Criminal Justice Section
Criminal Justice Magazine
Volume 18 Issue 1
Seeking Middle Ground Between Client and Government
By Bruce Zagaris
Bruce Zagaris , a member of the Criminal Justice Section, is a partner in Berliner, Corcoran & Rowe, L.L.P., in Washington, D.C. He specializes in international criminal law, is founder and editor-in-chief of the International Enforcement Law Reporter , and is chair of the Criminal Law Committee of the International Bar Association. He frequently serves as an expert witness and consultant on money-laundering and white collar crime matters.
Editor’s Note: This article is adapted and updated from material previously published as "The Gatekeepers Initiative: An Emerging Challenge for International Financial Advisers" in Tax Analysts World Tax Daily, Tax Notes International, and Financial Crimes Review; and as "Money Laundering" in International Enforcement Law Reporter.
An international effort called the "Gatekeepers Initiative" is under way to increase cooperation among countries in disrupting and reducing illegal money-laundering activities. Much of the emphasis of this anti-money-laundering initiative is to deprive criminals—especially transnational criminals and organized crime—of the fruits of their crimes and the means of committing further crime. Another goal is to allocate the seized proceeds to governments and law enforcement. As expected, governmental agencies from nations around the globe are being charged with leading this cooperative effort. Nonetheless, to be successful, many think that private sector professionals, such as attorneys, accountants, and other financial advisers who deal with transactions involving the movement of moneys, must be significantly involved in efforts to identify, report, and prevent money laundering or the initiative will never be truly successful.
Yet this reliance on private sector lawyers and accountants raises serious questions. The confidentiality that international clients have come to expect from private sector financial advisers has already been eroded to some extent by due diligence requirements as instituted in the European Union (EU) member states under the recent revision of Directive 91/308/EEC, discussed below. In the United Kingdom and the Cayman Islands, so-called gatekeepers are now required to operate under due diligence requirements like those imposed upon financial institutions. For example, these gatekeepers are expected to check the identity of their clients, and thus have a general and sometimes a very specific sense of their business dealings and the source of their funds; identify and report suspicious transactions that they may encounter; and refrain from tipping off persons engaging in suspicious transactions—e.g., their clients—that their actions have been reported. The possible erosion of client confidentiality that is inherent in these reporting requirements is further illustrated and threatened by the provisions of far-reaching enforcement cooperation agreements elsewhere in the world, for example, mutual legal assistance treaties (MLATS) in criminal matters and tax information exchange provisions.
A related trend has been for law enforcement and regulatory authorities to combine international tax and counter-money-laundering enforcement by (1) ensuring that obligations to report transactions related to suspected criminal offenses apply, even when these transactions are believed to involve tax offenses, including foreign tax offenses; and (2) permitting money-laundering authorities to forward information to their tax authorities to support the investigation of tax-related crimes, and to communicate this information to other jurisdictions so it can be used by their tax authorities. ( See, e.g., Financial Action Task Force, 1998–99 Survey of Trends and Techniques.)
This article examines the emergence of the Gatekeeper’s Initiative and its potential for affecting the ways in which attorneys, accountants, and other professionals advise clients about international transactions. Even though the initiative is directed at transactional lawyers, it indicates that the legal environment surrounding the conduct of criminal defense lawyers is becoming more restrictive and foreboding, as illustrated by the recent convictions of criminal defense lawyers who were found to have crossed the line between strict defense work and helping clients with improper transactions. It would be wise to consider the cases of United States v. Michael H. Tarkoff, which affirmed the conviction of a criminal defense lawyer who helped the client criminal defendant in a Medicare fraud move his money outside the United States shortly after discussing a plea, and United States v. Abbell et al., which affirmed denial of judgment for two lawyer defendants on a money-laundering conspiracy, reversed the trial court’s judgment of acquittal for both lawyers on RICO conspiracy charges, and affirmed denial of the defendants’ requests for a new trial on charges arising out of representation of Cali cartel figures. (See discussion below.) The Gatekeepers Initiative alters the parameters of legal and ethical rules for all lawyers and adds pressure from international organizations to the penalization of crossing the boundaries of acceptable lawyer conduct.
