Recommendations of Good Practices for ACTEC Fellows Seeking to Detect and Combat Money Laundering
October 24, 2005
In an effort to avoid the imposition of burdensome FATF derived regulations governing United States attorneys, the Department of the Treasury asked ACTEC and the American Bar Association (ABA) to develop a set of best practices to create standards of practice under the FATF Recommendations. To date, only ACTEC has completed its drafting of these best practices standards. They are set forth below.
In order to assist our fellows in their efforts to learn about money laundering and to meet their ethical and legal obligations to combat money laundering, the American College of Trust and Estate Counsel (“ACTEC”) has adopted these recommendations of good practices to guide our fellows, by action of the Board of Regents on October 24, 2005.
We note first that these are not rules, but recommendations. The situation of ACTEC fellows varies widely, from partners in the largest firms in the largest cities in the United States, to sole practitioners in small towns far removed from international clients and affairs. While money laundering, of course, can occur in a purely local and domestic matter, we believe that most small, local law firms and individual lawyers “know” their clients and their clients’ affairs very well, and have little reason to be concerned about money laundering. Thus, these or any other recommendations of good practices must be applied to lawyers in very different ways, tailored to the circumstances of their practice.
We note further the strong and essential bond of attorney and client in the United States, and the vital role of attorney-client privilege. While some countries have adopted stringent anti-money laundering rules that by their terms apply to lawyers, including a rule obligating the attorney to report suspicions of a client’s money laundering to the financial or legal authorities, but made the rule “subject to attorney-client privilege”, the United States has not done so and we urge that it should not do so. We believe that a lawyer who suspects that his or her client is laundering money has an ethical obligation not to represent the client in the matter, and probably to resign representation of the client entirely, but that the lawyer has a further ethical obligation not to report the client to financial or legal authorities. To do otherwise would undermine the trust a client has in the confidences he or she may impart to his or her lawyer, and risk that a client would not disclose essential information to the lawyer. We note further that, in the United States, ethical rules governing lawyers are generally adopted on a state by state basis. The rules of each state will govern the conduct of a lawyer practicing in that state.
Finally, we note that these recommendations apply to lawyers acting as lawyers. We urge our fellows to recognize that various governments and agencies may adopt rules which apply to lawyers who act as a trustee or executor, rather than as a lawyer for the trustee or executor, or who collect client funds in escrow accounts as part of the financial transfers in a transaction. Our fellows should be aware of those rules, which may require a lawyer who is acting as a “financial intermediary” to report suspicions of money laundering to the financial or legal authorities.
The following recommendations are divided into three major sections: Education, Know Your Client, and Know the Purpose of the Transaction for which you are engaged.
Education
It is the position of ACTEC that the most important first step is to educate our fellows as to what money laundering is and how to detect it. Related to this is the sensible need, in our own interests, to ascertain the rules in the various jurisdictions in which we or our firms may practice regarding anti-money laundering initiatives. It may be that a lawyer practicing in Chicago is a partner in a firm with a London office. There are strict rules in place in London to combat money laundering, which do apply to so-called “gatekeepers” ( a term coined by the Financial Action Task Force on Money Laundering (“FATF”) to apply to lawyers, accountants and other professionals who are in a position to knowingly or unknowingly assist money launderers in a transaction). These rules may, or may not, apply to a new engagement which the lawyer undertakes for an international client. She or he should know which rules apply. In this context, we recommend:
1. ACTEC, and other professional organizations, should regularly provide information and schedule presentations at Continuing Legal Education and other meetings to educate their fellows as to what money laundering is and how to detect it. Many lawyers practicing today are not familiar with money laundering and how it is done. Presentations by government officials, specialist attorneys, and professionals from financial institutions who supervise the anti-money laundering operations of the financial institution will be helpful to attorneys who want to learn about this problem and how to combat it. Similarly, presentations on the state of the law in this rapidly changing area should be made to lawyers with regularity so that they can be current on their obligations.
For a large, multi-office law firm:
2. Every law firm should have a designated individual, who may be a partner in the firm or a non-lawyer employee, who is responsible for anti-money laundering efforts. That individual should be available to consult with lawyers seeking information on their duties, and also should supervise the firm’s compliance with its own guidelines (discussed below) to combat money laundering. That individual should consider whether U.S., U.K., E.U., or other legal regimes apply to a particular new engagement, or ongoing representation, if a question arises concerning the applicable rules on anti-money laundering.
