Those involved in business formations may unknowingly be violating professional conduct rules. As compliance requirements evolve to protect against money laundering, terrorism, and tax evasion, it has become harder for attorneys to keep up. But those who fail to comply can face serious fines and may even lose their license altogether. Join this on-demand webinar to safeguard against ethical violations. Attendees will have a better understanding of compliance requirements, new and emerging legislation, and best practices for new client due diligence. Learn about: - The intersection of business formation and money laundering/terrorism/tax evasion - How attorney-client privilege is impacted by current and emerging legislation - Penalties for doing business with certain risk groups - The ABA's Gatekeeper initiative that offers risk-based guidance - Ethical considerations of potential anti-money laundering requirements for lawyers - Due Diligence guidelines to prevent ethical dilemmas Meet our expert: Garth Jacobson, Esq. – CT Government Relations and Regional Attorney Garth B. Jacobson serves as a Senior Government Relations Attorney for CT Corporation. Prior to this position, he worked at Preston Gates and Ellis LLP. Previously, he held the position of Chief Legal Counsel to the Montana Secretary of State where he successfully litigated election law cases before the state trial and appellant courts and federal courts. During that tenure, he served on the state bar committees that drafted business entity legislation including profit and nonprofit corporate acts, revisions to the partnership laws and the limited liability company act. Additionally, he developed and administered alternative dispute resolution of business name infringements. He served on the Montana Ethics Advisory Commission. He also served on the Board of Trustees of the State Bar of Montana and was also the president of the First Judicial District Bar Association.

1. CTWolters Kluwer
Wolters Kluwer CT
Ethics in Evolving
Compliance
Requirements
PRESENTED BY:
GARTH JACOBSON, ESQ.

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• Current Lay of the Land:
– Present and future laws put Attorneys at risk of unknowingly violating Rule 1.2
Rules of Model Rules of Professional Conduct
– Background and connection between attorneys serving as business formation
professionals and unknowingly enabling money laundering terrorism and tax
evasion.
• Office of Foreign Assets Control
– What attorneys don’t know can result in fines.
– Specially Designated Nationals (SDN) list
 Attorneys need to screen their clients to avoid ethics rules violations.
• Financial Crimes Enforcement Network
– Bank Secrecy Act
– Suspicions Activity Reports (SARs) and Ethical impact on Attorneys
Agenda

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• The ABA Gatekeeper Initiative – Risk Based Guidance for Legal
Professionals
• Ethical Considerations of Potential Anti-Money Laundering Requirements
for Lawyers
– Model and NY Rules of Professional Conduct
 Rule 1.1 Competence
 Rules 1.2, Representation,
 Rule 1.4 Communication
 Rule 1.6, Confidentiality
 Rule 1.9 Duties to Former Client
 Rule 1.16 Terminating Representation
 Rule 1.18 Duties to Prospective Client
 Rule 1.13 Organization as a Client,
 Rule 4.1 Transactions with 3rd parties,
 Rule 8.4 Attorney Misconduct
• Case Studies
Agenda (cont.)

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Agenda (cont.)
• New York City Bar Formal Opinion 2018-4
• Attorney Due Diligence of Clients
– ABA Voluntary Good Practices Guidance for Lawyers
• Case Study

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MODEL RULES OF PROFESSIONAL CONDUCT
No Assistance in Illegal or Fraudulent Activities
Rule 1.2(d)
• (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.

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60 Minutes at your door
• What would you do?
How would you respond?
http://www.cbsnews.com/news/anonymous-inc-60-minutes-steve-kroft-
investigation/

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60 Minutes January, 31 2016
“The following is a script from "Anonymous, Inc." which aired on Jan. 31, 2016.
Steve Kroft is the correspondent. Graham Messick and Kevin Livelli, producers.
If you like crime dramas and movies with international intrigue, then you probably
have a basic understanding of money laundering. It's how dictators, drug dealers,
corrupt politicians, and other crooks avoid getting caught by transforming their ill-
gotten gains into assets that appear to be legitimate.
They do it by moving the dirty money through a maze of dummy corporations and
offshore bank accounts that conceal their identity and the source of the funds.
And most of it would never happen without the help -- witting or unwitting -- of
lawyers, accountants and incorporators; the people who actually create these
anonymous shell companies and help move the money. In fact, the U.S. has become
one of the most popular places in the world to do it.* * *”

