Though the popular television series Ozark romanticizes the underlying criminal conduct, money laundering and the manipulation of beneficial ownership are genuine issues confronting lawyers. This was, of course, highlighted in the joint 60 Minutes-Global Witness exposé entitled Lowering the Bar, which aired in 2016. Viewed by 9.3 million people, 60 Minutes effectively demonstrated how New York lawyers implicate themselves, wittingly and unwittingly, in money laundering. This exposé, and the ensuing Grievance Committee investigation that I co-prosecuted while with the First Department, resulted in two public censures. In re Koplik, 168 A.D.3d 163 (1st Dept. 2019); In re Jankoff, 165 A.D.3d 58 (1st Dept. 2018). The real value in the Committee's investigation flowed, not from the sanctioning of lawyers, but in the identification of unresolved issues. Specifically, issues concerning the lawyer's evolving practical and ethical role in the financial system and the lack of meaningfully specific obligations needed to avoid potentially violating the Rules of Professional Conduct (Rules) or worse—federal law. As discussed below, because an escrow account is a conduit for money laundering, lawyers should voluntarily enact due diligence protocols over the provenance of escrow deposits.

The Global Witness is an international organization dedicated to combating corruption. It teamed with 60 Minutes to create a ruse that was cleverly simple: an undercover operative arrived at a lawyer's office and, while recording the conversation, indicated his connection to an undisclosed West African government minister intent on introducing millions into the U.S. financial system. This part of the narrative implicated a historically corrupt geographic region, a prominent government official, and assets disproportionate to that career. To varying degrees, the undercover implied, strongly suggested, or frankly conceded that the provenance of the minister's money was illicit. And that a primary objective of any representation would be maintaining the minister's anonymity in the introduction of this money into the financial system and subsequent conversion to capital items. This dubious narrative implicated the lawyer's ability to lawfully advise and represent a client. It harmonized potentially illegal money with lawful, but contextually curious, legal objectives like anonymity in beneficial ownership. As most of the targeted lawyers were solo or small firms, which in my Committee experience occasionally lack the controls and safeguards of larger firms, this sub-group of practitioners was likely purposefully targeted. Lawyers like Koplik and Jankoff who provided information effectuating the minister's aims violated Rules 1.2(d) (counseling a client in conduct known to be illegal or fraudulent) and 8.4(h) (conduct adversely reflecting on a lawyer's fitness).

Whether lawyers should be mandated financial "gatekeepers," like banks, has been well debated. ABA Formal Opinion 463. The perception that lawyers are a "significant gap" in the struggle against money laundering—as established by 60 Minutes—has little to do with the profession however. Financial Action Task Force, Anti-Money Laundering and Counter-Terrorist Financing Measures United States Mutual Evaluation Report (FATF-MER), p. 3 (2016). And a lot to do with the existing framework for controlling money laundering (or lack thereof). Money laundering is the criminal practice of making the proceeds of criminal activity appear legitimate by disguising its origin. Voluntary Good Practices Guidance for Lawyers To Detect and Combat Money Laundering and Terrorist Financing p. 4 (2010). There are three recognized stages to money laundering: placement, layering, and integration. Id. at 5. Placement is the introduction of unlawful proceeds into the financial system. Id. And because of the affirmative legal obligations placed on financial institutions to combat money laundering, placement is considered the most vulnerable stage for a money launderer.

Banks are required by the Bank Secrecy Act (BSA), 31 U.S.C. §5311 et seq., to establish compliance programs commonly referred to as Know Your Customer (KYC). In addition to knowing their customers and the provenance of their deposits, banks are required to perform customer due diligence by screening customers against prohibited person lists maintained by various government agencies. Lawyers, conversely, are required only to report cash payments exceeding $10,000 (using Form 8300). (FATF-MER p. 38). The lawyer as the "gap" in identifying beneficial ownership stems, not from cultural resistance, but rather from the tripartite relationship between lawyer, escrow account, and bank.

For example, transactional funds will ordinarily be deposited into an escrow account in the name of the lawyer or firm. Rule 1.15(b)(1). With escrow accounts, "a bank has no direct relationship with or knowledge of the beneficial owners of these accounts, who may be a constantly changing group of individuals and legal entities." Federal Financial Institutions Examination Council, Bank Secrecy Act/Anti-Money Laundering Examination Manual p. 309 (2014). And this is acknowledged by the Financial Crimes Enforcement Network (FinCEN) in its rule exempting banks from mandatory due diligence on the beneficial ownership of money held in escrow by lawyers. 81 Fed. Reg. 29397 (11 July 2016) (observing "with respect to the intermediary's [i.e., lawyer's] underlying clients pursuant to existing guidance, a financial institution should treat the intermediary, and not the intermediary's underlying clients, as its legal entity customer."). Stated differently, the KYC nexus is between bank and lawyer, not bank and lawyer's client. The placement stage now becomes less vulnerable for the money launderer.

This diminished KYC was perfectly captured by the 60 Minutes investigation. In response to concern by the undercover about a bank's KYC inquiry into escrow deposits, one lawyer replied: "[w]ell, they've asked me twice at [name of bank redacted], I use [name of bank redacted]. They've asked me 'so you have a lot of money coming in'. I said yes, it's real estate deals. 'Oh thank you very much' [said the bank] … . What's it there for? I did a deal. That's it." Global Witness, Lowering the Bar, p. 8 (January 2016). The suggestion here that banks will accept, at face value, the abstract representations of the lawyer is consistent with regulations. As a result, lawyers are conduits for money laundering because they are a basis for reduced vigilance.

