Bank account disclosure rule now incorporates ABA proposals to protect client confidentiality
The rule—designed to combat money laundering, terrorist financing and other illicit financial activity by clarifying and strengthening customer due diligence requirements for banks and other financial institutions—generally requires covered institutions to disclose the beneficial owners of entities opening new accounts. The term beneficial owner is defined in the rule as (1) any individual who directly or indirectly owns 25 percent or more of the equity interests of a legal entity or (2) an individual with significant responsibility to control, manage or direct the entity.
But language proposed by the ABA was added to the rule’s final version to clarify that, when a firm opens an escrow or trust account on behalf of a client, those accounts will be designated as “intermediated accounts,” and the firm will only have to disclose its own beneficial ownership, not the identity or beneficial ownership of the client for whom the accounts were established.
The clarifying language was added to the rule in response to two ABA comment letters submitted to FinCEN in May 2012 and October 2014 by Kevin L. Shepherd, a partner at the Venable law firm in Baltimore who was then chair of the ABA Task Force on Gatekeeper Regulation and the Profession. In his 2014 comments, Shepherd noted that, under Rule 1.15 (Safekeeping Property) of the ABA Model Rules of Professional Conduct, lawyers are required to establish trust accounts for many of their clients, and the lawyers have a professional and fiduciary obligation to avoid commingling their clients’ money with their own. Model Rule 1.15 is widely followed by the states, which adopt and enforce binding ethics rules for lawyers.
Shepherd also cautioned that requiring law firms to disclose the identities of clients and beneficial ownership information when establishing trust accounts would be inconsistent with ABA Model Rule 1.6 (Confidentiality of Information). Rule 1.6 states that, except for certain narrow exceptions, “a lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent.”
FOLLOW THE RULES
In his comment letter, Shepherd said that “the risk that the client’s identity—and other confidential beneficial ownership information about the clients—could be divulged by the lawyer or law firm could discourage a client from retaining a lawyer or law firm and entrusting funds with the lawyer or law firm, thereby substantially interfering with a client’s fundamental right to counsel.”
FinCEN incorporated the ABA’s arguments into its final rule, recognizing both a lawyer’s professional obligation to maintain client confidentiality under professional conduct rules as well as the significant operational challenges lawyers face when seeking to collect beneficial ownership information for escrow accounts. FinCEN also noted that state bar associations impose extensive record-keeping requirements on attorneys with respect to such accounts. These generally include, among other things, records tracking each deposit and withdrawal, including the source of funds, recipient of funds and purpose of payments; copies of statements to clients or other people showing disbursements to them or on their behalf; and bank statements and deposit receipts.
For these reasons, FinCEN concluded that attorney escrow and client trust accounts will be treated in the final bank account disclosure rule like other intermediated accounts, and financial institutions should treat the intermediary law firm as its customer, not the law firm’s clients. As a result, financial institutions need only collect beneficial ownership information regarding the law firm establishing the new intermediated account, not the identity or beneficial ownership information of clients for whose benefit the accounts are established or maintained.
This article originally appeared in the August 2016 issue of the ABA Journal with this headline: “Convincing Argument: Treasury Department rule on bank account disclosure incorporates ABA proposals to protect confidentiality of clients.”
This report is written by the ABA Governmental Affairs Office and discusses advocacy efforts by the ABA relating to issues being addressed by Congress and the executive branch of the federal government. Rhonda McMillion is editor of ABA Washington Letter, a Governmental Affairs Office publication.