How To Combat Money Laundering: Avoiding the Dirty Green

How To Combat Money Laundering: Avoiding the Dirty Green

11.2.2020

By Devika Kewalramani and Rachel S. Kwon

When a client contacts a transactional lawyer to assist with a business venture, there may be more questions than answers: What is the client’s identity? What is the source of the funds? Why does the lawyer need to deposit and disburse funds immediately? Who is the recipient of the funds? What is the jurisdiction? What is the nature of the legal services to be performed? Without clear answers, what may appear to be legal assistance for a routine or simple transaction may turn out to involve bizarre or suspicious activity. A growing number of cases illustrate how lawyers may have unwittingly become embroiled in aiding or facilitating a client’s money laundering scheme. Transactional lawyers need to be careful about the potential ethical implications of assisting clients with questionable transactions and should consider taking steps to prevent violating the New York Rules of Professional Conduct (“Rules”).^[1]

The Rimberg, Koplik and Jankoff Troika

Three recent New York cases^[2] serve as a cautionary tale for how lawyers can become involved in suspicious client activity and ultimately be held liable for assisting clients in money laundering transactions. In a 2020 case, In re Rimberg, a lawyer was introduced to a South American business investor who claimed he wanted to invest “clean” money to produce a movie. The plan was that a large amount of cash would be delivered to the lawyer’s office for the lawyer to deposit and wire transfer to different accounts in exchange for a $25,000 legal fee. The lawyer had initial doubts about the legitimacy of the money and the transaction, but still moved forward. Several years later, the lawyer learned that the money was “drug money.”

In a 2019 case, In re Koplik, a lawyer met with a prospect who represented himself as acting for a West African minister who was looking to make substantial purchases in the United States with “some special money” that companies pay for certain rare earth or other minerals – money he described not as a “bribe” but as “facilitation money.” Despite learning the facts and without further inquiry, the lawyer proceeded to offer suggestions on how to achieve the client’s objectives. Similarly, in a 2018 case, In re Jankoff, a lawyer met with a prospect who purportedly was acting for a West African minister seeking to acquire large assets in the United States, and hinted that the source of the purchase money was questionable. The lawyer initially told the prospect that he needed to conduct some inquiries, but went ahead to offer advice on how to accomplish the client’s goals without inquiring further.

Ethical Considerations and Rules

The Rimberg, Jankoff and Koplik cases highlight the scenarios with which a transactional lawyer may be presented if contacted by a prospect seeking legal assistance for suspicious business activities. How should a lawyer prepare to be on guard and act as a gatekeeper in identifying these difficult situations? New York City Bar Formal Opinion 2018-4 (2018) (NYCBA Opinion) and American Bar Association Formal Opinion 491 (2020) (ABA Opinion) offer some practical guidance on a transactional lawyer’s ethical duties when asked to assist with a questionable matter.

At the outset, a lawyer who meets a prospect to discuss a transaction is required to act competently and reasonably under Rule 1.1(a). Under Rule 8.4(b), (c) and (h), a lawyer must not engage in illegal conduct that adversely reflects on the lawyer’s honesty, trustworthiness or fitness as a lawyer; engage in conduct involving dishonesty, fraud, deceit or misrepresentation; or engage in any other conduct that adversely reflects on the lawyer’s fitness as a lawyer. The NYCBA Opinion observes that assisting in a suspicious transaction is not competent where a reasonable lawyer prompted by serious doubts would have refrained from providing assistance or would have investigated to allay suspicions before rendering or continuing to render legal assistance. The opinion notes that what constitutes a suspicion sufficient to trigger inquiry will depend on the facts and circumstances.

