Money Laundering, Formal Opinion 463 and Legal Marijuana
Michael Francisco Assistant Solicitor General, Colorado Kevin Shepherd Venable LLP, Baltimore Paula Frederick General Counsel, State Bar of Georgia Dennis Rendleman ABA Ethics Counsel
Rocky Mountain High “This was obviously done by people who had never seen or been to the Rocky Mountains, and also had never experienced the elation, celebration of life, or the joy in living that one feels when he observes something as wondrous as the Perseid meteor shower on a moonless, cloudless night, when there are so many stars that you have a shadow from the starlight, and you are out camping with your friends, your best friends, and introducing them to one of nature's most spectacular light shows for the first time.”Perseid --John Denver Testifying before Congress in the “Parents Music Resource Hearings” responding to the allegation that his song was about drugs.
Marijuana Recreational States Medicinal States and D.C. Colorado Washington Alaska Arizona California Colorado Connecticut Delaware Hawaii Illinois Maine Maryland Massachusetts Michigan Montana Nevada New Hampshire New Jersey New Mexico Oregon Rhode Island Vermont Washington District of Columbia
Denver Post has entire section: www.thecannabist.co
Proposed Amendment to Colorado Rules of Professional Conduct RULE 8.6. COUNSELING CLIENTS CONCERNING MARIJUANA Notwithstanding any other provision of these rules, a lawyer shall not be in violation of these rules or subject to discipline for counseling or assisting a client to engage in conduct that, by virtue of (1) Article XVIII. Miscellaneous, Section 14, Medical Use of Marijuana for Persons Suffering From Debilitating Medical Conditions, or (2) Article XVIII, Miscellaneous, Section 16, Personal Use and Regulation of Marijuana, The lawyer reasonably believes to be either permitted or within an affirmative defense to prosecution under state criminal law, and which the lawyer reasonably believes is in compliance with legislation or regulations implementing such provisions, solely because that same conduct, standing along, may violate federal criminal law.
Colorado Supreme Court Adopted March 24, 2014 (Justice Coats and Eid would not approve) Rule 1.2 Scope of Representation and Allocation of Authority Between Client and Lawyer Comment  A lawyer may counsel a client regarding the validity, scope, and meaning of Colorado constitution article XVIll. secs. 14 & 16. and may assist a client in conduct that the lawyer reasonably believes is permitted by these constitutional provisions and the statutes, regulations, orders, and other state or local provisions implementing them. In these circumstances the lawyer shall also advise the client regarding related federal law and policy.
Arguments before Colorado Supreme Court Ethics Committee of Colorado Bar Association – Formal Ethics Opinion 125 Range of conduct Negotion of a contract or lease would violate RPC 1.2 Objection: Rule change would send the wrong message and undermine respect for the rule of law Issues: family law, employment, HOA, banking, chilling effect on lawyers. Issues: Attorney Regulation Counsel – ‘enforcement priorities,’ objections Arizona Model (1) not preempted; (2) reasonably believes compliance with state law; and (3) advise client regarding possible federal law implications
1.Threat of Prosecution – DOJ Memorandum – Asset Seizure 2.Banking – perils of an all cash industry – FinCEN – uninsured co-op 3.Tax treatment – Section 280(E) and business deductions 4.Medical Research 5.Employment 6.Commercial Affairs - including advertising and licensure 7.State Law Compliance
District of Columbia recreational decriminalization --If one is carrying a small amount for personal consumption with one foot on the National Mall and one foot on District of Columbia city property, what law and whose authority governs? --Is this a Supremacy Clause issue?
Overview FATF RBA for Legal Professionals (adopted by FATF in October 2008) ABA Voluntary Good Practices Guidance (adopted as official ABA policy at 2010 ABA annual meeting in San Francisco) Architecture of Voluntary Good Practices Guidance Analysis of risk categories Implementation of effective client due diligence/intake protocols ABA Formal Opinion 463 (“Gatekeeper Opinion”) Possible legislation?
What do you do? In Miami a man contacts a major national law firm and asks for a partner in the business law section. The client explains that he anticipates a series of transactions, but wants to maintain an anonymous profile. He will be wiring in $5 million and will ask the lawyer to act as nominee in a series of modest real estate purchases and high dollar automobile purchases. The client will send instructions on how to title later. The client wants the lawyer to act with utmost discretion and wants to pay a 15% premium to the lawyer for prompt and discrete service. The lawyer agrees and proceeds.
