ENABLERS in the Legal Profession: Balancing Client Confidentiality Against Preventing Money Laundering

The anticorruption world is abuzz with discussion of the Pandora Papers, a major leak of financial documents that exposed how wealthy elites, including various political leaders and shady businesspeople, conceal their assets. But alongside revelations about the illicit expenditures of the rich and powerful, reporting based on the Pandora Papers also highlighted the role that lawyers and law firms have played in facilitating these arrangements—many of which are technically legal, but at least some of which suggest possible money laundering or other illicit activities.

This is hardly the first time that concerns have been raised about attorneys’ involvement in money laundering. Indeed, such concerns have existed for years, and have been repeatedly emphasized by groups like the Financial Action Task Force, and a 2010 study found that lawyers played a facilitating role in 25% of surveyed money laundering cases in an American appeals court. But perhaps because of the Pandora Papers revelations, U.S. legislators finally appear to be taking the problem seriously. Within days of the Pandora Papers leak, Members of Congress introduced a bill called the ENABLERS Act, which would expand the scope of the Bank Secrecy Act (BSA) so that many of the BSA’s requirements, including the duty to file suspicious activity reports (SARs) with the Treasury Department and to implement anti-money laundering (AML) controls, would apply to a broader set of actors—including attorneys and law firms.

The American Bar Association (ABA), which has consistently resisted pretty much every effort to impose even modest AML requirements on the legal profession, has strenuously opposed this aspect of the ENABLERS Act. The ABA’s principal objection is that many BSA requirements—especially the requirement that covered entities file SARs with the government—conflict with the lawyer’s ethical duty of client confidentiality—the attorney’s obligation not to reveal information gained in the course of representing a client to outside parties, including the government, save in a very narrow set of circumstances. (The duty of confidentiality is related to, but distinct from, the attorney-client privilege, which prevents a lawyer from testifying against her client in court regarding private communications that the attorney had with the client in the course of the legal representation, or providing such communications in response to a discovery request. Some critics have also raised attorney-client privilege concerns about SAR filings.) The ABA and other commentators have argued that extending the BSA’s mandatory reporting requirement to attorneys, as the ENABLERS Act would do, compromises attorneys’ ability to guarantee confidentiality, and thereby discourages the full, frank communications between attorney and client that are essential for effective legal representation.

The ABA has a valid concern, but only to a point. A broad and unqualified extension of BSA reporting requirements to attorneys could indeed impinge on traditional and important principles of lawyer-client confidentiality. But this is not a reason to leave things as they are. Rather, the ENABLERS Act and its implementing regulations can and should draw more nuanced distinctions, imposing SAR and other AML requirements on lawyers when those lawyers are acting principally as financial advisors, but enabling lawyers to preserve client confidentiality—including with respect to suspicious transactions—when lawyers are providing more traditional legal representation, for instance in the context of litigation.

Let’s start by giving the ABA’s argument its due: SAR reporting requirements, if applied to lawyers, would obligate a lawyer to report (without the client’s knowledge or consent) information on the client’s financial transactions—information that the lawyer only has because the client provided it to her in the course of seeking advice. Of course, lawyers are already subject to a duty not to assist clients in the commission of a crime; the ABA requires lawyers to decline to represent a client where “facts known to the lawyer establish a high probability that a client seeks to use the lawyer’s services for criminal or fraudulent activity.” And lawyers may reveal otherwise confidential information when doing so is necessary to prevent a high probability of imminent death, injury, or serious financial or property harm. But the BSA’s obligation to report suspicious transactions kicks in at a much lower threshold, based on “red flags” that suggest a transaction is “suspicious.” Indeed, financial institutions are not obligated to decline to facilitate “suspicious” transactions, the vast majority of which involve no illegality. But covered institutions must report these transactions to the government. And so extending the BSA to lawyers would mean that lawyers would have to file SARs on their clients even though the ordinary exceptions to the duty of confidentiality do not apply, and even when the “suspicious” nature of the transaction would not require that the lawyer decline to represent the client.