In situations where a prospect asks to receive and transfer funds through the lawyer’s or the firm’s escrow account, the lawyer should exercise extreme caution. Acting as a conduit for client funds is extremely dangerous for both the lawyer and the lawyer’s existing clients and is to be avoided unless the indicia of legitimacy are clear. New York City Bar Formal Opinion 2015-3 (2015) describes this scam in its simplest form: a prospect asks a lawyer to receive, deposit and disburse funds either as the lawyer’s first or principal task. The scam operates when the “client’s” check or wire transfer has “cleared,” the lawyer’s bank makes the funds available, and the lawyer disburses them as directed, often to an account abroad. At some time after the lawyer disburses the funds, the lawyer’s bank learns that the check was fraudulent and reverses the credit, or the lawyer learns that the wire into the lawyer’s account was fraudulent and demands the return of the funds. The lawyer then learns that the recipient of the funds will not return them, leaving the lawyer poorer by the amount disbursed and under grave suspicion of participating in money laundering. The opinion also notes that “the duty of competence [under Rule 1.1] includes a duty to exercise reasonable diligence in identifying and avoiding common Internet-based scams, particularly where those scams can harm other existing clients.” The opinion adds that when other clients are harmed by loss of client funds due to an escrow account scam, the lawyer has a duty to notify such clients.

Thus, if a lawyer believes that there is reason for suspicion or doubt, the lawyer is required to take further action to ensure that he or she abides by Rule 1.2(d), which states that a lawyer shall not counsel or assist a client to engage in conduct that the lawyer knows is illegal or fraudulent, except to discuss the legal consequences of any proposed course of conduct with a client. The standard for “knowledge” is broad. As defined in Rule 1.0(k), the term “knows” denotes actual knowledge of the fact in question which may be inferred from the circumstances. Moreover, the ABA Opinion points out that a lawyer may not ignore the obvious and deliberately or consciously avoid knowledge that a client is or may be using the lawyer’s services to further a crime or fraud. Hence, there is an underlying duty to inquire or dig deeper, especially if the lawyer knows of facts that make it more likely that the client plans to use the lawyer’s services for unlawful activities.

Under Rule 1.3(c), a lawyer is required to act with reasonable diligence and promptness in representing a client. When facing suspicious facts and circumstances, the Rules require that a lawyer act reasonably diligently to obtain sufficient information to determine how to proceed, if at all. In addition, a lawyer is held to certain communication requirements. Rule 1.4(a) requires a lawyer to promptly inform a client about the need for the client’s informed consent, reasonably consult with the client about how to achieve the client’s objectives, and consult with the client about what the lawyer may or may not do if the requested assistance is prohibited by the Rules or other law.

After further inquiry, if a transactional lawyer believes that a potential matter might be illicit or fraudulent, there may be some options to consider:

(i)           working with the client to derive lawful alternatives, corrective action or remedial measures by the client;

(ii)          declining or withdrawing representation; or

(iii)         disclosing confidential information.

In some situations where the lawyer has communicated with the client, the lawyer may have few options but to decline or withdraw from the representation. For example, if the lawyer has communicated with the client in an attempt to obtain further information about the potential matter and the client refuses to provide additional requisite information, or if the client refuses to pay for additional costs of such inquiry, then the lawyer has the option to decline or withdraw from such representation or pay for such inquiry him or herself. In addition, if the lawyer requires the client’s informed consent to disclose confidential information pursuant to Rule 1.6(a)(1)^[3] in order to conduct an inquiry and the client refuses to consent, then the lawyer may decline or withdraw representation. Further, if the lawyer has communicated with the client and attempted to dissuade the client from proceeding with illegal or fraudulent activity, but the client insisted on proceeding, then the lawyer would be ethically bound to decline further assistance and withdraw from representation pursuant to Rules 1.2(d), 1.16(b)(1)^[4] and 1.16(c)(2).^[5] Moreover, if a client is not dissuaded and the lawyer believes that the client will continue with illegal or fraudulent activity, the lawyer may have an additional duty to disclose certain confidential information to the proper authorities. Under Rule 1.6(b)(2), a lawyer may reveal or use confidential information to the extent that the lawyer reasonably believes necessary to prevent the client from committing a crime.

Risk Factors and the Duty To Inquire

The ABA Opinion sets forth some hypothetical scenarios that illustrate how the duty to inquire or investigate may be closely tied to the facts and circumstances of a particular situation. Depending on the risk factors present, further inquiry or investigation may or may not be needed:

Scenario 1.

