How far should lawyers go to make sure their clients aren't using them to launder money?

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Money Laundering

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Federal prosecutors described Omar Colon as “one of the biggest cocaine traffickers in Delaware history.”

His 2017 arrest followed the purchase of 17 kilos of cocaine hidden in oxygen tanks at a Red Roof Inn parking lot. Before that, Colon’s job appeared to be owning a property management business that bought and rehabbed homes. One of the properties, a three-bedroom single-family home in Bear, Delaware, had a tunnel system hidden behind a fake fireplace that led to an underground marijuana grow facility, according to the District of Delaware’s U.S. attorney’s office.

Colon started the property management business in 2009 after a 2003 state court drug trafficking conviction. The real estate purchases were made with checks from multiple bank accounts as well as cashier’s checks sometimes purchased by third parties—including Colon’s teenage daughter, according to the government. There are federal reporting requirements for bank deposits or cash purchases of $10,000 or more. So multiple real estate purchases involving multiple cashier’s checks for small amounts from different banks seem sketchy to some, according to lawyers interviewed by the ABA Journal.

All told, Colon bought at least 14 pieces of real estate in cash or money orders with funds from selling drugs. Many of the details might raise red or yellow flags about Colon’s capital; however, according to the indictment, his checks were made out to law firms handling the real estate closings.

Many lawyers interviewed by the ABA Journal say there is nothing in attorney professional conduct rules that would prohibit counsel from representing Colon, and there shouldn’t be—attorney-client privilege rules are sacrosanct to upholding the Constitution, and private counsel’s work involves representing individuals, not the government. There also are concerns that bias could figure in if lawyers start making value judgments about their clients’ backgrounds.

Alternatively, other lawyers interviewed by the ABA Journal, many of whom are former federal prosecutors, say people know they can launder dirty money under the cloak of attorney-client privilege and confidentiality rules, and real estate is an effective vehicle to do so.

Clarifying rules

The topic has been discussed within the ABA, and revisions to Model Rule 1.16 of the ABA Model Rules of Professional Conduct were approved by the House of Delegates in August at the ABA Annual Meeting in Denver. (See “Duty to Inquire,” page 63.) Comment language in the revised rule states that lawyers have an obligation to “inquire into and assess” the facts and circumstances of a representation before accepting it. Comment language also makes clear that a lawyer should make further inquiries as needed throughout the entire representation of a client.

As changes to the rule were being discussed, one criticism was that existing rules already make clear that lawyers have a duty to avoid becoming part of a criminal scheme. Sixth Amendment concerns figured in too.

“Whether it compromises attorney-client privilege or makes us that probing and penetrating government authority trying to oversee the activities of our clients or future clients, our criminal defense bar cannot manage attorney-client relationships in that manner,” says Michael Heiskell, a Texas lawyer and president of the National Association of Criminal Defense Lawyers.

Others say the revisions don’t go far enough. “A criminal would basically have to announce, ‘Hi, I want you to do this so I can launder my money’ before the lawyer would be required to say no,” says Scott Greytak, director of advocacy with Transparency International U.S.

Greytak supports the Enablers Act, a bill introduced in Congress in 2021 to crack down on money laundering. It was rolled into the 2023 National Defense Authorization Act, but ultimately cut following opposition from various organizations, including the ABA. Had it passed, the legislation would have subjected lawyers to some or all of the Bank Secrecy Act of 1970, which would require them to submit suspicious activity reports on clients’ financial transactions, according to a 2022 ABA statement.

Due diligence

In Pennsylvania and Delaware, where Colon bought properties, there’s nothing in the professional conduct rules that would require lawyers to ask new real estate clients about prior convictions, says Ellen Brotman, an attorney discipline defense lawyer.

However, the cashier’s checks would give her pause. “After the second or third one, I would be uncomfortable. A lot of this is about your gut. We all have common sense, practical feelings about things we hope the law hasn’t dragged out of us,” says Brotman, who is licensed in Pennsylvania, New York and Washington, D.C.

Also, the idea of assessing the facts and circumstances of each representation raises additional concerns for some lawyers.

“If I had to question my clients about this business or that business, I wouldn’t have that many clients. I think it would encourage more funny business and less disclosure,” says David Weissmann, an Atlanta real estate lawyer.

Alternatively, clients might be more accepting of additional review if it’s mandated by attorney conduct rules, says Andrew Gabriel, a real estate partner at McDonald Carano in Las Vegas. “If everyone understood it was a new norm, it would be easier to implement that kind of change,” he explains, adding that in Nevada, real estate funds are deposited and disbursed through title companies, not law firms.

Another concern is that lawyers don’t have the investigation skills needed to determine the source of client funds. Indeed, Colon, who had a bifurcated trial and was ultimately convicted of drug trafficking in 2021 followed by a 2022 money laundering conviction, had an explanation for where he got the money. His father was murdered in 1986 in a Puerto Rico grocery store, and the store owner bequeathed an insurance claim to Colon and his brother, according to an affidavit signed by his grandmother.

The affidavit was not notarized and seemed dubious, prosecutors argued. The grandmother died in 2021, which the government determined through IRS research.

Also, there were allegations Colon had a history of using others’ signatures “to suit his purposes,” based on comparisons of money order signatures, the government argued in its motion to keep the affidavit out of trial. It was granted by the court.

With large real estate transactions, it’s not unusual for lawyers to hire investigators to look at the other party, says Howard Master, a former federal prosecutor. He now works with Nardello & Co., a global investigation firm. A complex investigation could run into the six-figure range if there are concerns about sanctions or corruption, Master says.

For smaller matters, firms often handle any investigation work themselves, he adds. Master likes that the proposed revisions for Model Rule 1.16 makes clear lawyers’ responsibilities are ongoing and not just limited to new-client intake. But he thinks the ongoing piece would be difficult for some attorneys.

“It’s one thing to say no to a prospective client, but it’s a very different thing to essentially fire an existing client,” Master adds. “Often lawyers have long-term relationships with clients, and clients like that.”

At McDonald Carano, they don’t ask about financing sources for new or existing clients, but they have the capacity of running a credit check, and they run conflict checks for new transactions on all sides of the deal, Gabriel says. From the firm’s clients, they get owners’ names. For parties the firm does not represent, they look up the entities with state agencies that register those entities.

Most of McDonald Carano’s real estate clients are publicly traded companies or otherwise well-known, Gabriel says.

“If a client came in and wanted to do an all-cash deal with a lot of money, it might raise an inquiry,” he adds.

According to Colon’s indictment, many of the cashier’s checks involved amounts under $33,000, and that is not a lot of money for real estate, Brotman says.

“It’s all so fact-dependent,” she says, adding that she has provided counsel to attorneys when something seems off about a transaction they are handling. “We talk about how to gain some comfort. If you can’t get the comfort you need, then go to Rule 1.16,” Brotman says.

This story was originally published in the October-November 2023 issue of the ABA Journal under the headline: “Clean Hands: How far should lawyers go to make sure their clients aren’t using them to launder money?”

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