What do you do? In a mid size town in rural Colorado, a client from New York City contacts a general practitioner and claims to have made a lot of money in hedge funds, but now wants to diversify into farm land. The client plans to acquire a series of farms, but does not want to set off speculation and artificial inflation of prices. He will wire money into firm's trust account over time, and the lawyer will create a series of LLCs to make strategic acquisitions. The lawyer agrees to the representation.
FATF What is it/Why does it Matter? Financial Action Task Force on Money Laundering (“FATF”) FATF is an intergovernmental body established by the G-7 Summit in 1989 (36 members). Formed to develop and promote AML policies, both at national and international levels. FATF does not have the power to enact legislation-but standard setter- “soft law”-not a treaty USG/Treasury plays a leading role in promoting global AML implementation Treasury’s Office of Terrorist Financing and Financial Crimes is the head of delegation for the USG AML/CFT policy shop, works across financial sector, and regularly engages with the ABA.
FATF--History 1990-FATF issues Forty Recommendations October 2001 FATF issues 8 Special Recommendations (later 9) in response to terrorist financing concerns June 2003 FATF amends Forty Recommendations- Extends application of various AML measures described in the Forty Recommendations to designated non-financial businesses and professions (“DNFBP”), including lawyers Professionals are viewed as the “gatekeeper” to the international and domestic financial system (when carrying out certain services) February 2012-FATF revised Forty Recomendations again-no change to DNFBP requirements
What is the Risk Based Approach? 2008-FATF risk-based approach (“RBA”) Guidance for DNFBPs, including lawyers RBA-premise that AML obligations should be proportionate to AML risk--use reason and judgment as opposed to check the box mentality U.S./FATF continuing to assess willful actors v. unwittingly attorney involvement Treasury/ABA, ACTEC, ACREL, ACMA worked together to make the FATF guidance more practical Basis for ABA “Voluntary Good Practices Guidance”
Treasury Role in Gatekeeper Issues Attorneys not covered under the BSA Raise awareness/Education -We encourage ABA/private sector to implement Good Practices Guidance Welcome the ABA 463 ethics opinion-highlighting AML due diligence/existing ethics obligations- believe SRO approach makes sense. Reaching out to organizations such as State Bar regulators
Current Gatekeeper Issues Role of Gatekeepers has garnered the attention of the Administration and Congress Senator Levin-role of lawyers in facilitating foreign corruption-has called for AML obligations for professionals, including lawyers G-8/US Action Plan on Company Formation-Beneficial Ownership Major vulnerability-criminal exploitation of U.S. shell companies a range of crimes S. 1465-company formation legislation—BUT, Administration no longer supports Levin legislation; Form SS-4 approach underway Identify beneficial owners AML obligations could extend to attorneys who form companies on behalf of clients-carve-out if use formation agents
FATF RBA for Legal Professionals In October 2008, FATF adopted RBA for Legal Professionals No suspicious transactions reporting (“STR”) and no tipping off (“NTO”) rule—differs from RBA guidance for other DNFBPs (e.g., accountants, trust and company service providers). Critical decision point at April 2008 Paris meeting. FATF developed separate RBA guidance for each discrete DNFBP sector.
FATF RBA for Legal Professionals FATF Guidance is a complex document—126 separately number paragraphs. Addressed to different audiences: private and public sectors. High level guidance—FATF Guidance articulates broad principles Initial focus of FATF on financial institutions; efforts resulted in modifications to Bank Secrecy Act and other legislation in member nations FATF turned focus in 1999 to role in money laundering of DNFBPs, including most transactional lawyers
ABA Voluntary Good Practices Guidance FATF Guidance encouraged private sector to develop good practices guidance to implement the FATF Guidance. ABA led the development of the voluntary good practices guidance. Adopted as official ABA policy at 2010 annual meeting in San Francisco (R. 116). Endorsed by the following specialty bar associations: American College of Real Estate Lawyers, American College of Trust and Estate Counsel, American College of Mortgage Attorneys, and American College of Commercial Finance Lawyers. Endorsed by 6 ABA Sections: Real Property, Estate and Trust Law, Taxation, International Law, Business Law, Law Practice Management, and Criminal Justice.
