Is Orange Not Your Color? Then Don’t Ignore Client’s Red Flags

Lawyers can generally believe what their clients tell them but must conduct some due diligence if there are red flags, a panel said June 1 at a recent American Bar Association conference.

Lawyers can’t ethically turn a blind eye after starting to question whether their clients’ activities are legitimate or not. They must balance their ethical duties with other business and financial interests and be cautious when dealing with new and even long-standing clients, the panel said.

Duties and Dilemmas

Kathleen M. Uston, assistant bar counsel in Virginia, said that while lawyers are generally allowed to rely upon facts given by their clients, there may be “triggers” that invoke a lawyer’s duty to conduct a reasonable inquiry, Uston said.

Uston cited the Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing, adopted by the ABA in 2010, which is “intended to provide a broad framework for implementing a risk-based approach for the legal profession.” The report outlines “a series of steps an attorney should take when performing intake,” Uston said.

She also cited ABA informal opinion 1470, which says “[A] lawyer must be satisfied, on the facts before him and readily available to him, that he can perform the requested services without abetting fraudulent or criminal conduct and without relying on past client crime or fraud to achieve results the client now wants. Otherwise, the lawyer has a duty of further inquiry.” The opinion also says a lawyer must “be assured that the requested services will not be predicated upon the client’s past fraud or other criminal conduct.”

And a more recent ABA Opinion 463 discusses client due diligence lawyers should conduct “to avoid facilitating illegal activity or being drawn unwittingly into a criminal activity.”

The duty to inquire isn’t limited to litigators. Carol A. Needham, a professional responsibility professor at St. Louis University School of Law, said all transactional lawyers also should ask questions about their clients and what the lawyer is being asked to do.

When conducting due diligence on a client, a lawyer must be respectful of the client’s confidentiality, Uston said.

If a lawyer is considering whether he is straddling the line of legality or has crossed it, Doug Richmond said, he must choose between how he’ll “look in orange” and refusing to proceed in the matter. Richmond is managing director of Aon’s professional services group.

Uston pointed out that Model Rule of Professional Conduct 1.2(d) prohibits a lawyer from assisting clients in “conduct that the lawyer knows is criminal or fraudulent.” So a lawyer must know about a client’s criminal conduct, which she didn’t think was as high a standard as the actual knowledge required in asserting a claim for aiding and abetting.

Richmond explained that a common cause of action brought by third parties against lawyers is for aiding and abetting. It can be aiding and abetting either a breach of fiduciary duty or fraud. He said the elements are:

  • the client commits an underlying wrong;
  • the lawyer has actual knowledge of the client’s wrongful conduct; and
  • the lawyer substantially assists and encourages the client’s wrongful conduct.

More Hammers for Lawyers?

The panel debated whether additional standards are needed to serve as a “hammer” to ensure lawyers’ compliance. Richmond said lawyers generally were “very attuned to and very conscious and conscientious of and about” the voluntary guidance. He also noted the strong existing U.S. framework in place regarding federal and state statutes on financial transactions. Needham pointed out that the inter-governmental Financial Action Task Force on Money Laundering has advocated for additional standards to be imposed on lawyers. She said even if 98 percent of the lawyers comply with the voluntary guidance, that’s still two percent that don’t. But Richmond questioned whether there would be 100 percent compliance if stricter standards were imposed.

“You can’t regulate against desperation, naivete, vulnerability,” Richmond said, and there is a limit on what regulation can achieve.

Participant Anthony Davis, a professional responsibility partner with Hinshaw & Culbertson LLP in New York, thought Richmond was being “incredibly naive” given the CBS 60 Minutes interview a few years ago where an undercover investigator met with lawyers in an attempt to get assistance with money laundering. Only one lawyer the investigator spoke to immediately declined the representation. Davis thought domestic law firms generally were ignorant about these issues.

Richmond still advocated for more education to lawyers about conducting client intake, rather than regulation.

Typical Cases

Uston said bar counsel typically see issues with lawyers assisting their client’s criminal conduct in immigration fraud, misuse of trust accounts, and the wiring of funds.

For instance, her office prosecuted a lawyer who represented an ethnically-focused business where workers came to the U.S. with special skills to help prepare ethnic food for the business. The lawyer knew and trusted the father who was the head of the business, but got into trouble after the son took over and started using the immigration mechanism as a way to enslave the workers as indentured servants. The lawyer trusted the son’s interpretation of what skills the workers had and wrote that on the immigration forms. But the information was wrong. Because he was criminally prosecuted, he was subject to discipline.

Uston also said clients try to use lawyers’ trust accounts to engage in criminal conduct, such as to launder money or engage in Ponzi schemes. She said solo practitioners nearing retirement are often targeted by clients asking the lawyer to accept money into the lawyer’s trust account, often in exchange for a fee.

Adequate Supervision?

Richmond said law firms do a great job supervising associates, but not necessarily of supervising partners. Steve Badger, chair of the Indiana State Bar’s legal ethics committee, said newer partners may, given the pressure to build business, ignore red flags when accepting new matters. Arthur D. Burger, a professional responsibility partner at Jackson & Campbell, PC in Washington and panel moderator, said some partners have “launch fever” when considering potential new matters, so supervising the new-matter intake process is advisable.

Richmond said there should be some screening by a conflicts or new business intake committee when considering new matters.

Uston suggested lawyers undertake an objective analysis to determine if they might be used by a client to further criminal conduct.

The panel was part of the ABA’s 44th National Conference on Professional Responsibility, in Louisville, Kentucky.

To contact the reporter on this story: Mindy Rattan in Washington at mrattan@bloomberglaw.com

To contact the editor responsible for this story: S. Ethan Bowers at sbowers@bloomberglaw.com