Guest Post: By Refusing to Respect Attorney-Client Confidentiality, European Courts Threaten To Undermine Anti-Bribery Enforcement

GAB is pleased to welcome back Frederick Davis, a lawyer in the Paris and New York offices of Debevoise & Plimpton and a Lecturer at Columbia Law School, who contributes the following guest post:

In the fight against transnational bribery and other forms of corporate crime, a key element of some national prosecution agencies’ strategy is to encourage corporations to “self-report” to the government and to cooperate with any subsequent investigation. The United States Department of Justice (DOJ) pioneered this strategy, but other jurisdictions are beginning to adopt it as well. The basic approach is to offer companies both a stick and a carrot: The stick: If corporations do not self-report and are ultimately discovered, they will be prosecuted vigorously. The carrot: A self-reporting, cooperating company can obtain a more favorable settlement, and perhaps avoid prosecution altogether. From a public policy perspective, it is vastly more efficient for prosecutors to work with corporations in the fight against corruption, essentially enlisting them as partners to detect, investigate, and bring to justice the individuals responsible for corruption, than for prosecutors to do all this work themselves.

From the company’s perspective, though, the decision whether to self-report is difficult: By making a first phone call to a prosecutor, the company all but commits to negotiating a settlement and abandons both the chance of non-detection and the (perhaps scant) possibility of a successful defense. At a minimum, starting this process will entail large costs (particularly legal fees), as well as risks, including the risk that prosecutors may discover more matters to be investigated. There is also the problem, already discussed on this blog, of evaluating whether a negotiated outcome in one country will preclude or deter prosecution in another. And at least at the early stages, the company may not even be certain whether a violation has in fact taken place, or how widespread or egregious such violations may have been. For these reasons, when a company’s leaders learn that there may have been violations of anti-bribery or other laws, the company will retain a seasoned legal team to oversee a thorough internal investigation of the facts in order to make a reasoned decision whether, and where, to self-report.

When a company asks lawyers to do this, it is essential that the attorneys’ work be protected by the attorney-client privilege, at least until such time as the company decides to share fruits of the investigation with prosecutors. If a company knew that everything learned or generated by its lawyers in the course of an internal investigation could be subject to seizure or forced disclosure to prosecutors, then companies would face a huge disincentive to start the process of conducting an internal investigation at all, since doing so could simply create a handy road map – and compelling evidence — for the prosecutor. In the United States, although the conduct of such an internal investigation poses a number of possible traps for the unwary, if the investigation is properly managed then the company can generally be assured that no prosecutor will get her hands on the fruits of its lawyers’ work unless and until the company specifically authorizes such disclosure. Matters are more complicated in Europe, however. For example, in-house counsel are generally not considered to be “attorneys” capable of generating a protectable professional privilege. And in some countries, such as France, the client does not necessarily have the power to “waive” the secret professionel (the rough equivalent of the attorney-client privilege) at all. Most notably—and most troublingly—recent court decisions in the UK and Germany have gone even further in making the results of lawyers’ internal investigations discoverable by prosecutors without the company’s consent. These decisions, if not reviewed or curtailed by legislation, will create huge disincentives to self-investigation, and hence to self-reporting. Continue reading

Applying Anti-Money Laundering Reporting Obligations on Lawyers: The UK Experience

Anticorruption advocates and reformers have rightly been paying increased attention to the role of “gatekeepers”—bankers, attorneys, and other corporate service providers—in enabling kleptocrats or other bad actors to hide their assets and launder their wealth through the use of anonymous companies. An encouraging development on this front are the bills currently pending in the U.S. Congress that would require corporate formation agents to verify and file the identity of a registered company’s real (or “beneficial”) owners, and also would extend certain anti-money laundering (AML) rules, particularly those requiring the filing of suspicious activity reports (SARs) with the US Treasury, to these corporate formation agents.

Not everyone is thrilled. The organization legal profession, for example, is crying foul. American Bar Association (ABA) President Hilarie Bass wrote to Congress that the proposed expansion of SAR obligations to corporate formation agents, many of whom are attorneys or law firms, would compromise traditional duties of lawyer-client confidentiality and loyalty. As Matthew pointed out in a prior post, it’s not clear that this assertion is correct, as the proposed bills contain express exemptions for lawyers. But even putting that aside, it’s worth recognizing that applying SAR obligations to attorneys wouldn’t be unprecedented. Many European countries have had similar requirements in place since the early 2000s, when the European Commission issued directive 2001/97/EC, which required states to adopt legislation imposing obligations on non-financial professionals, including lawyers, to file suspicious transaction reports (STRs, essentially another term for SARs). As in the US right now, that aspect of the 2001 EC directive was extremely controversial. One EU Commission Staff Working Document went so far as to say it was “the most controversial element of the Directive” because it represented “a radical change to the principle of confidentiality that the legal profession has traditionally observed.” Some EU states and national bar associations launched an ultimately unsuccessful legal challenge to the requirement that attorneys file STRs, on the grounds that it violated the right of professional secrecy guaranteed by the Charter of Fundamental Rights of the European Union.

Yet in the end, the imposition of the STR obligations on lawyers does not seem to have radically altered the legal profession in Europe. Countries appear to have developed safeguards that preserve the essential aspects of attorney-client confidentiality, even while implementing the EC Directive. Consider, for example, how this all played out in the United Kingdom. Continue reading

Guest Post: The UK Order on UBO Registries in Overseas Territories–A Reply

Earlier this month, Martin Kenney, the Managing Partner of Martin Kenney & Co. Solicitors (a specialized investigative and asset recovery practice based in the British Virgin Islands (BVI)) posted a widely-read piece on the FCPA Blog that criticized the UK Parliament’s decision to require that British Overseas Territories create public registries of the ultimate beneficial owners (UBOs) of legal entities registered in those jurisdictions. Mr. Kenney’s post provoked two critical responses here on GAB, the first from Senior Contributor Rick Messick, the second from Editor-in-Chief Matthew Stephenson. GAB is delighted that Mr. Kenney has chosen to continue the debate over this important topic by providing the following rebuttal to those criticisms:

Matthew Stephenson wrote in his recent response to my FCPA Blog, about the futility of the UK Parliament’s proposed changes to open company UBO registers in the British Overseas Territories, that: “At the very least, beneficial ownership information should be verified and kept on file so that it will be available to law enforcement in the event of an investigation.”

In my piece, I had explained: “The fact is that the BVI already has its house in order. The island’s systems now include the Beneficial Ownership Secure Search system (BOSS System). A database that is searchable, with the information being available to UK law enforcement agencies within 24 hours. In addition, the BVI has signed up to no fewer than 28 Tax Information Exchange Agreements, with countries that include the UK, USA, Canada, Germany, France, Australia, Japan, Netherlands, etc. So what part of this is secret?” Continue reading

Why Does the American Bar Association Oppose Beneficial Ownership Transparency Reform?

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: Continue reading