But preserving the status quo, in which lawyers are wholly exempt from the BSA’s AML requirements, is untenable. For one thing, the BSA includes a number of other AML requirements that do not currently apply to lawyers—requirements that do not implicate concerns about the lawyer’s duty of confidentiality (or at least, not in the same way). But even if we focus on whether SAR requirements ought to apply to lawyers, it’s important to keep in mind that while the case for a strong duty of confidentiality arises principally in the context of traditional legal representation (most obviously, in litigation), lawyers often perform services that are typically associated with financial advisors and intermediaries—setting up companies and trusts, structuring transaction (or advising clients in how to do so), and the like. There is no good reason to exempt lawyers who provide these sorts of services from BSA requirements, especially when those requirements do and should apply to other entities that provide virtually identical services. In this context, exempting lawyers from BSA requirements merely serves as a boon to the legal profession, allowing law firms to profit from illegitimate offshore financial transactions and insulating those transactions from regulatory scrutiny.

In short, it’s crucial to distinguish situations where people need to be able to confide in their lawyer without worrying that the lawyer will report theirs financial dealings to the government from situations where lawyers are performing predominantly financial services work. If the government is seeking to seize a foreign politician’s U.S. assets, that politician ought to be able to hire a lawyer to represent her, and she should be able to provide that lawyer with complete information about her past and ongoing financial transactions—without any worry that the lawyer will turn this information over to the U.S. government. By contrast, if that same politician decides to acquire luxury real estate by arranging for a cash purchase through a trust controlled by a Cayman Islands corporation, and she hires a lawyer to arrange the transaction, the lawyer should be under exactly the same obligation to file a SAR as an ordinary financial institution asked to provide the same transactional services would be. For what it’s worth, existing law already acknowledges a version of this distinction in other contexts: the attorney-client privilege, for example, does not extend to non-legal advice offered by an attorney. In a similar fashion, BSA requirements could be imposed when attorneys are providing predominantly non-legal services.

The current draft of the ENABLERS Act appears to gesture in the direction of something like this distinction, though the relevant section is somewhat unclear. The current draft would exempt from BSA requirements “any attorney or law firm that uses a paid trust or company service provider, including any paid entity formation agent, operating within the United States.” This language appears to have been lifted from an earlier version of a bill on requiring corporate formation agents to collect information on the true beneficial owners of those companies—a requirement that was enacted into law, albeit in a different form, in the Corporate Transparency Act. Perhaps due to those origins, the current language of the ENABLERS Act exception appears narrowly targeted at exempting attorneys from BSA requirements when those attorneys outsource company formation to another service provider. But if appropriately redrafted, the ENABLERS Act could provide a more general exemption for lawyers who hire an outside party, such as a bank, to help orchestrate a transaction. In that case, the outside party (the bank or other institution) would be subject to the BSA’s requirements, so that there would be no need for the lawyer to also report. In other words, if attorneys are concerned about reporting obligations, the Act should allow them to use third-party services that are themselves subject to BSA obligations to conduct the financial transactions that would be subject to disclosure under the BSA. In those cases where the legal services cannot be outsourced, the law—either the bill itself, or its implementing regulations—should distinguish those legal services that should be exempt from BSA reporting requirements because those requirements would undermine the candor that is essential for effective legal representation.

The Pandora Papers are a wake-up call for America’s anticorruption community. The United States plays a key role in facilitating illicit financial transactions on a global scale. The legal profession should not continue to profit off of that system. Rather, lawyers who act as financial service providers should be subject to the same obligations as other comparable professionals. There are certain contexts in which lawyers should not have to report information about their clients’ financial transactions to the government, but any exemption from BSA reporting requirements should be limited to those contexts. When lawyers are merely facilitating financial transactions, rather than providing legal advice, lawyers should be subject to the same disclosure requirements as all other financial intermediaries.

17 thoughts on “ENABLERS in the Legal Profession: Balancing Client Confidentiality Against Preventing Money Laundering

  1. Mayze, it is really a relevant and timely subject.
    Considering the distinct roles that a lawyer could play, I am wondering if you have other thoughts about the duty to file SARs when the lawyer’s activity falls into a grey area. For example, providing legal advice for an international trade or analyzing the legal risks of setting up an offshore company are not exactly finance services work. Do you think that it will be more efficient if the Act qualifies some activities performed by lawyers or some people who they deal with – like politically exposed people -, which will trigger SAR?