The origin of the Gatekeepers Initiative
The Gatekeepers Initiative emerged from the Ministerial Conference of the G-8 Countries on Combating Transnational Organized Crime, held October 19–20, 1999, in Moscow. At the end of the conference, a final communiqué was issued:
We have agreed to bring our anti-money-laundering regimes into closer alignment and to consider putting certain responsibilities, as appropriate, on those professionals, such as lawyers, accountants, company formation agents, auditors and other financial intermediaries who can either block or facilitate the entry of organized crime money into the financial system.
Bold moves by European Union. Since that time, the principal impetus for the Gatekeepers Initiative has come from the EU. For approximately the last three years, the EU has been trying to revise its 1991 Anti-Money-Laundering Directive. An important aspect of the EU directive is that it was intended to have extraterritorial effect. For instance, article 1 of the directive defined "financial institution" and "credit institution" to include EU branches of financial and credit institutions whose head offices are outside the EU. The directive also explained the need to focus on the interaction of national prevention and enforcement with international cooperation. In addition to requiring EU member states to criminalize money laundering, it required them to undertake broad preventive steps, such as internal control procedures, "know your customer" procedures, employee training, identification and reporting of suspicious activities, and auditing of due diligence programs.
Action by EU institutions. On October 31, 2001, the European Union published its directive revising its anti-money-laundering directive, meaning that it henceforth was in effect. ( See Directive of the European Parliament and of the Council Amending Council Directive 91/308/EEC on Prevention of the Use of the Financial System for the Purpose of Money Laundering, Joint Text Approved by the Conciliation Committee Provided for in Article 251(4) of the EEC Treaty, 1999/0152(COD) C5-0496/2001, PE-CONS 3654/01, Brussels, Oct. 31, 2001. ) This directive now imposes anti-money-laundering due diligence obligations on lawyers, accountants, and other professional investment advisers. Previously, the EU anti-money-laundering directive had applied only to credit and financial institutions.
As a result of the directive, when attorneys, notaries, auditors, tax advisers, and accountants advise clients on managing financial accounts, creating companies or trusts, or executing financial transactions, these investment gatekeepers will be subject to the same requirements as banks and other credit institutions. In particular, attorneys, accountants, auditors, real estate agents, and other independent legal professionals are affected when, on a client’s behalf, they participate in planning or undertaking real estate or business transactions; managing money, securities, or other assets; opening and operating savings or securities accounts; organizing contributions necessary for the creation, operation, or management of companies; and creating and operating trusts, companies, or similar structures.
Article 3(1) of the revised directive requires that institutions and individuals identify their customers by means of supporting evidence when entering into business relationships. Attorneys, auditors, and others must take reasonable measures to obtain information as to the real identity of the persons for whom they are working, or for whom the people they are servicing work. If they are establishing business relations or entering into a transaction with a customer who has not been physically present for identification purposes—that is, they are involved in non-face-to-face operations such as Internet transactions—they must obtain additional documentary evidence or supplementary measures to verify or certify the documents provided by the customer.
Article 6(1) requires that institutions and persons subject to the directive inform authorities, by their own initiative, of facts that might indicate money laundering and supply authorities, at their request, with all information demanded in accordance with procedures established by appropriate legislation.
EU member states can decide whether to permit EU-authorized exemptions in national law. They will be able to nominate bar associations, accounting associations, "or other self-regulatory bodies for independent professionals," to help address the issues, but they must determine how those
nongovernmental bodies will cooperate with regulatory
It is important to note, however, that the EU member states are not required to apply the obligations to report suspicious transactions to independent legal and financial professionals with regard to information they receive from or obtain on one of their clients in the course of ascertaining a legal position for their clients or defending or representing their clients in judicial proceedings.
Further, article 9 of the revised directive confirms that disclosure on good faith to a financial intelligence unit by an institution or person will not constitute a breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory, or administrative provision. Good faith disclosures will not involve the institution or individual in liability of any kind. Whether the United States, if it adopts a gatekeeper initiative by applying its money-laundering law, will apply a "safe harbor" for civil matters, as it presently does, or civil and criminal matters, is an open issue. Moreover, a dicey issue occurs when a lawyer makes a suspicious activity report (SAR) for a client, including a long-standing client, which is discussed below.
The extension of reporting requirements to professional advisers in EU member states means that their counterparts in non-EU countries, not otherwise directly affected by the directive’s extraterritorial application provisions, will have a business advantage because they will not be bound by the due diligence rules. This means that investors and clients who do not want their advisers bound by such rules, either for legitimate or illegitimate reasons, are likely to use professionals in non-EU countries. Thus the newly revised directive necessarily exerts pressure on non-EU member states that have not broadened their legislation to cover nonfinance institutional professionals.
