Post by anenro on Aug 20, 2023 15:57:26 GMT 4
American Bar Association Revises Model Rule of Professional Conduct to Combat Money Laundering
By Andrew N. D'Aversa on August 17, 2023
On August 8, 2023, the American Bar Association (“ABA”) House of Delegates voted overwhelmingly (216–102) to pass Revised Resolution 100 (the “Resolution”), which in turn revised ABA Model Rule of Professional Conduct 1.16 and its Comments (the “Rule”) to explicitly recognize a lawyer’s duty to assess the facts and circumstances of a representation at the time the lawyer is engaged and throughout the representation to ensure that the lawyer’s services are not used to “commit or further a crime or fraud.”
The Comments to the Rule clearly illustrate that the ABA is concerned with the use of a lawyer’s services to—wittingly or unwittingly—assist clients in laundering money. The Resolution itself acknowledges this, stating “the impetus for these proposed amendments was lawyers’ unwitting involvement in or failure to pay appropriate attention to signs or warnings of danger . . . relating to a client’s use of a lawyer’s services to facilitate possible money laundering and terrorist financing activities.” And the ABA’s press release echoes this concern, noting the Rule was revised “because of concern that lawyers’ services can be used for money laundering and other criminal and fraudulent activity.”
The Resolution’s Revisions to the Rule
The Resolution addresses these concerns by imposing an obligation on lawyers to inquire into and assess the facts and circumstances of the representation of their client and requiring or permitting—depending upon what is uncovered—the lawyer to withdraw their representation of the client. The Resolution revises the Rule in the following ways:
The Rule now explicitly requires lawyers to “assess the facts and circumstances of each representation to determine whether the lawyer may accept or continue the representation”;
The Rule now explicitly requires lawyers to reject or discontinue the representation if, after advising the client or prospective client that the lawyer cannot perform the services asked, the client “seeks to use or persists in using the lawyer’s services to commit or further a crime or fraud”; and
The Rule now explicitly permits lawyers to reject or discontinue the representation if the “client persists in a course of action involving the lawyer’s services that the lawyer reasonably believes is criminal or fraudulent.” (emphasis added).
The Resolution also revises the Comments to the Rule in the following ways:
Explaining that a lawyer has “an obligation . . . to inquire into and assess the facts and circumstances of the representation before accepting it.”
Explaining that the lawyer has a continuing obligation to inquire if the facts and circumstances of the representation change during the representation, which can include a change in historic client behavior or the addition of a new party or entity.
Explaining that the obligation to inquire is “informed by the risk that the client or prospective client seeks to use or persists in using the lawyer’s services to commit or further a crime or fraud . . . . [which] means that the required level of a lawyer’s inquiry and assessment will vary for each client or prospective client, depending on the nature of the risk posed by each situation.”
The Rule’s Risk-Based Inquiry
As indicated above, the Rule leaves the level of inquiry to be determined on a case-by-case basis dependent upon the risks presented by the representation. The rule of reason now written into the Rule is flexible, depending upon a list of five non-exclusive factors added to the Comments. These five factors provide a rough guide to lawyers on what to inquire upon and how deeply to do so. The factors include:
The identity of the client, including the beneficial owners of the client if it is an entity;
The lawyer’s “experience and familiarity with the client”;
The “nature of the requested legal services”;
The “relevant jurisdictions involved in the representation,” and specifically, “whether a jurisdiction is considered at high risk for money laundering or terrorist financing”; and
The “identities of those depositing into or receiving funds from the lawyer’s client trust account, or any other accounts in which client funds are held.”
In addition to these factors, the Comments point to a number of documents to assist lawyers in “assessing risk” including the Financial Action Task Force’s (“FATF”) Guidance for a Risk-Based Approach for Legal Professionals, the Organization for Economic Cooperation and Development’s (“OECD”) Due Diligence Guidance for Responsible Business Conduct, the U.S. Department of Treasury’s (“Treasury Department”) Specially Designated Nationals and Blocked Persons List, and ABA publications on the topic.
U.S. Efforts to Regulate Lawyers Spurred Passage of the Resolution
At least some members of the ABA HOD believed that making the Rule more explicit was unnecessary. Back in April 2020—as we discussed here—the ABA issued Opinion 491, which provided guidance to lawyers that closely mirrors the newly revised Model Rule 1.16. For some HOD members, what was implicit in former Model Rule 1.16 and explicit in Opinion 491 need not be rehashed again: a lawyer’s ethical duty was clear. The Revised Report appended to the Resolution largely supports a part of that perception, stating that the Resolution does not impose “new obligations.”
The Resolution is part of a larger conversation by U.S. lawmakers and regulators with the legal profession on how gatekeepers can close the so-called gates of the U.S. financial system to would-be money launderers. In July 2022, the US House of Representatives attempted to pass a “scaled back” ENABLERS Act (as we wrote about here) that could have required lawyers to comply with aspects of the Bank Secrecy Act (“BSA”). And the ABA noted that it was successful in persuading Congress to remove the regulation of lawyers in initial versions of the Corporate Transparency Act. Recently, federal prosecutors were successful in securing a guilty plea against a New York attorney accused of money laundering conspiracy in connection with an indicted Russian oligarch and in defending, on appeal to the Court of Appeals for the Fourth Circuit, a money laundering conspiracy conviction won against a Baltimore attorney accused of assisting two drug dealers in laundering funds (as we wrote about here and here, respectively). While prosecutions involving attorneys are rare and U.S. lawmakers and regulators have not imposed additional requirements on lawyers, the ABA has felt public pressure on legal professionals mounting.