    • That’s a great suggestion, Marcelle! While courts definitely conduct this kind of line drawing in the context of legal ethics/attorney-client privilege, I think it’s also possible to imagine an effective Act that would identify specific activities that would be prototypically legal advice-like or not advice-like. While I’m sympathetic to concerns about PEPs/individuals whose identities make them higher-risk for money laundering, I also think those folks deserve good, thoughtful legal advice when they need it, so I’d be more hesitant about an identity-focused approach.

  2. Mayze, while the Pandora Papers are such a relevant and timely subject, I appreciate your view on the issue, especially as a future lawyer who hopes to work with companies. One thing I struggle with in your blog post is the idea that the ENABLERS Act should distinctly cover lawyers who are acting principally as financial advisors. I am unsure if it is just me but this seems counterintuitive. If a lawyer is providing financial assistance and thinks something may be an illicit activity, wouldn’t the lawyer want to provide guidance on how to make sure the company isn’t acting illegally? Rather than being suspicious and reporting them?

    • Great question, Cas! I don’t view this proposal as requiring reporting where someone is consulting a lawyer for prospective advice about how to obey the relevant laws––I believe that SAR reporting as it currently stands is only for transactions or attempted transactions. If someone sought and heeded a lawyer’s advice about their financial transactions, I don’t think that would trigger any reporting in the first instance (which is definitely a good thing, in terms of making sure that folks can receive legal counsel!)

  3. This is a very relevant post, Mayze.

    Recently, Transparency International has recommended that governments should impose report obligations on intermediaries (like lawyers, accountants, real state agents and notaries) as a way of strengthening anti-money laundering policy across the world (https://www.transparency.org/en/news/who-is-opening-the-gates-for-kleptocrats). Naturally, this proposition raises the resistance of those professionals. And you described it really well about lawyers in the U.S..

    In that regard, the American Bar Association has suggested that this kind of regulation should be a matter of state and territorial law, with a minimal of federal government regulation.(https://www.americanbar.org/advocacy/governmental_legislative_work/priorities_policy/independence_of_the_legal_profession/bank_secrecy_act/). What do you think about this ABA’s proposition? Would it make changes unfeasible in the American scenario?

    • Thank you, Rafael––the ABA proposal is an interesting one. In terms of state/territorial law, I worry that a jurisdictional-specific approach might lead to some genuine threat to attorney-client confidentiality and privilege. If a specific state were to adopt very onerous reporting requirements, I’d be concerned about inhibiting access to legal services/disincentivizing individuals from understanding the legality of their actions.

  4. Mayze–I really appreciate this post, especially how you address the need for reforms even when they alter the status quo. I think this applies to so many other areas even outside the BSA-context. Our comfort with how things have been done in the past is not always a good reason to leave things as they are. If anything, maybe this is the sort of situation when we should be asking ourselves these important questions the most… Why do we have this rule/tradition in the first place? Who does it benefit, and is there a better way?

    Also, I think your discussion of the distinction between lawyers acting in a financial-advisory capacity vs. a legal/litigative capacity is incredibly helpful. I have always struggled with the line-drawing in attorney-client confidentiality cases, so I found that this was a really clear way of drawing a distinction, even if it’s not a silver bullet. It’s easy to forget that just because someone is a lawyer doesn’t mean they are always acting as a lawyer. I would be curious to hear, though, whether you think the ENABLERS draft, even with its currently fuzzy language, would be better than the status quo, or if you think refinement to the language is necessary before passage?

    • What a thoughtful series of questions, Josh! I also think a lot about the financial vs. legal capacity question in attorney-client confidentiality cases, and I’m drawn to it because it’s the most workable inquiry that courts are familiar with and well-positioned to carry out. With regards to whether I think the act should pass as-is, I’m not sure––eroding confidentiality and privilege is a serious concern, and I could imagine this type of requirement being leveraged in inappropriate ways by an overzealous prosecutor. That said, I think it’s a moot point: without fine-tuning the requirements, I think that there will be coordinated pushback from legal professional groups that will undermine the attempt to pass the ENABLERS Act.

