Combatting Money Laundering; FATF and the Lawyer’s Role

Table of Contents:

• What is FATF?
• What does this have to do with lawyers?
• Will this ever happen in the US?
• The role of education.
• What is the role of ACTEC and its Fellows?
• What is new?

In 1989, the G-7 nations (now the G-8), including the United States, formed the Financial Action Task Force (familiarly known as FATF) to develop measures to combat the use of the world’s financial system by criminals and induce member nations and others to adopt and implement those measures, mostly by legislation but also by regulation, by government and by “self-regulatory bodies” (such as the ABA) responsible for professional and trade groups.  FATF expanded its role after the 9-11 terrorist attacks to address the use of the financial system to facilitate terrorist activities.

 

Largely as a result of these efforts, much of the developed world has adopted all or part of the so-called "Forty Recommendations" (the Recommendations). The Recommendations are the international standards for combatting money laundering and terrorist financing activities. In the US, the Recommendations can be seen most clearly in those parts of the Bank Secrecy Act and the USA Patriot Act having to do with the customer/client due diligence (CDD), suspicious transaction reports (STRs), and no tipping off (NTO) obligations applicable to banks and other financial institutions. Most readers will be familiar with the painstaking and sometimes frustrating customer intake (or “onboarding”) process that banks employ when opening new accounts and, in some cases, retaining existing accounts. These are largely driven by the FATF process.

 

Over a decade ago, FATF and its now 39 members determined that a number of "Designated Non-Financial Businesses and Professions" (DNFBPs) were "gatekeepers" to the domestic and international financial systems and could themselves potentially be unwitting participants in money laundering and terrorist financing. These gatekeepers included lawyers, accountants, and trust and company service providers. Lawyers engaged in certain types of activities, including virtually all trust and estate, business, real estate and other transactional lawyers, are squarely in the cross-hairs of this “gatekeeper” initiative. In the ensuing ten years, FATF has met with representatives of the legal profession to discuss, develop, and implement guidance applicable to lawyers similar to those applicable to financial institutions. Recommendations 22 and 23 specifically urge FATF member nations to adopt laws, rules, and regulations that impose CDD, STR and NTO obligations on lawyers performing, among other services, the sorts of work trusts and estates lawyers are accustomed to providing.

 

Representatives of the legal profession (including notaries from various civil law jurisdictions) collaborated with FATF to prepare a document setting forth a "Risk Based Approach" (RBA) to address this concern. Known as the “RBA for Legal Professionals”, adopted by FATF in 2008, and updated in 2019, this high level guidance is designed to preserve for lawyers the traditional relationship between them and their clients while at the same time recognizing the important role of lawyers as gatekeepers and the potential that they may unwittingly assist their clients in money laundering or terrorist financing. You will notice, however, that it urges legal professionals to file suspicious transaction reports (STRs) without advising a client or prospective client that a report has been made (“no tipping-off” or NTO). Many European jurisdictions have embraced this guidance. In the UK, for example, the Proceeds of Organized Crimes Act requires solicitors to file STRs on their clients under certain circumstances. Similar obligations are applicable to lawyers in many of the FATF member nations.

 

FATF and its US representatives (from US Treasury) continue to believe that voluntary actions by lawyers in a risk-based regime are insufficient to combat money laundering and terrorist financing. If non-US lawyers can be required to conduct formal (and discoverable) CDD and file STRs (with an NTO element), they assert that US lawyers should as well. FATF works by peer pressure and the US representatives are under unrelenting political pressure to adopt meaningful anti-money laundering and counter-terrorist financing laws and regulations applicable to lawyers.

 

In the US, the ABA has led an effort, with ACTEC as an active partner, to resist the imposition of legislation and regulation that would, in their view, violate the traditional attorney-client relationship, the duty of client confidentiality, and the overall lawyer/client relationship.