3. Every law firm should adopt an anti-money laundering policy and procedures. We recommend that law firms adhere to the four guidelines which theFinancial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department requires covered financial institutions to meet in their self-applied regulations:
a. the law firm should develop internal policies, procedures and controls to combat money laundering
b. the law firm should designate a compliance officer, who may have other responsibilities (indeed, who in a law firm will always have other responsibilities), but who has charge of the law firm’s anti-money laundering efforts
c. the law firm should have an ongoing training program, with required attendance, to teach its associates and partners, and non-legal employees who have financial responsibilities, how to detect, and combat money laundering
d. the law firm should have an ongoing training program, with required attendance, to teach its associates and partners, and non-legal employees who have financial responsibilities, how to detect, and combat money laundering
For a small, local law firm:
2. Even a small, local law firm, or a sole practitioner, should have a person in the firm who is informed about money laundering, and has established her or his or the firm’s procedures to detect and combat money laundering. For a sole practitioner, we would recommend attending one or more educational programs on money laundering in the next two years, and then remaining “current” on suggested best practices through professional reading and periodic attendance at a continuing legal education program.
3. It may be impractical or impossible for a small, local law firm to adopt one or more of FinCEN’s four guidelines, but the firm should know what the guidelines are and adopt procedures appropriate to its circumstances. Thus, for example, recommendation b., above, calling for the appointment of a compliance officer, is not appropriate for a sole practitioner, but a three or four-person firm might select one of their members to stay current on suggested best practices. Similarly, recommendation d., calling for periodic audits, is also not appropriate for a sole practitioner, but a three or four-person firm might well choose to put money laundering on the agenda for a firm partners’ meeting twice a year, to discuss experiences over the prior six months of each partner and whether there are any new developments in law or suggested practices about which all partners should be informed.
Know Your Client
A lawyer, and a law firm, should always know who his, her or its clients are. This does not mean that a lawyer cannot represent a person who may have committed a crime, or indeed any other class of persons– the ethics of the legal profession require that everyone is entitled to counsel, and any criminal is entitled to a lawyer. The issue is rather that the lawyer should know whom he or she is in fact representing, so that he or she can act accordingly. The essential requirement that a lawyer “know” his or her client does not mean that the lawyer must request copies of passports, or driver’s licenses, or other objective evidence. In many situations these requirements may be appropriate, but in others, such as where the lawyer may personally know the client, they are not necessary. There should not be an over-regulation of the type of information a lawyer should be required to obtain, but in some fashion, it should be clear that the lawyer knows who his or her client is, and that the client’s identity is reflected in the lawyer’s records. In the case of an investment or business entity, or trust arrangement, it is important to know who the beneficial owner is, and who the settlor and beneficiaries of the trust are. (Of course, it is important to know who all of the parties are for purposes of appropriate advice, since, for example, tax results may vary according to the nature of the beneficial interests held, and knowledge of your client’s identity is also important for conflicts purposes.) A lawyer accepting a new client should obtain such information as is necessary to satisfy the lawyer that he or she knows who the true client is (thus, for example, knowing the ultimate client if an intermediary seeks advice), and that the lawyer retain that information in the firm’s files for at least five years.
— A law firm should be able to give legal advice to another law firm, or to a financial institution or other company or firm, without inquiring further as to why the firm is seeking the advice, if the law firm rendering the advice is confident that the firm seeking the advice is the ultimate client for purposes of the advice. If it is apparent that the firm seeking the advice is not the ultimate client, but is seeking the advice for its client or customer, the law firm should still be able to render the advice, without completing client due diligence as to the ultimate client or customer, if the firm seeking the advice is known to the law firm rendering the advice, and is known to have anti-money laundering controls of its own.
• Nevertheless, the law firm rendering the advice may in some cases seek knowledge about the ultimate client’s identity, in order to assure an absence of conflicts, because it is uncertain of the efficacy of the anti-money laundering controls of the firm seeking the advice, or for other reasons.
— In this context there should not be any difference between oral and written advice, as long as the law firm is being paid to render the advice.
