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.