 

The ABA and its partners such as ACTEC have worked with FATF, Treasury and others to persuade those organizations that the answer in the US is not legislation or regulation but education. These lawyer groups acknowledge that combatting terrorist financing and money laundering are of critical importance and lawyers should not be unwitting (much less deliberate) participants in these criminal activities. They have suggested that the better approach is to develop and issue guidelines for US lawyers to assist them to recognize and respond properly to situations that might involve those risks. In 2005, ACTEC issued its Recommendations of Good Practices for ACTEC Fellows Seeking to Detect and Combat Money Laundering, well before FATF issued the lawyer focused RBA for Legal Professionals. The ABA developed and adopted in 2010 the Good Practices Guidance. The US Treasury issued a statement in support of the Good Practices Guidance, which was unprecedented for a paper produced by the private sector.

 

The Good Practices Guidance is an exceedingly valuable document for trusts and estates lawyers and other transactional practitioners. It sketches out the history of the FATF process and its application to lawyers, identifies the gist of the money laundering and terrorist financing problems and gives lawyers useful guidance in identifying the "red flag indicators" that might signal the existence of these risks, thus requiring a higher level of CDD (or even rejection of a proposed engagement). The Good Practices Guidance has become the major teaching tool used by the ABA, ACTEC and others seeking to educate US lawyers on these issues.

 

As a partner in the US efforts to resist the imposition of CDD/STR/NTO rules on lawyers, ACTEC has joined with the ABA and other groups to address the serious issues raised by the FATF effort to impose a regime on US lawyers that would run afoul of the traditional attorney-client relationship, the duty of client confidentiality, and the overall lawyer/client relationship. The FATF Task Force was created in 2004 and has been the forum for addressing these issues. Acting through the Task Force, ACTEC Fellows have made scores of presentations to lawyer groups around the country (and internationally) on FATF and the Good Practices Guidance. A teaching outline, written by ACTEC Past-President Duncan E. Osborne, is available to use for this purpose and volunteers are welcome. If you would like to review and use this outline, contact ACTEC Past-President John A. Terrill, II at jaterrill@htts.com.

 

Fellows around the Country have helped to include information about FATF and the Good Practices Guidance on state and local bar websites. If your jurisdiction does not have a link, contact Kevin L. Shepherd at KLShepherd@Venable.com.

 

October, 2014:

ACTEC submits comments to Notice of Proposed Rule Making Regarding Beneficial Ownership of Legal Entities. In August the Financial Crimes Enforcement Network of the United States Treasury ("FinCEN") issued a notice of proposed rule making ("NPRM") designed to further the collection of "beneficial ownership" information from certain legal entities opening accounts. The NPRM proposes rules requiring most financial institutions to collect detailed information regarding the individuals who own and/or control what are referred to as "legal entity customers." While the preamble of the NPRM states that the new rules will not apply to private trusts, the proposed rules lack clarity on this point. Moreover, the proposed rules fail to address how the new procedures will apply to legal entities which themselves are owned in whole or in part by trusts. ACTEC, acting through the FATF Task Force and the Washington Affairs Committee, filed comments to the NPRM supporting FinCEN's decision not to apply the rules to private trusts and suggesting ways to improve the final rules to reflect this decision.

October, 2014:

The American Bar Association, the International Bar Association and the Council of Bars and Law Societies of Europe (CCBE) issue lawyer typology report. As has been previously reported, FATF promulgated its so-called Lawyer Typologies Report in 2013, with the goal of providing lawyers worldwide with examples of lawyer involvement in money laundering or terrorist financing. This report was a disappointment to many, including the members of the FATF Task Force, based as it is almost solely on actual examples of lawyers knowingly involved in their clients' improper activities. On October 22, a consortium of bar groups (the American Bar Association, the International Bar Association and the CCBE) published a paper titled A Lawyer's Guide to Detecting and Preventing Money Laundering. Members of the ACTEC Task Force contributed meaningfully to the paper. The final product, resulting from a cooperative effort by lawyers representing a variety of countries and legal systems, will serve as an important educational tool.

July 29, 2014:

Conference of Chief Justices Adopts Resolution in Support of Voluntary Good Practices Guidance.  An important part of the effort by the ABA Gatekeeper Task Force, with active participation by the ACTEC Task Force, to engage with American lawyers in understanding FATF and the role of lawyers has been to seek the participation of other organized groups, Bench and Bar.  The Conference of Chief Justices (CCJ), representing the Chief Justices of every American state, the District of Columbia and a number of Protectorates, has recently adopted a resolution emphatically endorsing the Voluntary Good Practices Guidance and the application of a risk based approach by American lawyers in dealing with the threats of money laundering and terrorist financing.

