By Andrew A. Servais
In its recent Formal Opinion 491, issued April 29, 2020, the American Bar Association (“Opinion 491”) provided a strong reminder to lawyers that they may not always rely solely upon a client’s word where there is a “high probability” that the client or prospective client is seeking to use the lawyer’s services to commit a crime.
Specifically, the Opinion 491 provides that a “lawyer who has knowledge of facts that create a high probability that a client is seeking the lawyer’s services in a transaction to further criminal or fraudulent activity has a duty to inquire further to avoid assisting that activity under Rule 1.2(d). Failure to make a reasonable inquiry is willful blindness punishable under the actual knowledge standard of the Rule.” ABA Standing Comm. on Ethics & Prof’l Responsibility, Formal Op. 491, 4/29/20. ABA Model Rule 1.2(d) prohibits a lawyer from advising or assisting a client in conduct the lawyer “knows” is criminal or fraudulent. In 2018, California adopted revised rules including a new Rule 1.2.1, which essentially follows the language of ABA Model Rule 1.2(d) and makes it unethical for a lawyer to “assist a client in conduct that the lawyer knows is criminal, fraudulent or a violation of any law….” Applicable ABA Model Rules, while not binding in California, are persuasive authority in interpreting the New California Rules.
The opinion specifically examines what attorneys have to do to satisfy the “knowing” standard. The standard requiring further inquiry singles out a “high probability” of potential illegal conduct. And the failure to take further steps to get more information amounts to “willful blindness” that is sanctionable under the actual knowledge standard of the rule, the opinion said.
Although the opinion contains several hypotheticals drawn from the ABA Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing, the guidance is equally timely given the current COVID-19 pandemic including fraudulent schemes involving the SBA’s Paycheck Protection Program (“PPP”), established as part of the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”).
Within a span of weeks, federal charges have been announced against defendants accused of committing fraud related to PPP loans across the country including in the Central District of California, Southern District of New York, District of Rhode Island, Eastern District of Texas, and Northern District of Georgia.
The defendants received PPP funds and either used the funds for jewelry and other lavish purchases as in the case of Reality TV personality (https://www.justice.gov/usao-ndga/pr/reality-tv-personality-charged-bank-fraud) or sought PPP loans claiming to “have dozens of employees earning wages at four different business entities when, in fact, there were no employees working for any of the businesses.” (https://www.justice.gov/opa/pr/two-charged-rhode-island-stimulus-fraud)
Lawyers generally do not have a duty to monitor a client’s use of money outside of specific engagements of that nature, but if the lawyer can obtain information from sources other than the prospective client without breaching confidentiality obligations under Rules 1.6 or 1.18, the lawyer should seek the information. And “[e]ven if information learned in the course of a preliminary interview or during a representation is insufficient to establish ‘knowledge’ under [Model] Rule 1.2 (d), other rules may require the lawyer to inquire further in order to help the client avoid crime or fraud, to avoid professional misconduct, and to advance the client’s legitimate interest.”
“This consultation will ordinarily include inquiry into whether there is some misapprehension regarding the relevant facts. If there is no misunderstanding and the client persists, the lawyer must withdraw.”
Thus, where a client seeks legal assistance in quickly creating public records of companies and employees which did not previously exist for the purpose of obtaining a PPP Loan, the Lawyer would have “a duty to inquire further to avoid advising or assisting” in criminal or fraudulent activity. But, during this pandemic and after, Lawyers will face closer calls.
For instance, the opinion provides an example where a lawyer in rural Georgia received a call from a hedge fund employee in New York City who allegedly wants to buy farms in rural Georgia, through a series of LLCs to avoid “a wave of land speculation and artificially inflate local prices.” This prospective client is unknown to the lawyer, and such a structure might cause the lawyer in Georgia to ask more questions and get satisfactory answers before agreeing to the engagement.
The bottom line is that if there is a high probability that the client is asking the lawyer to assist with illegal activity, then further inquiry is required, but Opinion 491 also confirms that “[o]verall, as long as the lawyer conducts a reasonable inquiry, it is ordinarily proper to credit an otherwise trustworthy client where information gathered from other sources fails to resolve the issue, even if some doubt remains…”
Andrew A. Servais is a Partner with Wingert, Grebing, Brubaker & Juskie LLP.