically revises its recommendations.
The recommendations themselves have no domestic legal effect. Although they originally targeted financial institutions, in recent years, through what has become known as the Gatekeeper Initiative, the international fight against money laundering has been expanded to include more direct regulation of lawyers and other professionals who are viewed as being in a position, vis-à-vis the clients they serve, to detect potential money laundering transactions.
This article summarizes the recommendations and identifies possible ramifications for lawyers in the United States.
Due diligence and record keeping. What principal components of the FATF Recommendations would apply to lawyers? Among the provisions is an extension of the same customer due diligence and record-keeping requirements governing financial institutions to “lawyers, notaries, other independent legal professionals, and accountants when they prepare for or carry out transactions for their client” relating to certain specified activities. These activities are: (1) buying or selling real estate; (2) managing client money, securities, or other assets; (3) managing bank, savings, or securities accounts; (4) organizing contributions for the creation, operation, or management of companies; and (5) creating, operating, or managing legal persons or arrangements, and buying and selling business entities.
The due diligence provisions would require that lawyers verify identities of the parties and beneficial owners and the business purpose of the transaction. Continuing due diligence on the source of the subject funds may also be required. For high-risk transactions, such as those involving politically exposed persons, lawyers would be required to perform enhanced due diligence.
Lawyers would also be required to maintain “all necessary records” regarding the specified transaction, including information obtained through the due diligence, for at least five years after the client relationship ends. Where a “complex, unusually large transaction” lacks an apparent economic or visible lawful purpose, lawyers should investigate the background and purpose of the transaction, memorialize their findings, and make this writing available to authorities upon appropriate authorization and subject to any legal privilege that may apply.
Suspicious transaction reporting (STR). The more controversial and ethically problematic aspect of the recommendations is the requirement that lawyers file reports, in certain circumstances, with government enforcement officials or SROs (self-regulatory organizations) concerning their clients. Under the recommendations, lawyers must report “suspicious transactions” to government authorities or SROs when the lawyer is engaging in a “financial transaction” on behalf of or for clients in any of the five areas described above in connection with due diligence requirements. However, it does not appear that contemplated financial transactions would trigger the STR requirements. Therefore, if an attorney declines to assist a client with a “financial transaction,” the STR requirement may not apply.
Whether a transaction is “suspicious” would be judged on an objective standard, the pertinent assessment being whether a lawyer “suspects or has reasonable grounds to suspect” money laundering. A suspicious transaction is one that appears to involve the proceeds of criminal activity or be related to terrorist financing, or one that has no apparent economic or visible lawful purpose.
The recommendations contain an exception to the suspicious transaction reporting obligation if the information giving rise to the “suspicion” is “obtained in circumstances where [laywers] are subject to professional secrecy or legal professional privilege.” It is not clear whether the term “professional secrecy” corresponds to “confidential communications,” and there is concern that the exemption may not fully protect the traditional sanctity of the attorney-client relationship and ethical rules requiring attorneys to maintain the confidentiality of client information.
An especially worrisome aspect of the recommendations is the “no tipping off” rule, which would prevent a lawyer from informing a client that a suspicious transaction report has been filed. While an Interpretative Note to the Recommendations makes it clear that this rule does not encompass lawyers’ efforts to “dissuade a client from engaging in illegal activity,” the rule would seem to include circumstances in which the client is apparently not contemplating illegal activity but is nevertheless engaged in suspicious conduct. In addition, permitting dissuasion while forbidding tipping off creates an ethical line that could be difficult to navigate. Finally, there is no indication in the recommendations as to how withdrawal from a representation, which may be ethically required, would be accommodated in the context of the “tipping off” rule. Obviously, it would be inconsistent with well-established ethical rules to prevent or inhibit lawyers from withdrawing from a representation through an aggressive interpretation of the “tipping off” rule.
Under the recommendations, lawyers would be protected from criminal and civil liability where the reporting requirement causes them to breach a contractual, legislative, regulatory, or administrative restriction regarding disclosure. It is unclear whether this “safe haven” extends to violations of ethical rules, so lawyers could be at risk if they withdraw from representing clients for whom they have filed an STR. Moreover, it is unclear whether the recommendations, if implemented, would protect lawyers from malpractice, breach of contract, or consequential damages if a lawyer terminates a client relationship due to an STR concern.
One final note is that pursuant to the Interpretive Note to Recommendation 16, jurisdictions may institute a system whereby STRs would be submitted to a bar association or other legal SRO, as long as that organization cooperates with the country’s financial intelligence unit overseeing anti-money-laundering reporting. This note requires “appropriate forms of cooperation” but does not clarify what such cooperation would entail.
The ABA Task Force on Gatekeeper Regulation and the Profession, which includes representatives from the Section of International Law, expressed concerns to the FATF that imposing on lawyers requirements similar to those on financial institutions would be unreasonably and unnecessarily burdensome, especially for small firms and sole practitioners. In addition, the ABA has urged that any anti-money-laundering requirement focus on lawyer activities that involve the actual transferring, holding, or moving of money for the client to avoid infringing on fundamental attributes of the attorney-client relationship.
In February 2003 the ABA House of Delegates adopted Resolution 104, regarding the attorney-client relationship and confidentiality in the context of U.S. anti-money-laundering enforcement objectives. This resolution opposes any law or regulation, implemented for anti-money-laundering or anti-terrorist-financing purposes, that would compel lawyers to disclose client confidential information to law enforcement authorities through a suspicious transaction reporting requirement, or would otherwise compromise the independence of the bar or attorney-client relationship. At the same time, the resolution recognizes the legitimate interests of the government in preventing money laundering and terrorist financing and acknowledges the importance of continued education of the profession regarding these crimes. Moreover, the resolution commits the bar to reviewing the ethics rules regarding permissive disclosure of confidential information to determine if further modifications would be appropriate to address law enforcement concerns. (In August 2003 the ABA House of Delegates approved a resolution that amended Model Rule 1.6 to allow for greater permissive disclosure, which could help address concerns with money-laundering activities.)
|For More Information about the Section of International Law|
- This article is an abridged and edited version of one that originally appeared on page 6 of International Law News, Spring 2004 (33:2).
- For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221 or go to www.ababooks.org.
- Website: www.abanet.org/intlaw/.
- Periodicals: The International Lawyer, quarterly journal; International Law News , quarterly.
- Books and Other Recent Publications: Careers in International Law, 2d ed.; Negotiating and Structuring International Commercial Transactions, 2d ed.; ABA Guide to International Business Negotiations, 2d ed.; Joint Ventures in the International Arena; ABA Guide to Foreign Law Firms, 3d ed.; International Lawyer’s Deskbook, 2d ed.; International Trademarks and Copyrights: Enforcement and Management, International Practitioner’s Deskbook Series.