  5. Mayze, I’m hugely supportive of holding lawyers to account for corruption and money laundering. There are clearly too many in the profession who play fast and loose. One question I have is whether it’s possible to expand BSA/AML requirements to lawyers without creating the compliance infrastructure you see in banks. While compliance programs serve a valuable role, many are bureaucratic, condescending, and not terribly sophisticated, which is another way of saying they don’t lend themselves terribly well to policing legal practice.

    On a somewhat different note–and in praise of rigorous compliance requirements–expanding the ENABLERS Act exception that allows attorneys to outsource company formation to another service provider to banks and other financial institutions is a good, but we would have to be careful that lawyers don’t take advantage of this by identifying banks with weak anti-money laundering and anti-corruption programs, something which they’ve definitely done in the past by steering their clients to financial institutions that don’t ask too many questions.

    • I really appreciate both these points, Justin, especially the second issue! I’ll have to think about the potential for incentivizing lawyers to rely on banks with weak AML and anti-corruption protocols––it would certainly be counterproductive if lawmaking in this area just concentrated weak spots in AML efforts in a different industry.

  6. Mayze, thanks for your thoughts on this topic. It was interesting to hear the American perspective as we in Kenya are still struggling with how to rope the legal profession into the reporting framework as they have been one of the weakest links in money laundering. We have a few lessons to learn from what America is trying to do but it is comforting to hear the struggles are similar and there are no straight answers available. I wonder if there are countries that have implemented some form of legislation on this that we could borrow lessons from?

    • Hi Justa, I’m not an expert on international law in this field, but I know that many countries in Europe already impose money laundering reporting obligations on solicitors, including the UK––there may be something there!

  7. Really excellent post, Mayze.

    Indeed, it seems as though the push to address the role that professional services (like lawyers) facilitate the movement of dirty money had already been at the forefront of anti-corruption policy priorities before the buzz of the Pandora Papers, given President Biden’s memo on establishing corruption as a core national security interest (noting that “anonymous shell companies, opaque financial systems, and professional service providers enable the movement and laundering of illicit wealth, including in the United States and other rule-of-law-based democracies.”). I think that, as you note, the Pandora Papers might act as the tipping point to finally holding lawyers accountable for their handling of dirty money, especially as it continues to prove to be a national security threat.

  8. Devon, I like your comment about President Biden prioritizing corruption as a national security threat. He should prioritize this threat globally. Just recently here in Kenya, when the U.S Secretary of State Anthony Blinken was visiting, 3 convicted terrorists bribed their way out of Kenya’s maximum security prison and caused the entire county a security nightmare for several days, before some villagers somewhere spotted them and courageously arrested them. And I like that these measures can be extended to other professionals like accountants etc who facilitate these money laundering activities. I still haven’t heard from anyone if there are countries with best practices that have developed these frameworks to a level where we can draw some lessons learned and best practices.

  9. Mayze, very interesting post. I think your recommendation to distinguish between lawyers who provide financial services and lawyers who provide traditional legal advice is thought-provoking. However, as Marcelle mentioned, I am a bit wary about how this can be done practically, especially if a lawyer is providing multiple services to the same client. Moreover, I was intrigued by your recommendation to allow lawyers the ability to transfer reporting obligations to third parties already subject to BSA requirements, such as a financial institution. Do you see this as a potential loophole or way to mitigate the overlap in services as mentioned above?

  10. Nice Post!
    I found this information really helpful that concerns attorneys’ involvement in money laundering. Lawyers are presently, maybe to some degree unintentionally, at the front of the fight against money laundering. With numerous purviews, including the United States of America as yet forced to weaken lawful expert honor, the danger now is that these lawyers will be viewed as the compulsory facilitators to the money laundering avoidance portions of their clients that they will undoubtedly secure. We can take help from AML Penalties, one of the best platforms to provide focused inputs, news, analytics, and information on AML events, laws, and regulations.

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