The success of the proposed new directive will depend partly on the implementation of due diligence by professional bodies, cooperation between these professional bodies and regulatory authorities, the education of professionals, and self-compliance efforts by professional bodies.
Action by nongovernmental organizations. The action to revise the 1991 anti-money-laundering directive has sparked debate among professional organizations representing attorneys, accountants, auditors, and other affected professionals.
On July 27, 1999, in Brussels, Belgium, the Council of the Bars and Law Societies of the European Community, the Conference of Notaries of the European Union, the European Federation of Accountants and Auditors for Small and Medium-Sized Enterprises, and the Federation of European Accountants joined together to sign a charter combating organized crime. This charter contains the ethical principles to which these professions must now adhere. These include checking the identities of clients, refusing to accept bribes, and refraining from otherwise contributing to illegal activities. The charter instructs each of the participant organizations to prepare or improve mechanisms to assist their members and to enact supervisory mechanisms and disciplinary sanctions. In addition, the professional organizations promised to take steps to raise awareness regarding money-laundering issues, an effort the European community is considering supporting.
A representative of the Council of the Bars and Law Societies noted that "the charter does not mark the beginning of our commitment to the fight against money laundering, but makes it more visible." Although the charter sets forth the major principles, and thus is a considerable step forward, the various signatory professional organizations must revisit their own codes of conduct to implement these new general principles.
The European community initially articulated the basic idea of the charter, and the United Nations Office for Drug Control and Crime Prevention endorsed those efforts. In addition to the charter, the Federation of European Accountants is now working on revising its rules as a result of anti-money-laundering initiatives.
As a result of the G-8 summit in Moscow and other initiatives to prevent and combat transnational crime, the U.S. Treasury and Justice Departments, in their National Money Laundering Strategy for 2000 and 2001, outlined an initiative to develop a partnership with associations of legal and financial professionals to ensure that money launderers are denied access to the financial system. In particular, attorneys, accountants, and auditors were designated to serve as gatekeepers to the domestic and international financial systems. The initiative is designed to ensure that these gatekeepers are not unwitting facilitators of money-laundering schemes.
Two actions are in play under the U.S. strategy. First, a study group has been established consisting of the Treasury and Justice Departments, the Financial Crimes Enforcement Network, the Securities and Exchange Commission, and federal bank regulators to examine how best to use accountants and auditors to detect and deter money laundering. Second, the chief of the asset forfeiture and money-laundering section of the Department of Justice is reviewing the professional responsibilities of attorneys and accountants with regard to money laundering and will make recommendations as needed. ( See Dep’t of Treasury & Dep’t of Justice, The National Money Laundering Strategy for 2000, at 44–46 (Mar. 2000).)
Regarding the review of professional responsibilities of gatekeepers, the U.S. strategy requires a Money Laundering Steering Committee to make recommendations for a national course to follow. Recommendations are not yet forthcoming as of publication of this article. The U.S. strategy seems to include three options: (1) increased education, (2) applying new rules with respect to professional responsibility, and (3) the application of SARs on the federal and/or state levels for gatekeepers.
Members of the U.S. government have unofficially expressed disappointment that the American Bar Association (ABA) has not already acted to amend its ethical regulations to comport with the changing international standards. The failure of the bar is likely to be used to justify new legislation applying due diligence requirements to bar members. However, the ABA and bars in general are beginning to identify the issues that are involved and to discuss them more urgently.
The Financial Action Task Force has meetings scheduled in February and June of 2002, and it is likely that the United States will be placed under increased pressure to enact legislation similar to that passed by the Europeans and the Canadians. Some expect the Bush administration to announce its new initiatives in this arena in spring 2002.
While we are considering U.S. policy and the directions it might take, it behooves us to also look at changing case law within our courts. The Eleventh Circuit Court’s recent decision in United States v. Abbell (No. 99–12058, 11th Cir. Ct., Nov. 7, 2001) shows how defense counsel can be deemed guilty of money laundering. The court found that, despite the wide variety of "legitimate" businesses of the defendants, evidence was presented that supported a finding that illegal and legal moneys were commingled and hence tainted all funds that originated from the clients. This case and United States v. Michael H. Tarkoff (No. 99–13223, 11th Cir. Ct., Feb. 20, 2001), in which a defense counsel was convicted for helping a criminal defendant move tainted funds to avoid forfeiture in a Medicare fraud prosecution, show an increasing trend of prosecutions and convictions of defense counsel for money laundering. Considered together with the principles and trends of the Gatekeepers Initiative, they require defense counsel to beware of the peril of suffering criminal consequences.