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Money Laundering and Terrorist Financing
• Background
– Growing concern by federal government about money laundering and
terrorist financing.
 Six Government Accountability Office (GAO) studies since 2000.
– Federal Agencies believe states have failed to supervise the formation and
operation of legal persons.
– Business Formation Agents are viewed as integral part of the money
laundering problem.
 GAO reports assert registered agents shield identity of beneficial owners of
business entities.

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• In 2003, money laundering had an estimated world wide value between
$500 billion and $1 trillion dollars annually
• Money laundering provides the financing for…
– Drug dealers
– Arms traffickers
– Terrorists
– International Organized Criminal
– As well as common tax cheats
. . . to operate and to expand their activities, with significant social and
economic consequences.
Money Laundering is Serious

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“In recent years, the Financial Action Task Force (FATF) has noted increasingly
sophisticated combinations of techniques, such as the increased use of legal
persons to disguise the true ownership and control of illegal proceeds, and an
increased use of professionals to provide advice and assistance in laundering
criminal funds.”
-FATF, The Forty Recommendations, 20 June 2003, incorporating the amendments of
22 October 2004
Evolution of the Problem of Money Laundering
– in the Direction of Business Formation Agents

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• FATF was established by the G-7 Summit of Paris in July 1989 in response
to mounting concern over money laundering.
• The FATF is an inter-governmental body whose self-described purpose is
the development and promotion of policies, both at national and
international levels, to combat money laundering and terrorist financing.
The Financial Action Task Force (FATF)
on Money Laundering

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• The FATF is mandated to:
– examine money laundering techniques and trends;
– review existing national and international legislation and enforcement, and
– define further measures needed to combat money laundering.
• Prior to September 11, 2001, the FATF was primarily focused on anti-
money laundering and published the Forty Recommendations to
provide a set of counter-measures
• After September 11, FATF issued an additional Nine Special
Recommendations to address terrorist financing.
• FATF, as of February 2012, now has a revised 40 Recommendations.
The Financial Action Task Force (FATF)
on Money Laundering

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• FATF’s recommendations call for countries to:
– criminalize money laundering and enable authorities to confiscate the
proceeds of money laundering;
– implement customer due diligence programs
 Require record keeping
 Require suspicious transaction reporting;
– establish a financial intelligence unit to receive and disseminate
suspicious transaction reports; and,
– cooperate internationally in investigating and prosecuting money
laundering
The Financial Action Task Force (FATF)
on Money Laundering

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FATF’s Membership
• Argentina
• Australia
• Austria
• Belgium
• Brazil
• Canada
• China
• Denmark
• European Commission
• Finland
• France
• Germany
• Greece
• Gulf Co-operation Council
• Hong Kong, China
• Iceland
• India
• Ireland
• Italy
• Japan
• Luxembourg
• Mexico
• Kingdom of the Netherlands
• New Zealand
• Norway
• Portugal
• Russian Federation
• Singapore
• South Africa
• South Korea
• Spain
• Sweden
• Switzerland
• Turkey
• United Kingdom
• United States

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Why Be Concerned by FATF?
Because FATF is successful:
• FATF 40 already incorporated into U.S. Bank Secrecy Act via USA Patriot ACT for
financial institutions.
• FATF 40 recommendations already accepted as international norms.
• FATF has initiated a movement to extend national anti-money laundering programs
beyond the financial sector.