Ultimately, however, it appears that the Treasury Department forced the ABA’s hand to pass the Resolution. In a speech to the ABA HOD prior to the vote, Kevin Shepherd, the ABA’s Treasurer and representative to the Treasury Department and the FATF, explained the impetus for passing the Resolution. He stated that a failure to pass the Resolution would:
Federal regulation of the legal profession. If this House does not adopt Resolution 100, Treasury will press Congress to pass the ENABLERS Act. The ENABLERS Act will regulate lawyers as banks, meaning lawyers would have to file suspicious activity reports on their clients, and the lawyers would be forbidden to tell their clients that they have done so . . . . As a wake-up call, Treasury informed me last Friday that the failure of the ABA to adopt Resolution 100 will cause Treasury to explore every means available in its regulatory toolkit to impose anti-money laundering regulations on the legal profession.
As Shepherd put it, the “political reality” was that the ABA HOD either pass the Resolution or the system the ABA has long-supported of state-based, judicial regulation of lawyers would be dismantled by the Treasury Department via regulation or passage of the ENABLERS Act.
Passage of the Resolution preserves—for now—the status quo that lawyers need not report to federal regulators or law enforcement on their clients or engage in client due diligence for every engagement, regardless of potential risk. The new Rule explicitly imposes an ethical duty on lawyers to withdraw from representation when clients wish to use their services to further a crime or fraud and a duty to complete a “risk-based” inquiry commensurate with the particulars of the situation.
It remains an open question whether U.S. lawmakers and regulators see this as only one part of a broader regulatory push. The Paradise Papers, Panama Papers, and Pandora Papers and FinCEN Files have pushed legislators and regulators closer to acting upon further regulation of the legal profession as gatekeepers of the U.S. financial system. Although lawyers are subject to discipline and prosecution, those cases remain rare and may be perceived as insufficient to lawmakers and the Treasury Department—even though they carry disastrous consequences like disbarment or even jail time. It is unclear whether Congress can conceive of legislation (and pass it) or the Treasury Department can write regulations that can control money laundering risk while preserving the careful balance of judicial, state-based regulation of the legal profession and the sanctity of the attorney-client relationship and its corresponding privileges.
By Andrew N. D'Aversa on August 17, 2023
On August 8, 2023, the American Bar Association (“ABA”) House of Delegates voted overwhelmingly (216–102) to pass Revised Resolution 100 (the “Resolution”), which in turn revised ABA Model Rule of Professional Conduct 1.16 and its Comments (the “Rule”) to explicitly recognize a lawyer’s duty to assess the facts and circumstances of a representation at the time the lawyer is engaged and throughout the representation to ensure that the lawyer’s services are not used to “commit or further a crime or fraud.”
The Comments to the Rule clearly illustrate that the ABA is concerned with the use of a lawyer’s services to—wittingly or unwittingly—assist clients in laundering money. The Resolution itself acknowledges this, stating “the impetus for these proposed amendments was lawyers’ unwitting involvement in or failure to pay appropriate attention to signs or warnings of danger . . . relating to a client’s use of a lawyer’s services to facilitate possible money laundering and terrorist financing activities.” And the ABA’s press release echoes this concern, noting the Rule was revised “because of concern that lawyers’ services can be used for money laundering and other criminal and fraudulent activity.”
The Resolution’s Revisions to the Rule
The Resolution addresses these concerns by imposing an obligation on lawyers to inquire into and assess the facts and circumstances of the representation of their client and requiring or permitting—depending upon what is uncovered—the lawyer to withdraw their representation of the client. The Resolution revises the Rule in the following ways:
The Rule now explicitly requires lawyers to “assess the facts and circumstances of each representation to determine whether the lawyer may accept or continue the representation”;
The Rule now explicitly requires lawyers to reject or discontinue the representation if, after advising the client or prospective client that the lawyer cannot perform the services asked, the client “seeks to use or persists in using the lawyer’s services to commit or further a crime or fraud”; and
The Rule now explicitly permits lawyers to reject or discontinue the representation if the “client persists in a course of action involving the lawyer’s services that the lawyer reasonably believes is criminal or fraudulent.” (emphasis added).
The Resolution also revises the Comments to the Rule in the following ways:
Explaining that a lawyer has “an obligation . . . to inquire into and assess the facts and circumstances of the representation before accepting it.”
Explaining that the lawyer has a continuing obligation to inquire if the facts and circumstances of the representation change during the representation, which can include a change in historic client behavior or the addition of a new party or entity.
Explaining that the obligation to inquire is “informed by the risk that the client or prospective client seeks to use or persists in using the lawyer’s services to commit or further a crime or fraud . . . . [which] means that the required level of a lawyer’s inquiry and assessment will vary for each client or prospective client, depending on the nature of the risk posed by each situation.”