While the applicable federal statutes require that a lawyer not actually launder money or aid, abet, assist, or conspire to do so, the issue of a lawyer's mens rea in the criminal and ethical contexts overlap. American Bar Association (ABA), Formal Opinion 463 (2013). Rule 1.2(d), found by the First Department to have been violated in Koplik and Jankoff, requires the lawyer to not counsel or assist a client "in conduct that the lawyer knows is illegal or fraudulent." Rule 1.2(d) (emphasis added). The term "knows" is defined as "actual knowledge of the fact … [and] may be inferred from the circumstances." Rule 1.0(k) (emphasis added). And in the disciplinary context, what is inferable is a sui generis concept affected by many factors, many outside the control of the lawyer under investigation—including the former client's posture (presumably there is scrutiny for the underlying transaction and the client will be motivated as such).

Regulations requiring the disclosure of beneficial ownership have reached local levels. Under New York State Tax Law §1409, effective Sept. 13, 2019, "[w]hen the grantor or grantee of a deed for residential real property containing one- to four-family dwelling units is a limited liability company, the joint return shall not be accepted for filing unless it is accompanied by a document which identifies the names and business addresses of all members, managers, and any other authorized persons … until full disclosure of ultimate ownership by natural persons is achieved." New York State Tax §1409 (emphasis added). And there is a parallel provision in New York City Administrative Code §11-2105(h). These recent amendments only confirm the need for lawyers to perform a minimum degree of due diligence on clients for two reasons: establishing whether to decline representation (which will depend, to some degree, on the lawyer's appetite for risk) and having proof in the file that a contemporaneous effort to learn was made in order to militate against an allegation of scienter in a disciplinary proceeding or criminal investigation. Rules, Preamble [11] (noting "[t]he Rules presuppose that disciplinary assessment of a lawyer's conduct will be made on the basis of the facts and circumstances as they existed at the time of the conduct in question"); see also ABA Formal Opinion 463 (advocating for due diligence to avoid being unwittingly implicated in illicit activity); ABA Informal Opinion 1470 (1981) (opining that a "lawyer cannot escape responsibility by avoiding inquiry"); N.Y.C. Formal Opinion 1999-02 (same).

A leading authority on the issue of client due diligence is the ABA's Voluntary Good Practices Guidance for Lawyers To Detect and Combat Money Laundering and Terrorist Financing (Good Practices). It advocates for a "risk-based approach" to due diligence that "ensure[s] that measures to prevent or mitigate money laundering and terrorist financing are commensurate with risks identified." Id. at 7. Risk factors include geographic risk (offshore), client risk (cash businesses, masked beneficial ownership), and service risk (provision of services where the lawyer "touches the money"). Id. at 15-22. Though a risk-based approach is practical, it requires accurate appreciation of the risks involved and is subject to the pitfall of poor judgment. The 60 Minutes narrative likely does not represent the typical scenario presented to a lawyer whose escrow account is the key around KYC. As Good Practices acknowledges, most transactions for lawyers involve domestic (and local) clients and the likelihood of there being overt red flags is probably minimal. Id. at 16.

As State Tax Law §1409 and Administrative Code §11-2105(h) direct, the identification of beneficial ownership is now locally mandated. Lawyers who make a living facilitating financial transactions may be prudent to employ basic, uniform, due diligence establishing beneficial ownership. While such efforts may be onerous, there are existing resources available to ease the burden. And the cost of such due diligence inquiries should be chargeable to the client. Rule 1.5, cmt. [1] ("A lawyer may seek payment for services performed in-house … either by charging an amount to which the client has agreed in advance or by charging an amount that reflects the cost incurred by the lawyer [provided it is not excessive]."). FinCEN, for example, has a (modifiable) due diligence form for beneficial ownership that requires the identification of any direct or indirect (accounting for nominees) beneficial owner with 25% or more equity interest. Excepting public companies, 25% is an acknowledged threshold for disclosure. Inter-American Development Bank, A Beneficial Ownership Toolkit, p. 14 (2019). (Note, though, §§1409 and 11-2105(h) have no such requirement.) If the transaction or client has significant value, it can be feasible to retain a third-party to perform comprehensive due diligence consistent with the confidentiality requirements of Rule 1.6. While a client intent on engaging in illicit activity can misrepresent beneficial ownership, this due diligence is precisely the type of evidence that can be disclosable under Rule 1.6(b)(5)(i) in a subsequent disciplinary investigation implicating Rule 1.2(d) or any other requiring scienter. Demonstrating a willingness to take non-mandated steps would also be strong evidence against the catchall provision of Rule 8.4(h). My Committee experience, and service in-house for two separate federal investigations, instruct that a lawyer's posture under the circumstances is largely reactionary—the lawyer lacks control under the duress of scrutiny. And a practice of consistent and basic due diligence will serve you well.

Si Aydiner is a solo practitioner focusing on the defense of attorney discipline actions, ethics, and appeals (www.esquireethics.com)