April 25, 2014:

"Combating Threats to the International Financial System: The Financial Action Task Force."  On Friday, April 25, the New York Law School Law Review in conjunction with the school’s Center for Law and Business and with the support of ACTEC presented a symposium on “Combating Threats to the International Financial System: The Financial Action Task Force.”  The event was an outstanding success, with more than 75 attendees representing private practice, government and academia.  The full program with links to speakers’ PowerPoint presentations can be found at http://www.nylslawreview.com/financial-action-task-force-program/.  Biographies of the speakers can be found at http://www.nylslawreview.com/financial-action-task-force-speakers/. Several members of the College were part of the program.  Immediate past-president Duncan Osborne gave the keynote address, Jack Terrill was part of Panel III: The FATF and Professional Ethics and gave a presentation on the British experience with FATF and academic fellow Bill LaPiana moderated Panel III.

The presentations and discussions were marked by frank exchange of sometimes very differing views of FATF’s approaches to combating money laundering and financing of terrorism, and everyone agreed as an opportunity for learning and understanding the symposium was a success. In order to foster that educational mission, the New York Law School Law Review will publish papers from the symposium.  Instructions for ordering copies of the symposium can be found by the following the appropriate links on this page: http://www.nylslawreview.com/fatf/.

 

August 21, 2013:

FATF Task Force reviews and comments on the recent decision of The Canadian Court of Appeal for British Columbia declaring unconstitutional legislation applying anti-money laundering and counter terrorist financing statutes and regulations to lawyers. ACTEC Fellows, Bob Lawrence and Margaret Van Houten, have prepared a comprehensive and useful analysis of the Canadian case, Federation of Law Societies of Canada v. Canada (2013 BCCA 147, April 4, 2013). The case should be of considerable interest to US lawyers and others who are concerned with the potentially negative impact of proposed legislation and regulations on the traditional confidential relationship between lawyers and their clients. While the actual legislation in Canada, and the Canadian Constitution, differ in many respects from legislation proposed in the United States, and from the United States Constitution, the decision (currently under appeal to the Supreme Court of Canada) by an appellate court in Canada, whose legal traditions spring to a great extent from the same origins as US traditions, is important and the review by Bob and Margaret should provide ACTEC Fellows and others with a useful tool in thinking about the role of US lawyers in the worldwide effort to combat money laundering and terrorist financing.

Letter from ABA President Laurel Bellows to State and Local Bar Presidents Regarding ABA Formal Ethics Opinion 463 on Client Due Diligence and Money Laundering. The issuance of Formal Opinion 463 has prompted the American Bar Association to look for ways to communicate its importance, and the importance of the Good Practices Guidance, to its members.  One such communication is the July 31, 2013 letter from ABA President Laurel G. Bellows directed to Presidents of State Bars.  The letter encourages the Bar leaders to alert their members to the issuance of Formal Opinion 463 (particularly its reference to and reliance on the Good Practices Guidance), and to find ways to educate their members on the importance of these issues.

 

G-8 Meeting in Northern Ireland results in an international consensus regarding money laundering and terrorist financing. Representatives of the so-called Group of 8 (G-8) met in Northern Ireland in June, 2013. Although the agenda included a number of serious international issues, the G-8 leaders issued a joint statement addressing, among other issues, the need for greater transparency of ownership of companies and beneficial ownership of trusts. That same day, the White House published a National Action Plan on Preventing the Misuse of Companies and Legal Arrangements. Read together, there is only one clear message: The United States, as part of the G-8 and as part of FATF, has stated in unequivocal terms that US Treasury, working with other federal agencies, will pursue efforts to enact legislation and/or regulations addressing collection and retention of beneficial ownership information (including trust beneficiaries). Although not part of the White House Action Plan, the joint statement reiterates the goal of the G-8 to continue to pursue the imposition of CDD and related requirements on, among others, the legal profession.