ABA Voluntary Good Practices Guidance Tracks format/order of the FATF Guidance. ABA Guidance contains “practice pointers” designed to highlight or illustrate practical impact of particular point. Practice pointers reflect insights into the intent of particular provisions. Approach allows legal profession to engraft gloss on FATF Guidance. ABA Guidance is not static—will be continually revised to reflect new or better insights (and to reflect 2012 Forty Recommendations). Particular focus on various risk factors and their identification and evaluation. Sensitivity to widely varying practice settings of US lawyers. Practical explanation of risk based approach, “specified activities,” and client due diligence.
ABA Voluntary Good Practices Guidance US Treasury issued statement in support of ABA Guidance: “The Treasury Department welcomes this Good Practices paper as a useful step in protecting the legal profession as well as the broader financial system from the risks of money laundering and terrorist financing. Treasury looks forward to continuing engagement with the ABA to facilitate implementation of effective policies and procedures to protect against money laundering and terrorist financing.”
Who are covered by the ABA Guidance? Lawyers/legal professionals. Notaries are included, but not the “American” type notaries. In-house counsel excluded!
Who are covered by the ABA Guidance? Lawyers who “prepare for or carry out specified activities.” Phrase “prepare for or carry out” not defined in Forty Recommendations. 5 categories of “specified activities,” such as “buying and selling of real estate.” Lawyer Guidance does not define “buying and selling of real estate”: does it include financing or leasing transactions? Another specified activity is the “creation of companies” (company formation agents) and “buying and selling business entities”—Not defined.
Who are covered by the ABA Guidance? Remaining specified activities: Managing of client money, securities, or other assets Management of bank, savings, or securities accounts Organizing contributions for the creation, operation, or management of companies What about local counsel? May not be covered because they may not be preparing for or carrying out a specified activity—role is peripheral to overall specified activity.
What are the risk categories? Lawyer Guidance requires lawyers to assess risk as part of client due diligence. Three major risk categories: Country/geographic risk Service risk Client risk
Risk Factor #1: Country/Geographic Risk No universally agreed definition of whether a particular country or geographic area represents a higher risk. Higher risk countries: countries subject to sanctions or embargoes and countries identified by credible sources as generally lacking appropriate AML/CFT laws, regulations, and other measures.
Risk Factor #2: Client Risk Lawyer Guidance identifies about a dozen categories of potentially higher risk clients. PEPs—politically exposed persons. Based on 2012 changes to Forty Recommendations, PEPs are high level officials both domestically and internationally! Report issued in February 2010 by Senate Permanent Subcommittee on Investigations focuses on PEPs (e.g., Equatorial Guinea, Nigeria, Angola, and Gabon). Structures with no apparent legal or legitimate tax, business, economic, or other reason. Masking of beneficial ownership. Cash intensive businesses. Clients with certain criminal convictions—convictions for “proceeds generating crimes” such as embezzlement. Clients with no address/multiple addresses.
Risk Factor #3: Service Risk “Touching the money”—lawyers acting as financial intermediaries—handling receipt and transmission of funds. Concealment of beneficial ownership—lack of transparency concerns FATF. “Beneficial ownership” remains a hot issue in both the US and within FATF. Accelerated real estate transfers. Inadequate consideration. Out of character transactions.
Variables that affect risk— the balancing test Concept of proportionality—”variables” tell the lawyer whether to increase/decrease level of client due diligence. No situation where risk is zero!! Think about it—every client presents some risk of money laundering or terrorist financing. Nature and regularity or duration of client relationship. Local counsel—providing limited legal services may be considered a low risk factor. “One shot” transaction.
Can you represent a high risk client? Neither the FATF Guidance nor the ABA Guidance prohibits a lawyer from representing a higher risk client. In representing a higher risk client, lawyer needs to make sure he/she has appropriate controls in place— perform enhanced client due diligence (as opposed to basic or reduced/simplified client due diligence).
Client Intake Protocols Appendix contains example of client intake protocols designed to implement ABA Guidance. One size does not fit all—need to tailor protocols to specific practice setting. Standard level CDD, reduced/simplified CDD, and enhanced CDD.
