ABA puts a bar on client due diligence
Recent efforts by the American Bar Association (ABA) to update its rules of professional conduct on client due diligence signals political momentum toward transparency, even if the outcome – at least in the short-term – leaves lawyers, and the criminal and corrupt that they enable, plenty of loopholes.
ABA members, at their annual meeting in Denver, decided by a 216-102 vote to require lawyers to assess the “facts and circumstances” of potentially representing a client. Under the new rules, lawyers would also be required to halt work for any client that wishes to use their services to commit a crime.
The organization’s Treasurer Kevin Shepherd could hardly have been clearer in his speech to members that the measure was a last resort to head off a threat by the United States Treasury Department to take immediate regulatory action as well as to lobby for legislation imposing additional obligations on lawyers via the ENABLERS Act, currently stalled in Congress.
Officially, the ABA says that the rules were revised “because of concern that lawyers’ services can be used for money laundering and other criminal and fraudulent activity.”
Ultimately, the ABA’s move is a stopgap measure. Analysts note that the new rules do not spell out specific steps that lawyers should take when vetting a client. Nor do they create a definitive obligation to determine the identity of a client, such as the beneficial owner—the real person who owns or controls a company, not another company or trust.
Instead, the amendments add guidance advising lawyers that their due diligence should vary based on the perceived level of risk represented by a client and, crucially, it does not require lawyers to report suspicious activity by existing or prospective clients, as the ENABLERS Act would require.
For the moment, 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, remains in place.
This should not be enough to satisfy the Biden Administration.
The ENABLERS Act aims to make legal professionals subject to the United States’ (US) most important anti-money laundering law, The Bank Secrecy Act. This would subject them to the same standards as financial institutions in submitting suspicious activity reports when providing financial-related legal services to clients. This would be the most effective means of closing off the loopholes used by the criminal and corrupt.
Despite being blocked by the Senate last December, the ENABLERS Act could still be resubmitted as a standalone bill and the fact that it enjoys bi-partisan support should offer some encouragement to Congress.
This dilemma is not unique to the US. Across the Atlantic, The European Commission is still plotting its next move following last December’s ruling by the Court of Justice of the European Union. The Court found that disclosing the existence of a lawyer-client relationship to third parties infringes on legal privilege and confidentiality a right “justified by the fact that lawyers are assigned a fundamental role in a democratic society.”
That judgement means that until the European Union (EU) tables and adopts a new law that specifically addresses lawyer-client privilege, the EU’s recent legislation on disclosure of beneficial ownership and anti-money laundering will leave a carve-out for lawyers.
The Luxembourg court’s decision appears to be the first which considers the constitutional implications of the conflict between mandatory disclosure rules in a tax reporting context and the professional obligations of lawyers to their clients.
As Transparency International Director Scott Greytak points out, “if you create a carve-out for ‘attorneys only’ from these obligations, you are giving corrupt actors a clear roadmap for how to better hide and move their money.”