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Money laundering and due diligence Featured

10:47am EDT October 23, 2001

As technology continues to advance in our increasingly global society, so do the methods of hiding and moving illegal money worldwide.

More financial business is done over the computer, through e-mail, direct deposit or wire transactions. Often, banks and other financial institutions never see their customers face-to-face or verify account information with proper identification. This technology-enabled anonymity could allow even the most blatant criminal to obscure illegal activities. But there has been an international response.

Early international efforts encouraged nations to criminalize money laundering, first focusing on proceeds from illegal drug trafficking, and later from any "serious crime." In conjunction with these efforts, the United States, along with 28 other nations, established the Financial Action Task Force to lead the anti-money laundering effort until 2004.

This task force makes broad proposals -- most notably its 40 recommendations to prevent money laundering through banks and other financial institutions -- for member nations to implement voluntarily. Most nations have adopted the recommendations, stemming the tide of laundering through those institutions, but criminals have responded by laundering through other channels.

In 1996, the task force responded by expanding its recommendations to "the conduct of financial activities ... by professions which are not financial institutions." The European Union followed by expanding its anti-money laundering directive to include "notaries and other legal professionals."

What does all this mean for the average business owner? If the United States expands the recommendations to other professions as Europe has already done, lawyers and other professionals will have due diligence requirements with regards to their clients. That would significantly change -- or possibly eliminate -- the attorney-client privilege as we know it.

For example, under the European directive, due diligence is required when representing clients in the buying and selling of property; handling of client money, securities or other assets; managing bank accounts; creating or managing companies or trusts; conducting any financial transaction; dealing with high value assets; and transporting funds.

Specifically, the recommendations require:

* A Suspicious Activity Report for any suspicious transaction engaged in by or on behalf of the client.

Professionals would need to report to the nation's anti-money laundering agency any transactions they have reason to believe involve money laundering. The range of suspicious activity could be much broader than the crime-fraud exception to the attorney-client privilege.

The professional is also prohibited from informing the client of the report's filing. The European directive imposes this obligation on attorneys but acknowledges the significance of the attorney-client privilege, exempting lawyers from the requirement during representation or defense and allowing lawyers to report to the bar association.

* An expanded definition of money laundering to include proceeds from any serious crime.

The European Union has adopted this recommendation in part, but, recognizing the impact on the legal profession, extends the obligation to report a suspicious transaction only to those offenses "linked to organized crime or damaging the European Communities' financial interests."

* Identifying the client and maintaining records.

Currently, lawyers may be exempt from identifying a client and maintaining records of a particular transaction during representation of a client. If this recommendation is adopted, lawyers would need to obtain such records.

* International information sharing.

The information in Suspicious Activity Reports would be transmitted to international authorities as well as to the home country's money laundering authority.

* Mandatory training in detection.

In addition to reporting suspected money laundering, professionals would need to train themselves to detect a possibly suspicious transaction.

These requirements would fundamentally alter client confidentiality rules found in many professions, including the attorney-client privilege. Whether, and to what extent, the United States. will adopt these recommendations is an open question.

The U.S. Department of Justice in its National Money Laundering Strategy 2000 has indicated it may expand the task force's 40 recommendations to nonfinancial professionals, stating that "because of the role they play as the gatekeepers to the domestic and international financial system, professionals -- especially lawyers, accountants and auditors -- are uniquely positioned either to facilitate money laundering or ... to deter and detect the crime."

If the United States adopts the recommendations wholesale, attorneys could be faced with the choice of maintaining client secrets and violating the anti-money laundering law or reporting on their clients and violating the Codes and/or Rules of Professional Responsibility.

Expanding the task force's recommendations could not only conflict with professionals' ethical obligations, but also impair the free flow of information between clients and professionals that is the basis of the privileges. On the other hand, maintaining the current privileges could impair the United States' movement against money laundering. Due to the high stakes for all parties involved, professionals should speak out in order to strike the proper balance. Kevin Conners is an attorney with Vorys, Sater, Seymour and Pease LLP, who practices in criminal defense involving white collar cases such as money laundering, tax fraud, health care fraud, conspiracy, bankruptcy fraud and currency transaction reporting.

A matter of law is presented by Vorys, Sater, Seymour and Pease LLP in cooperation with SBN Magazine.