FATF Typologies Report In response to criticisms from the legal profession, FATF issued a “typologies” report in June 2013 containing examples of where lawyers have been involved in money laundering—both unwittingly and knowingly ABA and other bar associations (IBA and CCBE) have criticized the report as being not useful and too dense— lacks educational value. ABA asked that FATF’s report focus on unwitting involvement—FATF declined to modify hypos to address concerns Bar groups producing own typologies report—issue at 2014 IBA annual meeting in Tokyo (October 2014)
ABA Ethics Opinion 463 In September 2011, ABA Gatekeeper Task Force requested that the ABA Standing Committee on Ethics and Professional Responsibility issue an advisory opinion on Gatekeeper issues. Committee issued opinion May 23, 2013 (Formal Opinion 463) Focus on Model Rules 1.2(d) (lawyer cannot knowingly counsel or assist client to commit crime or fraud) and 1.16 (withdrawing from representation if client persists in course of action involving lawyer’s services that lawyer reasonably believes is criminal or fraudulent.
Robust Educational Efforts ABA strongly focused on widespread educational efforts. On-going CLE programs, both locally and nationally. Posting of ABA Voluntary Good Practices Guidance on state, local, and specialty bar association websites. Publication of articles on CDD and Gatekeeper issues.
State Based Regulation of Lawyers Strong resistance to federal regulation of the legal profession. ABA opposes federal legislation (S.1465) that would impose burdensome and intrusive gatekeeper regulations on lawyers (Incorporation Transparency and Law Enforcement Assistance Act) Bills would subject lawyers and law firms to AML and SAR requirements of the Bank Secrecy Act when they help clients establish companies, trusts, or certain other entities, and would undermine the attorney-client privilege, the confidential lawyer- client relationship, and traditional state court regulation of lawyers S.1465 would impose burdensome, costly, and unworkable “beneficial ownership” reporting requirements on lawyers, their clients, businesses, and states.
State Based Regulation of Lawyers Strong resistance to federal regulation of the legal profession. Bills contain a vague and unworkable definition of “beneficial ownership” that would sow confusion into the company formation process and would be ineffective in fighting money laundering and terrorist financing.
State Based Regulation of Lawyers Model Rules of Professional Conduct Rule 1.2(d): A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.
Federal Laws and Response to State Marijuana Laws Controlled Substance Act, 21 USC § 811 Schedule I, 21 USC § 812 Conspiracy 18 USC § 371 Deputy Attorney General James M. Cole, August 29, 2013, memorandum to All U.S. Attorneys regarding marijuana enforcement. Department of Treasury Financial Criminal Enforcement Network Guidance, FIN-2014- G001, issued February 14, 2014.
Miami In Miami a man contacts a major national law firm and asks for a partner in the business law section. The client explains that he anticipates a series of transactions, but wants to maintain an anonymous profile. He will be wiring in $5 million and will ask the lawyer to act as nominee in a series of modest real estate purchases and high dollar automobile purchases. The client will send instructions on how to title later. The client wants the lawyer to act with utmost discretion and wants to pay a 15% premium to the lawyer for prompt and discrete service. The lawyer agrees and proceeds.
Colorado In a mid size town in rural Colorado, a client from New York City contacts a general practitioner and claims to have made a lot of money in hedge funds, but now wants to diversify into farm land. The client plans to acquire a series of farms, but does not want to set off speculation and artificial inflation of prices. He will wire money into firm's trust account over time, and the lawyer will create a series of LLCs to make strategic acquisitions. The lawyer agrees to the representation.
Colorado variation The same facts, but the client wants to participate in the marijuana industry: Supplier? Dispensary? Recreational Distributor/Store?
Arizona Ethics Opinion 11-01 “A lawyer may ethically counsel or assist a client in legal matters under the Arizona Medical Marijuana Act (‘Act’), despite the fact that such conduct may violate applicable federal law.” But: Advice or assistance may be given only if “no court decisions have held that the provisions of the Act relating to the client’s proposed course of conduct are preempted, void or otherwise invalid”; and… “the lawyer reasonably concludes that the client’s activities or proposed activities comply fully with state law requirements”; and…
“the lawyer advises the client regarding possible federal law implications of the proposed conduct if the lawyer is qualified to do so, or recommends that the client seek other legal counsel regarding those issues and appropriately limits the scope of the representation.”