Due diligence implications for U.S. professionals
Many implications may flow from subjecting U.S. attorneys, accountants, auditors, and other independent professionals to due diligence rules. Clearly, the implications mentioned here do not yet apply to attorneys because no nation has proactively applied the Gatekeepers Initiative. Although the United Kingdom has a law requiring professionals to report suspicious transactions and occasionally warns of enforcement actions against lawyers who do not obey the law, these actions have been rare. In early 2001 the British Fraud Office did charge two senior solicitors with respect to alleged money-laundering activities and that office was investigating four others at that time. ( See, e.g., UK Starts Criminal Laundering Investigations against Lawyers for Top Law Firms, 17 Int’l Enforcement L. Rep. 223–24 (June 2001).) For the purposes of this discussion, we must assume that the United States, if it extends its anti-money-laundering rules to professionals, will continue to proactively implement and enforce them.
One item to consider is that in other lines of business to which due diligence applies—for example, banks, money-service businesses, savings and loans, credit institutions, and broker-dealers—the business must hire a compliance officer and develop mechanisms to prepare a due diligence plan and help implement it, including developing training and internal and external audit procedures. The size of the business is not a factor for that requirement.
Another major issue likely to receive detailed attention involves the proper steps an attorney or law firm would have to take when it reports a suspicious transaction. Currently, anti-money-laundering law would preclude the attorney or the firm from disclosing the report to the client because that would be "tipping off" a criminal offense. The more difficult issues are centered on what a law firm does in regard to an existing client after it files a SAR. Most likely, firms will look to what banks and financial institutions do, as they also must grapple with similar problems. Sometimes these financial institutions seek guidance from regulatory or law enforcement authorities. However, in most cases, they are not able to obtain any reliable information initially. Continuing to do business with a client against whom a law firm has filed a SAR is precarious. On the other hand, terminating a relationship is sensitive, especially if the report does not result in a criminal investigation or prosecution. Terminating a relationship in the middle of an assignment also may lead to liability due to breach of contract, malpractice, breach of ethical obligations (such as the obligation of confidentiality or the obligation to zealously represent the client), or commercial losses to the law firm due to loss of work and overall loss of clients.
Another issue is whether filing a SAR would lead to criminal liability on the part of the law firm itself. For instance, a SAR may trigger an investigation into prior conduct between the law firm and the client, leading a regulatory or law enforcement authority to believe that the law firm should have known certain facts and acted earlier—or, worse, that it was a coconspirator. In addition to the SAR violating the right to client confidentiality, it may violate the client’s right to attorney-client privilege and the right against self-incrimination. In addition, in the event that law enforcement authorities prosecute the law firm, the attorney would have waived his or her own right against self-incrimination.
In the international context, SAR information has gained increased significance because it is being shared by some countries. The EU has a policy on exchanging SAR. ( See Council Decision of Oct. 17, 2000, Concerning Arrangements for Cooperation Between Financial Intelligence Units of the Member States in Respect of Exchanging Information (2000.642.JHA), Off. J. Eur. Comm., 24 Oct. 2000 (L 2714).) The United States is also trying, as a matter of policy, to exchange SAR information. One fundamental obstacle is that the United States treats SAR as intelligence information that can be kept indefinitely, while the EU policy is that, unless used for prosecution purposes, this information must be destroyed after a certain number of years. Just as importantly, the United States and many other countries like informal cooperation devoid of formal rules. The problem with informal cooperation is that the rights of private individuals and entities, whether targets or just third-party stakeholders, are not protected. Recent MLATs in criminal matters that grant the U.S. government compulsory process rights expressly state that they do not create a right for a "private person" to obtain evidence. In these MLATs, the United States has insisted on a provision that states that "[t]his Treaty is intended solely for mutual legal assistance between the Parties. The provisions of this Treaty shall not create any right on the part of any private person to obtain, suppress, or exclude any evidence, or to impede the execution of a request." ( See, e.g., Art. 1(3) of the Treaty Between the United States and the United Kingdom Concerning the Cayman Islands Relating to Mutual Legal Assistance in Criminal Matters, signed July 3, 1986, entered into force March 19, 1990.) The purpose is to prevent MLATs from being used to suppress or exclude evidence or to impede criminal investigations. Hence, if adversely affected persons want to prevent the execution of requests that they believe were made in violation of the treaty, their only recourse under the treaty is to the executive authority of the requested country, not its courts. Similarly, if they want to complain that the requested country violated the terms of the treaty in executing a request, they can complain only to the executive authorities of the respective countries.
