In a rare moment of bipartisanship, the U.S. Congress is on the cusp of adopting a significant piece of anticorruption legislation: the ENABLERS Act. The ENABLERS Act is targeted at closing loopholes in the American financial services system that have allowed corrupt foreign actors to use “gatekeeper” entities like law firms, trusts, payment processors, and accounting firms to launder billions of dollars through offshore accounts. The proposed legislation, which has been attached to the FY2023 National Defense Authorization Act (NDAA), would expand the definition of “financial institution” in the current Bank Secrecy Act (BSA) to cover more gatekeeper entities like those mentioned above, and would require these financial services-adjacent entities to institute anti-money laundering (AML) systems, comply with Know Your Client (KYC) regulations, and file suspicious activity reports (SARs) with the Treasury Department.
The ENABLERS Act, discussed previously on this blog, has received widespread support in both the House and Senate, but some influential interest groups remain opposed. Notably, the American Bar Association (ABA) has objected to the inclusion of law firms among the entities that the ENABLERS Act would subject to the BSA’s AML rules. The ABA’s chief objections are that the ENABLERS Act—especially the requirement that law firms would be required to file SARs—would undercut attorney-client confidentiality and the right to effective counsel and would inappropriately interfere with state judicial regulation of the legal profession.
While the ABA is correct in emphasizing the fundamental principle that everyone is entitled to legal representation, and that lawyers have duties of confidentiality, loyalty, and zealous advocacy to their clients, the ABA’s objections to the ENABLERS Act are overstated. Upon closer inspection, the ENABLERS Act does not ask lawyers to do more than the ethical regime that governs the legal profession already requires or permits.
- First, it is vital to understand that the ENABLERS Act targets transactional work, rather than litigation. The Act includes a specific exemption for lawyers defending their clients in litigation. The bill primarily targets financial-adjacent activities like corporate structure formations and arrangements, trust services, and payments to third parties. In fact, most of the work targeted by the bill is work that could be completed by non-lawyers such as bankers or insurance or real estate professionals. There is no compelling reason to exempt the entities that provide such services simply because the service providers happen to be attorneys.
- Second, although lawyers do have duties of confidentiality and loyalty to their clients, it is important to keep in mind that these duties are already qualified by lawyers’ ethical duties not to assist clients in criminal or fraudulent conduct. According to the ABA’s own Model Rules of Professional Conduct, a lawyer may not “assist a client in conduct the lawyer knows is criminal or fraudulent”; the Model Rules also include an exception to the normal rule of lawyer-client confidentiality; this exception allows a lawyer to reveal a client’s otherwise confidential information when the lawyer reasonably believes doing so is necessary to “prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer’s services” and “to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client’s commission of fraud in furtherance of which the client has used the lawyer’s services.” The Model Rules also permit a lawyer to withdraw from representation of a client if “the client persists in a course of action involving the lawyer’s services that the lawyer reasonably believes is criminal or fraudulent” (emphasis added). The ABA is concerned that requiring lawyers to file SARs would infringe upon the duty of confidentiality after discovery of suspicious transactions, which, the ABA appears to maintain, is a lower bar than the standards of “actual knowledge” or “reasonable belief” that the Model Rules use in the exceptions just described. But in this context, “suspicion” and “reasonable belief” are largely synonymous. To borrow from the language of criminal law, suspicion is not merely an unparticularized “hunch”; rather, as the Supreme Court has held, it is “the sort of ‘common-sense [conclusion] about human behavior’ upon which ‘practical people’…are entitled to rely” based on their professional experience. Perpetuating money laundering activity is the kind of unethical behavior the ABA expects attorneys to eschew in upholding ethical professional standards. Thus, asking lawyers to report suspected money laundering or fraud per the ENABLERS Act is consistent with the ethical standards and obligations the ABA already asks of attorneys and at most makes attorneys’ permissible acts to prevent the perpetuation of crime and frauds required.
- As for the objection that the ENABLERS Act would inappropriately interfere with the traditional prerogative of state supreme courts to regulate attorneys within their respective states, here again the concern is misplaced. For one thing, as noted above, the ENABLERS Act merely reinforces existing ethical requirements. Additionally, there is precedent for similar laws imposing mandatory reporting duties in specialty legal practices. The Sarbanes-Oxley Act, for example, requires a securities lawyer to report when there is credible evidence that a client is materially violating federal or state securities laws.
In short, the ENABLERS Act does not materially change obligations that lawyers must already follow under the ABA’s own Model Rules of Professional Conduct. While ethics rules differ somewhat state to state, in general the legal profession expects its members to uphold both the letter and the spirit of the law. The ENABLERS Act is wholly consistent with those principles, as well as principles of respect and commitment to the rule of law that should be shared by all Americans—principles that have long made U.S. markets the world’s foremost destination for foreign capital.