Right around the same time that this post appears on the blog, the U.S. Senate Judiciary Committee will be holding a hearing on “Beneficial Ownership: Fighting Illicit International Financial Networks Through Transparency.” The main focus of the hearing will be on a pending bill, the True Incorporation for Transparency for Law Enforcement Act (TITLE Act). That bill’s major provisions do two main things:
- First, subject to certain limited exceptions, the Act would require that every applicant wishing to form a corporation or limited liability company (LLC) in a U.S. State must provide that State with information on the true or “beneficial” owners of the company—that is, the live human beings who actually exercise control over, and/or receive substantial economic benefits from, these entities—and to keep this information updated. This information could then be requested by a law enforcement or other government agency, or by a financial institution conducting due diligence on a customer. Those applicants who don’t have a U.S. passport or driver’s license who want to form a corporation or LLC would have to apply through a U.S.-based “formation agent”; this agent would be responsible for verifying, maintaining, and updating information on the identity of the legal entity’s beneficial owners.
- Second, the bill would also subject these “formation agents” to certain anti-money laundering (AML) rules applicable to financial institutions, including the requirements for establishing AML programs and filing suspicious activity reports (SARs) with the Treasury Department. However, the TITLE Act expressly exempts attorneys and law firms from this provision—provided that the attorney or law firm uses a separate formation agent in the U.S. when helping a client form a corporation or LLC. (The idea, as I understand it, is that the bill would avoid putting attorneys in the position of potentially having to file SARs on their own clients—but in order to avail themselves of this exemption, an attorney helping a client form a corporation would have to retain a separate formation agent, and it would be this latter agent that would be subject to the AML rules. More on this in a moment.)
Compared to the more aggressive beneficial ownership transparency reforms touted by anticorruption/AML advocates, and adopted in some other countries, the proposed U.S. legislation is fairly mild—but it is still, as prior commentators on this blog have emphasized (here and here), a welcome step in the right direction. After all, while the U.S. record on fighting global corruption and international money laundering is good in some respects (Foreign Corrupt Practices Act enforcement and the Kleptocracy Asset Recovery Initiative come to mind), when it comes to addressing the facilitators of corruption, such as corporate secrecy, the U.S. is a laggard (as illustrated by poor U.S. score on the Tax Justice Network’s 2018 “Financial Secrecy Index,” released last month). So it’s indeed encouraging that the TITLE Act, and its counterpart in the U.S House of Representatives (the less-cleverly-named “Counter Terrorism and Illicit Finance Act”) have received both bipartisan support and the endorsement of a wide range of interest groups—including not just anticorruption, AML, and tax justice advocacy groups, but also representatives of law enforcement, the finance industry and other business interests (here and here). Many are cautiously optimistic that some version of these bills might actually become law this year.
But some opposition remains. The sources of that opposition are, in some cases, predictable: the Chamber of Commerce, for example, opposes these reforms, as does FreedomWorks, the lobbying group sponsored by the libertarian billionaire Koch brothers. One of the major opponents of the legislation, though, was more surprising, at least to me: the American Bar Association (ABA), which represents the U.S. legal profession. The ABA has come strongly against this legislation, sending letters to the responsible committees in both the House and Senate expressing strong opposition to even these relatively mild reforms.