Attorney-client privilege is another major area that may well be affected by due diligence rules and the Gatekeepers Initiative. One of the problems is that the privilege varies considerably among countries and among professionals. For example, there are differences between attorney-client privilege and accountant-client privilege. In a global context, a client, whether intending to conduct legitimate or illegitimate activities, will be able to spot and take advantage of the gaps in the law.
To reduce the risks and potential liabilities from any actions by potentially disgruntled clients, law firms are likely to follow the lead of banks and financial institutions, inserting into professional service agreements broad clauses warning potential clients of their obligations under the due diligence rules and seeking waivers of their ethical obligations to ensure privacy, zealously represent the client, and so forth.
The ability to send SARs to bar associations rather than to a regulatory agency does not appear to be a satisfactory answer if you are an attorney or a client. Ultimately, the bar association is faced with the same requirements as the regulatory agency. Decisions must be made about whether to undertake further investigations of a criminal nature quickly or whether to defer action. The decision may result not from the quality of the SAR but from the prioritization of resources in the context of the number of ongoing leads from other sources. Nevertheless, the aforementioned concerns about privacy, liability, and so forth are not eliminated by investing the bar as a middleman. Further, reliance on the bar raises many sensitive issues about the capabilities of bar associations to act as Financial Intelligence Units and the nature of the relationship between the bar association, attorneys, and clients once the bar association assumes the role of intermediary for the regulatory agencies.
Many European attorneys have lamented their inability to follow and participate in the EU’s effort to enact the Gatekeepers Initiative. They believe that in some cases policymakers have failed even to identify many of the issues, let alone resolve them. The moral of the story is for professionals who might be affected to get involved at the start, not before it is too late. In that context, common reactions to the Gatekeepers Initiative are horror and shock on the one hand and utter disbelief on the other. Many professionals do not believe the changes implicit in the Gatekeepers Initiative will ever occur in the United States, even though the U.S. Treasury has mentioned the Gatekeepers Initiative in both of its Money Laundering Strategy Control Reports, the G-8 provided a release about the initiative, and news of the EU revised directive has continued to instruct observers of money-laundering and compliance policy.
For professionals who want to defer the enactment of anti-money-laundering legislation, the best answer is better self-regulation. Education is a start. In addition to educating their own members, professionals should start educating their clients and constituents about the Gatekeepers Initiative and involve them in the policymaking. Professionals will also want to consider and discuss their own rules of ethics with other affected professionals, even though they compete in the context of a multidisciplinary practice environment.
Clearly, the Gatekeepers Initiative presents some fundamental transformations of law and culture for professionals and their clients. Indeed, international anti-money-laundering law has already transformed some aspects of law and culture in other industries. Hence, lawyers, accountants, auditors, real estate brokers, and other independent professionals may be hard pressed to completely exempt themselves from the new frontier of anti-money-laundering enforcement.
The Gatekeepers Initiative presents another wrinkle for tax planning purposes. Increasingly, international organizations are calling for broadening of the anti-money-laundering regime to include fiscal offenses, including foreign fiscal offenses. England has already enacted such laws, much to the dismay of English tax practitioners. And, while current U.S. anti-money-laundering law does not specifically criminalize foreign fiscal crimes, it does criminalize them in effect. For instance, the conviction of the Bank of New York’s Lucy Edwards and Peter Berlin was for wire fraud, namely, for helping Russian nationals evade Russian income tax. The U.S. courts also have enforced money-laundering laws to prosecute persons trying to evade Canadian excise tax on alcohol and cigarettes. Once anti-money-laundering authorities add tax crimes, the ability to swap intelligence by way of SARs will enable law enforcement to jump the tax secrecy hurdles that have restricted tax police.
Indeed, the new millennium brings tax and investment advisers and counsel in complex white collar cases into a new frontier of international financial enforcement, of which the subregimes of tax and anti-money-laundering loom large and the consequences of noncompliance are becoming monumental.