Annual Meeting

ABA House amends Model Rule to address anti-money-laundering efforts

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After a contentious debate, the ABA House of Delegates approved amendments to ABA Model Rule of Professional Conduct 1.16, which covers declining or terminating representation, at the ABA Annual Meeting in Denver on Tuesday.

According to the report that accompanies Resolution 100, the ABA Standing Committee on Ethics and Professional Responsibility and the ABA Standing Committee on Professional Regulation proposed changes to help ensure that “lawyers conduct client due diligence—appropriate to the circumstances—to detect and prevent involvement in unlawful activities,” such as money laundering or terrorism financing.

The amendments say a lawyer must assess the facts and the circumstances of each representation to determine whether they may accept or continue the representation. They also say if a client or a prospective client insists on using the lawyer’s services to commit or further a crime or fraud, the lawyer must withdraw from or decline the representation.

New language proposed in Rule 1.16’s comments makes clear that a lawyer should conduct due diligence throughout their entire representation of a client. It also says a lawyer may have to conduct further inquiry into and assessment of a client at any time because of changes in facts or circumstances. This could include when a new party is named or a new entity becomes involved in a case.

Additional amendments to the Model Rule’s comments clarify that a lawyer’s due diligence will vary for each prospective client or client, depending on the level of potential risk. According to the new language, lawyers may consider several factors when determining risk, including the identity of the client, the nature of the requested services and the jurisdictions involved in the representation.

“This makes explicit what is already a lawyer’s duty,” said North Dakota Supreme Court Justice Daniel J. Crothers, chair of the Standing Committee on Professional Regulation, who introduced Resolution 100. “The substantive words are that the lawyer has an obligation to inquire and to assess information relating to the representation. That requirement exists today, we submit. And it will exist under this rule.”

Crothers added that the duty recognized by an amended Model Rule 1.16 is similar to the duty that exists for conflicts of interest.

“As lawyers, when we’re doing a conflicts check, this is not a one-and-done exercise,” he said. “Rather, you do a conflicts check when you intake the client; you do another one if a client is added or a claim is added or a party is added. This is basic good lawyering—the purpose of this rule, at its base, is to help lawyers be good lawyers.”

Outgoing ABA Treasurer Kevin Shepherd also spoke in favor of the resolution, urging its adoption to help preserve state-based judicial regulation of the profession. Voting against the measure, he said, would not only run counter to long-standing ABA policy but also invite federal regulation of the lawyers.

According to the resolution’s report, widespread concerns about lawyers’ unknowing involvement in their clients’ crimes has increased the risk of federal oversight. As one example, the proposed ENABLERS Act would regulate lawyers and law firms as “financial institutions” and require them to disclose suspicious activity by their clients.

Follow along with the ABA Journal’s coverage of the 2023 ABA Annual Meeting here.

“As a wake-up call, [the U.S.] Treasury informed me last Friday that the failure of the ABA to adopt Resolution 100 would cause Treasury to explore every means available in its regulatory toolkit to impose regulations on the legal profession. It’s not a threat—it’s just a simple fact and political reality. We ignore it at our peril,” Shepherd said.

Several House members spoke in opposition to Resolution 100 and motioned to postpone and amend the measure. Those motions failed.

Paul “Chip” Lion, a Business Law Section representative to the House of Delegates, said the Business Law Section, the Section of Litigation, the Science and Technology Law Section and the Young Lawyers Division didn’t oppose an attorney’s reasonable inquiry into clients who were using their services for money laundering. But, he said, they did oppose the resolution as written because it is too broad and does not take into account unintended consequences.

“If, in fact, this change to Rule 1.16 makes what is implicit explicit, as the opponents assert, why is there such an uproar from major sections of this association?” Lion asked. “Why do certain members of the Standing Committee on Lawyers’ for Professional Liability assert the revised rule would increase lawyer risk, diminish insurability and increase insurance premiums? This is because this kind of inquiry is a new obligation and, at worst, it is vague.”

Past ABA President Laurel Bellows agreed that the amendments to Model Rule 1.16 should be more narrowly tailored. She suggested that lawyers in solo and small firms could be adversely impacted by the changes because they are not able to inquire into possible breaches of law at every stage of a client representation.

“This is not just money laundering, anti-human trafficking and financing of terrorism; now that’s something I can understand,” Bellows said. “That’s a very directed and focused resolution. But this resolution holds every lawyer with the responsibility of inquiring not just once but continuing to inquire.”

Bellows added: “Give me some limitations. Give me some more specifics that I can apply to my practice of law.”

The ABA has lobbied for many years against the ENABLERS Act and other similar legislation, arguing that such laws could impose a major regulatory burden on lawyers and law firms, as well as negatively impact lawyer-client confidentiality.

Advocates of Resolution 100 say the change to the Model Rule will address the federal government’s anti-money-laundering goals without compromising lawyer-client confidentiality and without subjecting the legal profession to federal regulation.

See also:

ABA Journal: “ABA advocates for combating money laundering while honoring client confidentiality”

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