 

FATF issues a final version of legal sector typology report. For some years FATF, working more or less in conjunction with representatives from the legal sector around the world, has been trying to create a comprehensive document outlining how it is that legal professionals might become involved, perhaps unwittingly, in providing services that support money laundering or terrorist financing. The ABA, with active support from ACTEC and other professional groups, participated in workshops, meetings and other forms of input. That effort culminated during the June, 2013 Plenary in Oslo, Norway, with the issuance of a lengthy document titled Money Laundering and Terrorist Financing Vulnerabilities of the Legal Professionals.

 

This document, while it was intended to provide guidance to legal professionals, and could have been an important part of teaching about FATF and client-intake protocols, and could have supplemented the Good Practices Guidance, has serious flaws. Most importantly, as the reader will readily see, the Report is based almost exclusively on actual reported cases from around the world; virtually every case included a clearly criminal activity aided and abetted by a legal professional who was both aware of, and a willing participant in, the money laundering scheme. Are those cases involving complicit lawyers a useful pedagogical tool? Clearly not. In addition, the Report is tediously long and detailed and contains no meaningful reference to terrorist financing typologies. The ABA and virtually every other organization representing legal professionals throughout the world pointed out their disappointment with, and suggested changes to, the Report. Those efforts fell short in producing a report that would have been useful to the legal profession.

 

The Report is not useless; it will be part of any effective educational presentation to lawyers. It is just not as useful as it could have been.

 

ABA Standing Committee on Ethics and Professional Responsibility Issues Formal Opinion 463 addressing the ethics of the Good Practices Guidance:A weakness in the approach of the Good Practices Guidance apparent to those who use it as an educational tool has been the less than satisfactory link among the Recommendations, the Good Practices Guidance and the Model Rules of Professional Conduct, a version of which has been adopted in every state other than California, as well as in the District of Columbia and the Virgin Islands. Although the Good Practices Guidance refers to Model Rule 1.16 in suggesting how a lawyer might react when a risk-based analysis indicates that a particular engagement is unacceptably problematic, the Model Rules themselves are silent on the issue of how lawyers might react to client situations potentially involving money laundering or terrorist financing or, indeed, CDD generally. This is the gap that has been mostly filled by Formal Opinion 463.

 

Formal Opinion 463 does not focus on the efforts by FATF to seek the imposition of an onerous and inappropriate legal and regulatory structure on US lawyers. Instead, its focus is on the Good Practices Guidance and the consistency between the Good Practices Guidance and certain Model Rules. The Good Practices Guidance is on its face not a statement of a standard of conduct; it is described in its own words as a resource for lawyers to help them understand what it at stake in the anti-money laundering and counter-terrorist financing world, how a lawyer might be drawn into problem cases and how to identify the potential for risk in particular situations. It sets forth, consistent with FATF's own RBA for Legal Professionals, a risk-based evaluation.

 

Opinion 463 acknowledges the usefulness of the Good Practices Guidance for this purpose. Stating quite directly that "the Model Rules neither require a lawyer to fulfill a gatekeeper role, nor do they permit a lawyer to engage in the reporting that such a role could entail" (thus bringing into question the whole idea of imposing gatekeeper rules on US lawyers), the Opinion goes on to suggest that the risk-based CDD evaluation process set forth in the Good Practices Guidance has a logical connection to those Model Rules that deal with client risks:

 

Model Rule 1.2 provides in relevant part "A lawyer shall not counsel a client to engage, or assist a client in conduct that the lawyer knows is criminal or fraudulent . . . . "

 

Model Rule 1.16 provides in relevant part "[A] lawyer shall not represent a client, or where the representation has commenced, shall withdraw from the representation of the client if: (1) the representation will result in a violation of the rules of professional conduct or other law."

 

Further “[A] lawyer may withdraw from representing a client if: . . . the client persists in a course of action involving the lawyer’s services that the lawyer reasonably believes is criminal or fraudulent.”

 

Federal law itself criminalizes certain conduct in support of money laundering and terrorist financing, and lawyers are clearly subject to these laws.

 

In conclusion, "[t]he Committee believes that the advice derived from the Good Practices Guidance, is consistent, and not in conflict with, the ethical obligations of lawyers under the Model Rules." Familiarity with, and application of, the advice contained in the Good Practices Guidance will help lawyers to avoid violation of law and ethical obligations under the Model Rules.