— The firm should obtain as much publicly available information as it determines to be useful about a prospective client, from the internet web or otherwise, and may choose to make discrete inquiries of institutions or others who know the prospective client, while always honoring the ethical obligation not to disclose the attorney-client relationship without the client’s consent.
— Information on client details should be periodically updated in a law firm’s files.
Know Everything About the Transaction
A lawyer’s duties relating to money laundering vary according to what the lawyer is being asked to do. A lawyer being asked to write a Will need not know about all of the client’s affairs, but should have that information which is necessary in order to render competent advice. But a lawyer being asked to set up a company in Jurisdiction A, and a trust in Jurisdiction B to own the company in Jurisdiction A, should satisfy herself or himself that she or he knows why each step of the transaction is taking place, and that there is a substantive reason, as a business, tax or other matter, for the step to occur. A transaction which serves no apparent purpose or, perhaps more disturbing, which seems to be economically inefficient and perhaps result in a loss of money, should be viewed with concern by a lawyer. We recommend that a lawyer advising in connection with a transaction should
— Identify and know all of the parties involved in the transaction.
— Determine the nature and purpose of the transaction.
— Fix the scope of the lawyer’s role in the transaction, and specify the same in an engagement letter.
— Identify all the other lawyers and advisors involved in the transaction, and have sufficient conversations with the other advisors (if possible without the client being part of the conversation) to allow assurance as to the role and position of the other advisors.
— Assure that the client is obtaining appropriate and competent advice in other affected jurisdictions, or be satisfied as to the reasons why advice is not being sought.
— Take special steps and have extra sensitivity if an individual is “politically sensitive” (a government or armed forces official or family member of the same) or if a jurisdiction or entity is involved in the transaction which is on U.S. government or multi-national “black lists” or schedules for heightened scrutiny.FATF, OECD, and FinCEN websites disclose various blacklists.
ACTEC fellows are often called upon to render advice to other lawyers, or to clients, which is not related to a transaction, and different standards should apply in such cases. For example, if an existing client gives a lawyer a copy of a trust instrument, and asks the lawyer whether or not the trust is a “grantor” trust under the Internal Revenue Code and applicable Treasury regulations, the lawyer should be able to answer such an inquiry without inquiring into whether the advice may at some future time relate to a transaction. Similarly, the lawyer should be able to advise the existing client, or a new client (as to whom the lawyer will probably wish to obtain appropriate “Know Your Client” information as discussed above) what a “grantor trust” is under the Internal Revenue Code, or as to how the marital deduction operates for United States estate tax purposes, without inquiring into whether that advice will at some future time be applied in the context of a transaction on which the lawyer may not be asked to give advice.
Reporting Requirements
While lawyers in the United States are not required to file reports with regulatory authorities under the USA PATRIOT Act if they suspect a client of money laundering, lawyers should be aware of the reporting responsibilities which they do have under current law, including:
— reporting the receipt from or for a client of $10,000 or more in cash, in one or a series of related payments. The lawyer is required to file a Form 8300 under the authority of Internal Revenue Code Section 6050I and 31 U.S.C. 5331, and31 CFR 103.30. Only transactions which take place completely outside of the United States are exempt from this requirement. This is not the form which financial institutions must use to report currency transfers. They report toFinCEN on Form 104.
— reporting signature authority over a foreign bank or securities account, if the aggregate value of the foreign accounts exceeds $10,000. The lawyer is required to file a Form TD F 90-22.1 under the authority of 31 U.S.C. 5314 and< 31 CFR 103 .
— receipt of payments from certain proscribed jurisdictions. While perhaps of limited application, lawyers should be aware of the provisions of the Trading With the Enemy Act, Title 50 App. U.S.C. Section 1 et seq., and theInternational Emergency Economic Powers Act, Title 50 U.S.C. Sections 1701-1707, and various special acts imposing sanctions on trading with certain countries, and persons resident in certain countries, such as Iraq, Iran, Cuba and North Korea. These acts are administered by the Office of Foreign Assets Control (“OFAC”) within the Treasury Department, and any lawyer having dealings with a country on OFAC’s lists of proscribed countries must be cautious as to fund transfers.
In addition, any lawyer practicing abroad, or in an international transaction, may be subject to further rules imposed by another country.