On April 29, 2020, the American Bar Association’s Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 491 on “Obligations Under Rule 1.2(d) to Avoid Counseling or Assisting in a Crime or Fraud in Non-Litigation Settings.”
Model 1.2(d) prohibits a lawyer from advising or assisting a client in conduct the lawyer “knows” is criminal or fraudulent. A lawyer or bar trying to discipline a lawyer will infer from the circumstances such knowledge, including a lawyer’s willful blindness to or conscious avoidance of facts. Hence, if facts known to the lawyer show a high probability that a client seeks to use the lawyer’s services for criminal or fraudulent activity, the lawyer has an obligation to make addition inquiring in order to avoid advising or assisting such activity.
Even if information obtained in the course of a preliminary interview or during a representation is not adequate to establish “knowledge” under Rule 1.2(d), other rules may require the lawyer to make more inquiries to help the client avoid crime or fraud, to avoid professional misconduct, and to advance the client’s legitimate interests. These include the duties of competence, diligence, communication, and honesty under Rules 1.1, 1.3, 1.4, 1.13, 1.16, and 8.4.
If the client or prospective client refuses to provide information necessary to determine the legality of the proposed transaction, the lawyer must ordinarily decline the representation or withdraw under Rule 1.16.
The issuance of the opinion comes in the content of media reports adverse to the reputation of lawyers, disciplinary proceedings for assisting clients in criminal activities, such as money laundering, criminal proceedings, and increased reports about the involvement of lawyers in efforts by foreign corrupt officials to launder money into the United States.
The opinion highlights the need of lawyers to meet their obligation to inquire when they have a client who may be seeking to use the lawyer’s services in a transaction to commit a crime or fraud. The opinion concedes that determining whether a client seeks to use the lawyer’s services for prohibited activities can be sensitive. Lawyers generally must believe their clients and investigating the client’s intention can be both expensive and time-consuming. The opinion discusses a lawyer’s obligation to inquire when faced with circumstances giving rise to suspicions about a prospective or existing clients activities is required by authority interpreting Rule 1.2(d) and in the rules on competence, diligence, communication, honesty, and withdrawal.
The opinion explains failure of a lawyer to make a reasonable inquiry is willful blindness punishable under the actual knowledge standard of the Rule. Whether the lawyer must inquire further depends on the circumstances. Rule 1.2(d) states that a lawyer “shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent.” Even where Rule 1.2(d) does not require further inquiry, other Rules may.
These Rues include the duty of competence under Rule 1.1., the duty of diligence under Rule 1.3, the duty of communication under Rule 1.4, the duty to protection the best interests of an organizational client under Rule 1.13, the duties of honesty and integrity under Rules 8.4(b) and (c), and the duty to withdraw under Rule 1.16(a). Making further inquiry ensures that the lawyer will be able to give the informed advice and assistance to which the client is entitled, that the representation will not result in professional misconduct, and that the representation will not involve counseling or assisting a crime or fraud.
National Strategy for Combating Terrorist and Other Financing Highlights Gatekeeper Problems
In February 2020, the U.S. Government issued its National Strategy for Combating Terrorist and Other Illicit Financing (“2020 National Strategy”). It identifies and analyzes the threats and vulnerabilities to the U.S. anti-money laundering and counter-financial terrorism (AML/CFT) system. The 2020 Strategy discusses as a major illicit financing risk attorneys, who need not understand the nature or source of income of their clients or potential clients. Attorneys advise on structuring transactions to avoid tax or other implications. In this regard in 2016, the Department of Justice alleged in a civil forfeiture case that lawyer trust accounts held by two large law firms helped launder almost $600 million stolen from the Malaysian government into the U.S. financial system.
OECD Mandatory Disclosure Rules for Addressing CRS Arrangements and Offshore Structures
An area of potential risk to lawyers is inbound investment by investors from countries that participate in OECD automatic exchange of information, known as the Common Reporting Standard (CRS). The OECD has developed mandatory disclosure rules for addressing CRS Avoidance arrangements and offshore structures. Each participating member should have penal or dissuasive sanctions to sanction violations. The 2017 UK Criminal Finances Act illustrates a law implementing the mandatory disclosure rules and imposes criminal sanctions extraterritorially for intermediaries who help taxpayers plan or implement structures violating the Act.
Formal Opinion 491, in addition to heralding the likelihood of new disciplinary proceedings for lawyers failing to make sufficient inquiries for clients who engage in criminal activities, is likely to open the door to prosecutions against U.S. lawyers both by prosecutors in the U.S. and abroad.