ABA Issues Formal Opinion on Lawyers as “Gatekeepers” for Client Criminality

0
41
You remember the summer of ’98.  The European Central Bank was founded in Brussels, Pete Sampras won the men’s singles title at Wimbledon, “Sex and the City” premiered on the telly – and Nigerian dictator Sani Abacha died at the … Continue reading

For years, lawyers have been in the cross hairs of prosecutors and regulators, who sometimes regard lawyers as potential gatekeepers responsible for preventing wrongdoing by clients. On April 29, 2020, the American Bar Association (“ABA”) issued an important opinion (“Opinion 491”) reminding lawyers that they are responsible for conducting sufficient inquiry into the facts and circumstances of a matter a client or prospective client asks them to undertake if there is a “high probability” that the client is seeking to use the lawyer’s services to commit a crime.

As we frequently blog, there are myriad ways that lawyers can hit the tripwire and face ethical or criminal liability for professional work performed for clients. The need for lawyers to be on guard against potential money laundering activity by clients is a primary focus of Opinion 491.

Opinion 491 states in particular:

[W]here facts known to the lawyer establish a high probability that a client seeks to use the lawyer’s services for criminal or fraudulent activity, the lawyer has a duty to inquire further to avoid advising or assisting such activity. . . . Even if information learned in the course of a preliminary interview or during a representation is insufficient to establish “knowledge” under [Model] Rule 1.2 (d), other rules may require the lawyer to inquire further in order to help the client avoid crime or fraud, to avoid professional misconduct, and to advance the client’s legitimate interest. . . . If the client or prospective client refuses to provide information necessary to assess the legality of the proposed transaction, the lawyer must ordinarily decline the representation or withdraw under [Model] Rule 1.16

Opinion 491 cites numerous cases, including Supreme Court precedent, incorporating the doctrine of willful blindness, also called conscious avoidance or the “ostrich theory,” into the legal definition of “knowledge.” In short, lawyers cannot stick their heads in the sand to avoid knowing a fact, or that they are being used to help a client commit a crime or fraud. If it may seem alien to some lawyers that they must be skeptical of a client’s objectives, Opinion 491 makes it clear that when there is a “high probability” based on the available facts that the client “seeks to use the lawyer’s services for criminal or fraudulent activity,” a lawyer cannot proceed blithely without taking further inquiry. If not satisfied, the lawyer must turn down the representation or withdraw.

Lawyers and Money Laundering

As noted, potential money laundering is a primary focus of Opinion 491. Citing the 2010 ABA Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing as well as the 2013 ABA Formal Opinion 463, Opinion 491 references the guidelines developed by the Financial Action Task Force (FATF) and the need to do a “risk based approach” to legal engagements to screen for potential money laundering activity. (FATF published a report in 2013 outlining AML vulnerabilities of legal professionals.  In this report, FATF outlined 42 risk indicators of potential money laundering; some indicators include a client’s reluctance to provide information, data, or documents in order to facilitate the transaction.) Opinion 463 had noted that lawyers should engage in due diligence “to avoid facilitating illegal activity or being drawn unwittingly into a criminal activity . . . . An appropriate assessment of the client and the client’s objectives, and the means for obtaining those objectives, are essential prerequisites for accepting a new matter or for continuing a representation as new facts unfold.” (emphasis added). However, Opinion 491 also makes clear that “as long as the lawyer conducts a reasonable inquiry, it is ordinarily proper to credit an otherwise trustworthy client where information gathered from other sources fails to resolve the issue, even if some doubt remains.”

Hypotheticals and the Need for Further Inquiry

It can be easy to declare the principle that a professional should apply a “risk based approach” and perform adequate “due diligence” in regards to a client or transaction. However, operationalizing those abstract concepts in the real world can be more daunting, particularly given potentially competing duties such as the need for zealous representation, client confidentiality and loyalty. Opinion 491 tries to provide some guidance to lawyers about what concrete steps they might take to satisfy their ethical and legal obligations to avoid helping clients engage in illegal or fraudulent activity; the opinion provides specific hypotheticals of possible representations which easily could cross over into facilitating money laundering or other offenses. For example, Opinion 491 presents a hypothetical client who has overseas income and funds held in a foreign bank in the name of an unnamed corporation, but the funds have not been disclosed to taxing authorities. To throw fuel on the fire, the client refuses to provide any detail about the source of the funds, the name of the bank or the nature of his employment. One might say that this circumstance does not even require a willful blindness analysis to conclude that this is one engagement the lawyer should turn down.

Another example in Opinion 491 of a suspicious potential client is reminiscent of a well-known segment on 60 Minutes, Anonymous, involving an undercover journalist who conducted a “sting” operation by meeting with various lawyers and posing as the representative of a potential client:

A prospective client tells a lawyer he is an agent for a minister or other government official from a “high risk” jurisdiction who wishes to remain anonymous and would like to purchase an expensive property in the United States. The property would be owned through corporations that have undisclosed beneficial owners. The prospective client says that large amounts of money will be involved in the purchase but is vague about the source of the funds, or the funds appear to come from “questionable” sources.

Opinion 491 provides other, more mundane examples. One involves a long-time client who wants to form LLCs to buy real property. Absent other red flags, one presumably would conclude that this representation would be appropriate, but of course a lawyer must assess each engagement on its own merits. Yet another example involves a lawyer in rural Georgia receiving a call from a hedge fund employee in New York City who allegedly wants to buy farms in rural Georgia, through a series of LLCs to avoid “a wave of land speculation and artificially inflate local prices.”  This prospective client is unknown to the lawyer, and such a structure might cause the lawyer in Georgia to ask more questions and get satisfactory answers before agreeing to the engagement.

These hypotheticals and the circumstances they present provide real food for thought for lawyers who might be approached by new or existing clients.

The Bottom Line

The key takeaway of Opinion 491 is a continuation of an ongoing theme: lawyers cannot blithely do what clients ask them to do without assessing the client’s request. If there is a high probability that the client is asking the lawyer to assist with illegal activity, then further inquiry is required. A lawyer cannot close his or her eyes to that which is before her. And if the transaction does not pass the “smell test,” the lawyer should turn down the engagement. Passing on fees is certainly preferable to aiding and abetting a fraud – one should protect one’s law license and liberty.

Law enforcement officials such as federal and state prosecutors, as well as regulators, hold gatekeepers such as lawyers and accountants to the high standards of their professions. They will not hesitate to charge such professionals if the law enforcement officials believe that the professional was complicit in the client’s illegal conduct. Closing one’s eyes is not a defense.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.