The Rule’s Risk-Based Inquiry
As indicated above, the Rule leaves the level of inquiry to be determined on a case-by-case basis dependent upon the risks presented by the representation. The rule of reason now written into the Rule is flexible, depending upon a list of five non-exclusive factors added to the Comments. These five factors provide a rough guide to lawyers on what to inquire upon and how deeply to do so. The factors include:
The identity of the client, including the beneficial owners of the client if it is an entity;
The lawyer’s “experience and familiarity with the client”;
The “nature of the requested legal services”;
The “relevant jurisdictions involved in the representation,” and specifically, “whether a jurisdiction is considered at high risk for money laundering or terrorist financing”; and
The “identities of those depositing into or receiving funds from the lawyer’s client trust account, or any other accounts in which client funds are held.”
In addition to these factors, the Comments point to a number of documents to assist lawyers in “assessing risk” including the Financial Action Task Force’s (“FATF”) Guidance for a Risk-Based Approach for Legal Professionals, the Organization for Economic Cooperation and Development’s (“OECD”) Due Diligence Guidance for Responsible Business Conduct, the U.S. Department of Treasury’s (“Treasury Department”) Specially Designated Nationals and Blocked Persons List, and ABA publications on the topic.
U.S. Efforts to Regulate Lawyers Spurred Passage of the Resolution
At least some members of the ABA HOD believed that making the Rule more explicit was unnecessary. Back in April 2020—as we discussed here—the ABA issued Opinion 491, which provided guidance to lawyers that closely mirrors the newly revised Model Rule 1.16. For some HOD members, what was implicit in former Model Rule 1.16 and explicit in Opinion 491 need not be rehashed again: a lawyer’s ethical duty was clear. The Revised Report appended to the Resolution largely supports a part of that perception, stating that the Resolution does not impose “new obligations.”
The Resolution is part of a larger conversation by U.S. lawmakers and regulators with the legal profession on how gatekeepers can close the so-called gates of the U.S. financial system to would-be money launderers. In July 2022, the US House of Representatives attempted to pass a “scaled back” ENABLERS Act (as we wrote about here) that could have required lawyers to comply with aspects of the Bank Secrecy Act (“BSA”). And the ABA noted that it was successful in persuading Congress to remove the regulation of lawyers in initial versions of the Corporate Transparency Act. Recently, federal prosecutors were successful in securing a guilty plea against a New York attorney accused of money laundering conspiracy in connection with an indicted Russian oligarch and in defending, on appeal to the Court of Appeals for the Fourth Circuit, a money laundering conspiracy conviction won against a Baltimore attorney accused of assisting two drug dealers in laundering funds (as we wrote about here and here, respectively). While prosecutions involving attorneys are rare and U.S. lawmakers and regulators have not imposed additional requirements on lawyers, the ABA has felt public pressure on legal professionals mounting.
Ultimately, however, it appears that the Treasury Department forced the ABA’s hand to pass the Resolution. In a speech to the ABA HOD prior to the vote, Kevin Shepherd, the ABA’s Treasurer and representative to the Treasury Department and the FATF, explained the impetus for passing the Resolution. He stated that a failure to pass the Resolution would:
Federal regulation of the legal profession. If this House does not adopt Resolution 100, Treasury will press Congress to pass the ENABLERS Act. The ENABLERS Act will regulate lawyers as banks, meaning lawyers would have to file suspicious activity reports on their clients, and the lawyers would be forbidden to tell their clients that they have done so . . . . As a wake-up call, Treasury informed me last Friday that the failure of the ABA to adopt Resolution 100 will cause Treasury to explore every means available in its regulatory toolkit to impose anti-money laundering regulations on the legal profession.
As Shepherd put it, the “political reality” was that the ABA HOD either pass the Resolution or the system the ABA has long-supported of state-based, judicial regulation of lawyers would be dismantled by the Treasury Department via regulation or passage of the ENABLERS Act.
Passage of the Resolution preserves—for now—the status quo that lawyers need not report to federal regulators or law enforcement on their clients or engage in client due diligence for every engagement, regardless of potential risk. The new Rule explicitly imposes an ethical duty on lawyers to withdraw from representation when clients wish to use their services to further a crime or fraud and a duty to complete a “risk-based” inquiry commensurate with the particulars of the situation.
It remains an open question whether U.S. lawmakers and regulators see this as only one part of a broader regulatory push. The Paradise Papers, Panama Papers, and Pandora Papers and FinCEN Files have pushed legislators and regulators closer to acting upon further regulation of the legal profession as gatekeepers of the U.S. financial system. Although lawyers are subject to discipline and prosecution, those cases remain rare and may be perceived as insufficient to lawmakers and the Treasury Department—even though they carry disastrous consequences like disbarment or even jail time. It is unclear whether Congress can conceive of legislation (and pass it) or the Treasury Department can write regulations that can control money laundering risk while preserving the careful balance of judicial, state-based regulation of the legal profession and the sanctity of the attorney-client relationship and its corresponding privileges.