The American Bar Association’s House of Delegates recently amended its Model Rule of Professional Conduct 1.16 to avoid attorneys’ “unwitting involvement in or failure to pay appropriate attention to signs or warnings of danger (‘red flags’) relating to a client’s use of a lawyer’s services to facilitate possible money laundering and terrorist financing activities.”
The change was made at the ABA’s annual meeting in early August. Resolution 100 made two amendments to Model Rule 1.16.
Amendments to Model Rule 1.16
Model Rule 1.16 is titled “Declining or Terminating Representation.” The amendment adds two clauses:
- A lawyer shall inquire into and assess the facts and circumstances of each representation to determine whether the lawyer may accept or continue the representation.
- [A] lawyer shall not represent a client or, where representation has commenced, shall withdraw from the representation of a client if… [T]he client or prospective client seeks to use or persists in using the lawyer’s services to commit or further a crime or fraud…
According to the resolution, “these are not new obligations.” Rather, the amendment makes “explicit that which is already implicit.” Even before these amendments, lawyers were obligated to undertake a variety of due diligence activities, both when onboarding new clients and throughout the attorney-client relationship. For instance, conflict checks must be run at the outset of a matter and periodically thereafter whenever parties or circumstances change (Model Rules 1.7 and 1.10). Lawyers must also consult with clients to understand their objectives, attempt to dissuade them from committing criminal or fraudulent acts, and conduct their own review of relevant facts and law (Model Rules 1.2, 1.3, and 1.4). And, of course, lawyers must refrain from personally committing any unlawful or fraudulent acts (Model Rule 8.4).
The resolution acknowledges there is no “one-size fits all” rule for client due diligence. That being the case, a new comment to Rule 1.16 sets forth a non-exhaustive list of factors to consider in evaluating the risk a new engagement poses:
- (i) the identity of the client, such as whether the client is a natural person or an entity and, if an entity, the beneficial owners of that entity,
- (ii) the lawyer’s experience and familiarity with the client,
- (iii) the nature of the requested legal services,
- (iv) the relevant jurisdictions involved in the representation (for example, whether a jurisdiction is considered at high risk for money laundering or terrorist financing), and
- (v) 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.
Ongoing Concerns Over the Legal Profession’s Regulation
Resolution 100 was another in a series of responses by the ABA (including Formal Ethics Opinions 463 in 2013 and 491 in 2020) to address concerns at both the national and international levels about the involvement of United States attorneys (whether unknowingly or intentionally) being used by clients to further criminal activities. Despite the ABA’s assertion that these opinions and the prior text of Rule 1.16 already imposed on lawyers a duty to conduct adequate due diligence, it appears the ABA’s House of Delegates ultimately concluded that it was either pass amendments to the Rule’s black-letter text or risk increased oversight of the legal professional by Congress. In an address to the House prior to the vote on Resolution 100, Kevin Shepherd, the ABA’s treasurer and representative to the Treasury Department, noted that, “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.”
There has been pressure on the legal profession for some time now to increase oversight of money laundering by its members. For instance, in 2016, the Financial Action Task Force (“FATF”), an “inter-governmental entity that coordinates efforts to prevent money laundering or terrorism financing among and between its member countries” (and of which the U.S. is a charter member), issued a report that found the U.S. noncompliant in four areas, including “the lack of sufficient client due diligence by the legal profession and lack of enforceable obligations in that regard.” The report referenced recent events like the Paradise Papers, Panama Papers, and Pandora Papers and FinCEN Files as examples of the need for further regulation of the legal profession. Further, while not referenced in the report, there have been at least two recent convictions of U.S. attorneys for money-laundering related crimes. See United States v. Wise, S.D.N.Y. Press Release No. 23-148; United States v. Ravenell, 66 F.4th 472 (4th Cir. 2023).
Congress also sought to take action in this arena by proposing the ENABLERS Act in 2022 as part of the National Defense Authorization Act. If passed, law firms would have been regulated under the Bank Secrecy Act like “financial institutions,” including having to submit Suspicious Activity Reports on clients’ financial transactions. To date, the ABA has successfully lobbied against the ENABLERS Act based on, among other reasons, the potential implications it has for the attorney-client privilege. However, while the Act was not included in the 2022 defense budget, it remains possible that Congress introduces it as a standalone measure in the future.
In addition, while not targeted specifically at the legal profession, the recently enacted Corporate Transparency Act, see 31 U.S.C. § 5336, 31 C.F.R. § 1010.380, which requires many U.S. companies, as well as foreign companies operating in the U.S., to file beneficial ownership statements with the U.S. Financial Crimes Enforcement Network (FinCEN), will also require lawyers to exercise greater client due diligence. A lawyer who files a beneficial ownership report on a client’s behalf without first understanding that client’s intentions and corporate structure risks being held responsible for misrepresentations in the report.
Criticisms of Resolution 100 and the Amendments to Model Rule 1.16
Despite the obvious benefit of preventing lawyers from aiding or enabling criminal conduct, Resolution 100 was not without opposition. Over 100 delegates voted against it, the final vote being 216-102.
One criticism was the amendments are too broad, requiring attorneys to continuously monitor clients for any sort of illicit conduct. Past ABA President Laurel Bellows noted: “This is not just money laundering, anti-human trafficking and financing of terrorism; now that’s something I can understand. That’s a very directed and focused resolution. But this resolution holds every lawyer with the responsibility of inquiring not just once but continuing to inquire…. Give me some limitations. Give me some more specifics that I can apply to my practice of law.”
Other concerns included vagueness of the new obligations, potential increased burdens and costs, particularly on smaller law firms, and the possibility of increased professional liability insurance premiums.
Legal Impact of Resolution 100
It should be noted that these amendments will have no immediate legally binding impact, as the ABA Model Rules are just that, a “model” upon which states may base their own attorney ethics rules. However, with the number of states that have adopted the Model Rules virtually verbatim, these amendments will likely be adopted in jurisdictions across the United States in the months and years to come. And even in jurisdictions that do not adopt the amendments, as the resolution noted, “these are not new obligations,” and the Model Rules could serve as persuasive authority for the due diligence lawyers must undertake.
The complete text of Resolution 100, including a redlined version of Model Rule 1.16, is available on the ABA’s website.
Harris Beach’s attorneys continue to follow developments in risk management and lawyer professional responsibility, as well as Bank Secrecy Act/Anti-Money Laundering For more information on professional responsibility in the legal profession, please contact attorneys Daniel Pesciotta at (585) 419-8733 and firstname.lastname@example.org and Scott D. Piper at (585) 419-8621 and email@example.com. For more information on the BSA/AML, please contact Constantine P. Lizas at (202) 975-9780 and clizas@HarrisBeach.com.
This alert is not a substitute for advice of counsel on specific legal issues.
Harris Beach has offices throughout New York state, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as Washington D.C., New Haven, Connecticut and Newark, New Jersey.