A prospect with substantial monies outside the United States wants to bring them into the country in a way that minimizes U.S. tax liability, but refuses to disclose to the lawyer the nature and location of his employment, the source of the monies, and the identity of the foreign bank (or the name of the corporation holding the account) where the amounts are deposited. The prospect has not revealed to anyone the existence of such monies and has not included the amounts in his U.S. income tax returns.

Scenario 2.

A long-term client calls her lawyer to ask her to form a limited liability company to buy a ranch.

Scenario 3.

A new and unknown prospect calls a lawyer stating that he just won a lot of money in Las Vegas and needs the lawyer to form a limited liability company to buy a ranch.

Scenario 4.

A prospect asks a lawyer to assist with acquiring several farms in a rural area out of state through a series of newly created limited liability companies with money she made from hedge funds that will diversify his investments but does not want to trigger a wave of land speculation that will artificially inflate local prices.

The ABA Opinion observes that further inquiry is required in Scenario 1, given the combination of risk factors known to the lawyer that creates a high probability that the prospect is engaged in illicit activity. Those risk factors are: the lawyer

• does not know the source of the monies;
• knows that the monies are located in some foreign jurisdiction;
• knows that the prospect is trying to minimize U.S. tax liability;
• does not know where or under whose name the monies are being held;
• knows that the monies are not known to regulators or other authorities;
• knows that the prospect has evaded U.S. tax requirements thus far; and
• has no existing relationship with the prospect or any other basis for trust or familiarity.

Based on the unknown factors, suspicious nature of the known facts and possible motive of the prospect, it would not be unreasonable to believe that the facts raise concerns of unlawful activity.

Whether further inquiry is required under Scenarios 2, 3 and 4 is less clear, and the ABA Opinion notes that it depends on contextual factors such as the lawyer’s familiarity with the client/prospect and the jurisdiction. Since Scenario 2 involves a long-standing client, the lawyer has a pre-existing relationship and familiarity with the client. The proposed transaction itself does not appear suspicious if it is of the same type of matters ordinarily handled by the lawyer. It seems that further inquiry would probably not be necessary, especially if the lawyer has previously performed similar work for that client or if the proposed work aligns with the client’s overall business. Regarding Scenarios 3 and 4, the ABA Opinion observes that it may be helpful for the lawyer to first conduct a preliminary inquiry to assess whether the prospects are who they claim to be and whether the source of money is legitimate, and then consider whether additional information is needed to accept or decline the representation.

Red Flags and Lessons Learned

The Rimberg court, quoting remarks by the sentencing judge in the underlying criminal case, observed, “‘people usually don’t walk into an office with a million dollars in cash’ and ask that it be converted into another form.” Reflecting on the facts presented in Rimberg, Koplik and Jankoff through the lens of the ABA Opinion and the NYCBA Opinion, transactional lawyers should be aware of the red flags in these cases to the extent they may confront similar situations in the future:

• There were signs of danger lurking in Rimberg: the unknown identity and background of the foreign prospect, the all-cash nature of the sizable $1 million transaction, the scheme to deliver the cash to the lawyer’s office for deposit and disbursement as wired funds to different accounts, and little or no legal work to be performed in exchange for a substantial fee of $25,000. Moreover, although the lawyer was told that the money was “clean,” it does not appear that he independently verified either this information or the legitimacy of the other accounts in any way. Also, the lawyer admitted that he “didn’t feel good about [the transaction]” and acknowledged that he felt that something was not right and that he “thought he was breaking some law somewhere.”
• Warning signals of suspicious activity were also present in Koplik: the sizable amount of money involved (in the tens of millions), the prospect’s description of the origin of the money as a form of bribery in exchange for access to rare earth or other minerals, and the anonymity of the ultimate client (an unidentified foreign governmental official represented by the prospect). It does not appear that the lawyer conducted a separate inquiry as to the identity of the client or the source of the money, that he shared his concerns about the legality of the proposed transaction with the client, or that he suggested alternative ways to lawfully achieve the client’s objectives. Also, the lawyer told the client that “they would need to hide the true source of the money,” which seems to indicate that the lawyer may have known or inferred that the client was seeking assistance with an illegitimate transaction.
• Similarly, there were clues of questionable activity in Jankoff: the anonymity of the ultimate client (the prospect claimed to appear for an unidentified foreign government official, as in Koplik) and the characterization of the purchase money as “gray money” or “black money.” The lawyer told the client he needed to consult an expert and to ensure that the money was “clean,” but it does not appear that the lawyer attempted to gather information about the legitimacy of the client, the origin of the money, or the reason for making purchases anonymously, or that he communicated any lawful alternatives to the client. Despite being aware of the suspicious circumstances, the lawyer proceeded to make “suggestions on how to transfer the money into the United States from other countries in ways that would mask the minister as the ultimate or beneficial owner” in furtherance of the client’s planned activities.