What’s the explanation for this uncompromising opposition? Do the objections make sense on the merits? How did the ABA decide to take such a strong stand, despite the fact that I’m sure many ABA members support greater beneficial ownership transparency? I don’t know the answers to any of these questions yet, and I may try to do a few more posts over this month as I try to work through these issues. But for now, let me offer some preliminary thoughts:
First, on the substance of the ABA’s objections as expressed in the two letters, I have to confess they seemed a bit thin and poorly reasoned:
- The ABA places great emphasis on the costs of compliance—formation agents, including lawyers (unless they employ a separate formation agent), will now have to collect and verify beneficial ownership information on their clients. This is, of course, a generic objection to just about any regulation, and it’s hard to evaluate in the abstract, without more concrete evidence on the magnitude of the costs (which the ABA’s letters do not supply). But on the surface, this didn’t seem like a very strong argument, for three reasons: First, as noted above, other private sector groups affected by the legislation, including the financial sector (not just big banks but also credit unions), don’t seem perturbed by the allegedly crippling compliance costs. Second, in the grand scheme of things, the nature of the information required—things like a verified photo ID and address for the company’s beneficial owners—doesn’t seem that onerous or hard to verify, as long as the client is in fact legitimate. Third, wouldn’t most competent lawyers want to know (and verify) who their client is? I’ve never practiced law (I only teach), so maybe I’m naïve about this, but it seems like the kind of information the TITLE Act would require is the kind of material most lawyers would ask for anyway in most cases.
- The ABA’s other major objection is that the bill could impinge on lawyer-client confidentiality. So far as I can tell, this objection carries essentially zero weight with respect to the part of the bill that requires applicants, or their formation agents, to provide beneficial ownership information to the government. Of course the government can require that a private party disclose certain information—in this case who he or she is, or is working for—in order to receive a government privilege, and the fact that this information might be transmitted to and through an attorney does not somehow convert the information into a client secret. (For example, an applicant for permanent resident status has to provide information to the government about her age, country of origin, employment, assets, etc. Many applicants retain an immigration attorney to fill out all the paperwork, but this does not make it somehow inappropriate for the government to require that the attorney file, on her client’s behalf, all of this information as part of the application.)
- There’s something more to the idea that subjecting lawyers (as “formation agents”) to the other requirements of U.S. AML law, including the obligation to file SARs, would be a serious infringement on traditional attorney-client confidentiality. After all, a lawyer representing a client on numerous matters might have a lot of information on that client—much more than a typical financial institution or corporate service provider. And even though lawyers have an ethical obligation not to assist a client in engaging in criminal activity, if lawyers had to file SARs on their clients, they could find themselves in a very awkward, perhaps untenable position: A lawyer might not know, or even think, that a client is actually engaging in money laundering, but the lawyer’s confidential information on the client’s business still provides “red flags” sufficient to trigger the obligation to file an SAR report.
- But of course, as noted above, even though the TITLE Act subjects other “formation agents” to U.S. AML rules, it explicitly exempts lawyers and law firms from this provision, so long as lawyers use some other formation agent when helping a client form a corporation or LLC. I’m no expert, but this strikes me as quite a sensible compromise. On the one hand, if a lawyer is only helping a client form a corporation, and not representing the client in any other matter that might give the lawyer additional confidential information, the lawyer can act as the formation agent but must comply with U.S. AML rules, just like any other formation agent. On the other hand, if a lawyer is representing a client more generally, and that client wants to form a corporation, the lawyer can avail herself of the exemption, outsourcing the formation responsibilities to a different entity (perhaps another lawyer, perhaps a different sort of formation agent), and thereby avoiding the obligation to file SARs on the client or do anything else that might be problematic from a client confidentiality perspective. (Recall again that the only information that the formation agent would need to get from the client is information that the client is legally obligated to provide to the government anyway, as a precondition for forming the corporation.)
So, the official explanations for objecting to the bill don’t seem to make much sense—at least that’s my preliminary judgment, though I may well be wrong and would welcome correction.
