By Andrew A. Servais
With the recent release of the “Pandora Papers,” renewed attention is focused on corporate ownership transparency. The so-called Pandora Papers release from the International Consortium of Investigative Journalists (ICIJ) has outlined the elaborate mechanisms that the wealthy deploy to shift funds between global jurisdictions, masking their true wealth and minimizing their tax obligations while also unmasking the U.S. as a tax haven — including the state of South Dakota with its proliferation of “dynasty trusts.”
Such developments are likely to implicate the attorneys who set up entities that may be used by clients to insulate or hide their beneficial ownership. Indeed, the ICIJ specifically refers to the role of lawyers in the creation of a world inhabited by those taking advantage of tax havens and tax loopholes; to their opportunity to take advantage of the attorney-client privilege; and to the American Bar Association’s Model Rules of Professional Conduct stating that a lawyer is an officer of the legal system and a public citizen, with a special role to “further the public’s understanding of and confidence in the rule of law.”
Furthermore, early this year, Congress passed the Corporate Transparency Act (CTA) to combat the use of shell corporations in money laundering, financial fraud, and other illicit or corrupt activities. The Financial Crimes Enforcement Network (FinCEN), the enforcement arm of the U.S. Treasury, is working to release associated regulations by a Dec. 31, 2021 deadline. The CTA requires all entities formed in or registered to do business in the United States to report beneficial ownership information to FinCEN, subject to some exceptions, by no later than Jan. 1, 2022. Although the CTA was intended to make it more difficult to operate anonymous shell companies for criminal or tax evasion purposes, the broad net it casts means that, for the first time in history, there are now federal reporting requirements for small companies that will require the annual collection and reporting of ownership information.
As a result, attorneys should be reminded that 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.
By Formal Opinion 491, issued April 29, 2020, the American Bar Association (Opinion 491) provides 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.
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).
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.”
With increased focus by the government on owners of business entities, there will be increased focus on the attorneys creating the businesses and trusts being regulated.