For transactional lawyers, it is critical to keep one’s eyes and ears wide open to the various pieces of information that are part and parcel of a potential transaction in order to carefully evaluate the situation before agreeing to commence representation. A lawyer’s assistance in a transaction to further a crime or fraud could have grave implications, including professional discipline, damage to the lawyer’s reputation, and civil and criminal liability.^[6] For example, in Rimberg, the lawyer was convicted on a guilty plea of operating an unlicensed money transmitting business in violation of 18 U.S.C. § 1960(a) – a federal felony – and was sentenced to one year’s probation, with 250 hours of community service and a $25,000 fine. In addition, the lawyer was suspended from practicing law for three years. In Koplik and Jankoff, the lawyers in question were publicly censured.

Practical Barriers to Inquiry and Investigation

The ABA Opinion points out that the lawyer’s duty to inquire under Rule 1.2(d) is “tied to the circumstances and the lawyer’s state of knowledge. It is not a freestanding, blanket obligation to scrutinize every client for illicit ends irrespective of the nature of the specific matter and the attorney-client relationship.”^[7] As discussed below, there could be all kinds of practical and situational challenges that can stand in the way of a lawyer’s ability to learn more pertinent information about a questionable new matter. If it becomes difficult or impossible to gather the needed information, the lawyer may be compelled to drop the representation or warn the client that the lawyer will have to drop the representation if the information is not provided.

For example, where the lawyer has a long-standing client relationship, it may not be easy to identify suspicious facts without the benefit of hindsight, and even if the lawyer thinks certain facts may appear dubious, he may not want to damage the relationship based on what he might consider a small likelihood of unlawful activity. Another example is that the lawyer may incorrectly believe the facts point to “mere suspicion” rather than “knowledge” of wrongful activity and fail to take proper remedial steps or withdraw from the representation.^[8] Also, a client may initially agree to provide additional information requested by the lawyer, but ultimately delay or fail to provide such information, or provide it in an incomplete state. In that situation, unless the lawyer has paused further assistance pending receipt of the requested information, he or she may realize that he or she has already provided too much assistance such that discontinuing representation could result in financial loss.

Another example is that a lawyer may discuss corrective or remedial action with the client to which the client agrees but fails to implement; if the lawyer continues the representation despite such failure, ethical violations may occur. Further, a lawyer may commence work and then learn about the client’s ongoing unlawful activities, in which case the lawyer is not necessarily off the hook for his past assistance just because the transaction is not complete. Under Rule 8.4(a), a lawyer may be subject to discipline for knowingly attempting to assist a client’s illegal or fraudulent conduct. However, preliminary work may not constitute a “knowing attempt” to assist wrongful conduct if the lawyer is concurrently investigating it with an eye toward ending assistance if suspicions are confirmed.^[9]

Sound Practices for Preventing Shady Schemes and Scams

In light of the severe repercussions for assisting a client’s illicit activity and the increased frequency of scams aimed at lawyers and law firms, some precautionary measures may be useful:

• At the outset, be alert to the facts and circumstances presented about the potential transaction, and ask questions. For example, how did the prospective client learn of the lawyer? Who is the client? Is the lawyer familiar with the client or has he or she worked with the client or any of its related entities in the past? Is the client based in a foreign country or in the United States? What is the origin or source of funds? To whom and where will the funds be transferred? What will the funds be used for? Will it be an all-cash transaction?^[10] What is the size of the deal? What is the jurisdiction (e.g., is it considered high risk by credible sources)? What is the nature of the transaction? What are the identities of any other interested parties? What is the time frame for completing the transaction? Does the lawyer have relevant experience in the field of practice so as to be able to understand what is or is not unusual activity? What is the role of the lawyer in the matter?
• During the course of the transaction, keep a watchful eye to detect any unusual or dubious circumstances and probe further if any facts need to be further clarified, explained or investigated before continuing with the representation.
• Consider establishing internal firm controls and operational protocols to identify and combat potential money laundering schemes, including:
• conducting due diligence on potential clients as part of the client intake process;
• building awareness of potential money laundering schemes by circulating relevant court decisions and ethics opinions providing guidance;
• organizing training and engaging in discussions within transactional practice groups on the potential risks of suspicious client activity and how to minimize such risks;
• ensuring prompt internal reporting of any actual money laundering schemes discovered by the firm’s legal or non-legal personnel; and
• creating a committee to review specific incidents or situations and make recommendations to firm management.

Transactional lawyers are at risk of becoming targets of rogue actors looking to engage lawyers in their illicit money laundering schemes. It is well advised to stay attentive to any signs of danger, because dropping one’s guard could be perilous.

Devika Kewalramani is a partner and chair of Moses & Singer’s legal ethics and law firm practice, where she represents law firms and attorneys in legal ethics, professional discipline, licensing and admissions matters. Rachel S. Kwon is an associate in the firm’s banking and finance practice. David Rabinowitz, who contributed editorial assistance, is a partner in the firm and a member of its litigation, intellectual property and legal ethics and law firm practice groups.

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[1]. 22 N.Y.C.R.R. § 1200.0.

[2]. In re Rimberg, 184 A.D.3d 171, 124 N.Y.S.3d 75 (2d Dep’t 2020); In re Koplik, 168 A.D.3d 163, 90 N.Y.S.3d 187 (1st Dep’t 2019); and In re Jankoff, 165 A.D.3d 58, 81 N.Y.S.3d 733 (1st Dep’t 2018).

[3]. Rule 1.6(a)(1) states, “A lawyer shall not knowingly reveal confidential information, as defined in this Rule, or use such information to the disadvantage of a client or for the advantage of the lawyer or a third person, unless . . . the client gives informed consent . . . .”

[4]. “. . . a lawyer shall withdraw from representation of a client when . . .  the lawyer knows or reasonably should know that the representation will result in a violation of these Rules or of law.”

[5]. “. . .  a lawyer may withdraw from representing a client when . . . the client persists in a course of action involving the lawyer’s services that the lawyer reasonably believes is criminal or fraudulent.”

[6]. ABA Formal Opinion 491 (2020), at 6.

[7]. ABA Formal Opinion 491(2020), citing United States v. Sarantos, 455 F.2d 877, 881 (2d Cir. 1972) (“Construing ‘knowingly’ in a criminal statute to include willful blindness . . . is no radical concept in the law,” but the standard does not mean that an attorney has a general duty to “investigate ‘the truth of his client’s assertions’ or risk going to jail;” upholding criminal conviction of lawyer who actively aided in immigration related marriage fraud).

[8]. See N.Y. State Bar Ass’n Opinion 1034 (2014), noting in paragraph 14:

Although a person’s knowledge may be inferred from circumstances, it is clear that a mere suspicion would not be enough to constitute knowledge,” and paragraph 27, which notes, “A suspicion of misconduct is not enough. But a reasonable belief that the client is engaging or has engaged in criminal or fraudulent conduct constitutes grounds for withdrawal from representation.

[9]. NYCBA Formal Opinion 2018-4 (2018), n. 5.

[10]. All-cash transactions pose “higher risk situation[s]” for terrorist financing or other illegal activities. American Bar Association, Voluntary Good Practices Guidance for Lawyers To Detect and Combat Money Laundering and Terrorist Financing, Am. Bar Ass’n 24 (2010).