What, then, explains the ABA’s surprisingly strong objections to these bills? I suppose the simplest explanation, and also the most cynical, would be financial self-interest—not of the bar as a whole, but of two overlapping subsets of the profession: (1) small firms or solo practitioners who provide corporate registration services (with no, or few, questions asked), who would indeed find it more difficult to operate if they had to perform any actual scrutiny on their clients; (2) larger firms who represent very wealthy, very shady characters, and help these clients set up complex financial and legal structures to shield their assets and identities—perhaps very occasionally for some arguably legitimate purpose, but more often for some other, usually unstated but fairly obvious illegitimate reason. If you don’t believe that this is part of what’s going on, check on the expose that Global Witness did a couple of years back, in which they secretly recorded fancy lawyers at a dozen white-shoe firms enthusiastically discussing the best ways that a prospective client—who they should have known from the first description was a corrupt foreign official—hide his assets in the U.S. While most of these lawyers stayed on the right side of the formal ethics rules, not all of them did—and even in those cases where no rules were broken, the casual, matter-of-fact tone of the conversations (genuinely shocking, at least to me) strongly suggests that such clients—and such client services—are quite common even at the most reputable firms.
Of course, not all lawyers have a vested financial interest in corporate secrecy, and indeed many lawyers are passionate advocates for greater transparency. The ABA has excellent, hardworking committees on topics like global anticorruption, international anticorruption, AML, and human rights, as well as many members with a strong interest in strengthening law enforcement, as well as others who, like their financial industry clients, would support measures that facilitate more effective due diligence, if only out of self-interest. How, then, did the ABA, which represents such an internally heterogeneous group, come to take such a one-sided position on this issue? This question is all the more puzzling given that the arguments grounded in the interests of the profession as a whole—such as the attorney-client confidentiality argument—seem so flimsy. I haven’t yet been able to get to the bottom of this. The ABA ordinarily sets policy and takes other important decisions through its House of Delegates, but I haven’t been able to track down any record of a formal House of Delegates vote regarding the ABA’s opposition to beneficial ownership transparency. Perhaps this is being driven by the ABA President, or by a small group of specially-interested senior ABA officials, without broader consultation and input from the larger membership? I’m still trying to figure this out, and if anyone out there in reader-land has any insight into how the ABA came to formulate its position on this issue, I would be most appreciative.
To be continued…
I believe this answers some of your questions
Yes, this is a TV piece on the Global Witness report I reference in my penultimate paragraph. I’m not sure, though, that it really does answer my questions. Was your point that the ABA rep’s articulated defenses in the TV piece explain the sources of the ABA’s opposition? Or were you suggesting (as others have to me, in off the record conversations) that the ABA was sufficiently ticked off by the Global Witness report and TV coverage — which they viewed as an unfair attack — that they’re circling the wagons?
Oh, sorry. SAR stands for “suspicious activity report” – the reports that regulated financial institutions must file with the Treasury if any of their current or prospective clients exhibit “red flags” suggesting possible money laundering activities.
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Matt, based on my experience as a researcher and whistleblower I believe your comment raises many of the most important legal and ethical issues related to the very integrity of the legal profession. The ABA owes you and everyone else an explanation for its unexplainable, unjustifiable position.
My past experience working in the oil & gas patches of countries like Kazakhstan and Ajerbaijan and with some of the largest and most powerful companies and law firms in the world led me to conclude, years ago, that money talks and that the attorney-client privilege is often abused by corporations, dictators & lawyers alike.
The ABA’s position on this proposed very much needed important anti- corruption reform is nothing short of a US & global disgrace. Thank you for highlighting the ABA’s implicit all-knowing complicity. Their position explains a lot and points to the need for fundamental reform of both the law and the legal profession.
Thanks for this very interesting (and troubling) post!
I guess TITLE Act is aimed to avoid situations of Mossack Fonseca, but my concern here is even if law firms could outsource the formation responsibilities to other entities, they may still have to access to or deal with information related to firms’ “suspicious activities” when managing other matters for the companies, which will by then be protected under the umbrella of Attorney-Client Privilege. So basically the exception could be taken advantage as a pretext for law firms to shirk the responsibilities of disclosing their clients’ conducts that raise corruption and money laundering concerns. I guess then we would face the issue of ensuring the formation agencies provide true and accurate information of the beneficiary owner, which is even harder, as those formation agencies themselves can be organized through SPVs, rendering their identities opaque and fuzzy.
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