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US Failed the Mutual Evaluation in 2016
• Recommendation 22 – Designated Non-Finantial Businesses and
Professionals (DNFBPs): Customer due diligence
– Attorney should conduct client due diligence to avoid doing business with
money launderers
– Non-compliant
• Recommendation 23, DNFBP Other Measures.
– Duty to Report Suspicious Activities to Law Enforcement
– Non-compliant
• Recommendation 24, Transparency and Beneficial Ownership of Legal
Persons.
– Access by authorized persons to beneficial ownership and control
persons of legal persons
– Non-compliant

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The US Anti-Money Laundering Charge Is Lead by:
• House Task Force to Investigate Terrorism Financing
• Sen Whitehouse (RI), Rep Maloney (NY)
• Requests GAO Reports
• Financial Action Task Force on Money Laundering (FATF)
• Financial Crimes Enforcement Network (FinCEN)
• Federal Money Laundering Threat Assessment Working Group
– Dept. of Treasury
– Dept. of Justice
 Federal Bureau of Investigation (FB)
 Drug Enforcement Administration (DEA)
– Dept. . of Homeland Security

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2006 GAO Report Finds Abuses of
Shell Companies Promote Money Laundering
• States do not uniformly collect common data elements on all companies
they form. These data elements are:
– The purpose of the company
– The address of the company’s principle office
– The name of the company’s agent for service of process.
– The physical address of the company’s agent for service of process
– The number and type of shares/ownership interests for all types of
companies.
– The signature and address of the incorporators/organizers.
– The names and addresses of all officers
– The names and addresses of all directors/managers/managing members.
– The name and addresses of all beneficial owners

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The Development of Legislation
and Related Activities
• 2005 Anti-Money Laundering Task force identifies deficiencies with DE, WY
and NV
– Law Enforcement perceives the following as Deficiencies
– Minimal annual fees
– One-person company is allowed
– No annual report is required until the anniversary of the incorporation date.
– Unlimited stock is allowed, of any par value
– Bearer stock can be used
– Nominee shareholders are allowed
– Share certificates are not required
– Minimal initial filing fees
– No minimum capital requirements
– Doesn't collect corporate income tax information to share with the IRS

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Anti-Money Laundering Task Force
• Meetings may be held anywhere
• Officers, directors, employees and agents are statutorily indemnified
• Continuance procedure (allows Wyoming to adopt a company formed in
another state)
• Stockholders are not revealed to the State.
– Law enforcement’s ultimate goal is transparency, exposing the links
between the legal person and those persons who control, own, or benefit
from the activities of a legal person.

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Timeline Activities
• 2006 June. Delaware passes increased regulation of RA and requires
maintaining the business entity to provide a contact person to RA.

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Timeline (cont.)
• July 2007 - NASS Task force report makes recommendation
• The NASS task force recommended that the ABA and NCCUSL amend all of
the model and uniform entity laws to:
– require that every form of entity keep a list of its record owners
– file a periodic report with the Secretary of State in the jurisdiction of
organization that identifies by name and address an individual with access to the
list of record owners
• 2008 May. Sen. Levin, Sen. Obama introduce S 2956 “Incorporation
Transparency and Law Enforcement Assistance Act. Would have:
– Placed business formation agents (attorneys) uof beneficial owners of business
entities and make available to law enforcementnder BSA
– Required Secretary of State Offices to maintain list

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• 2008 August. ABA Gatekeepers task force proposes and House of
Delegates adopts “Resolution 300” in opposition to S 2956. The
resolution recommends attorneys promote risk based assessment of
clients to prevent unknowingly promote money laundering.
• 2009 July NCCUSL adopts the Uniform Law Enforcement Access to Entity
Information Act ULEAEIA
– Act not recommended for adoption pending federal legislative actions
• 2010 August, HR 6098 introduced. Sponsored by Rep Maloney, Rep.
Frank
• July 2014 ….Proposed New Rules for customer due diligence for
financial institutions
– Oct 126 responses to the proposed rules
– Reissues requests for response Dec. 2015
Timeline (cont.)

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Timeline (cont.)
• Delaware Aug. 2014: New record keeping requirements and
communications contact person access to records for LLCs and LPs.
– Sections 18-305 and 18-104 (LLCs) and Sections 17-305 and 17-104 (LPs) and
now require that LLCs and LPs keep updated records of names and last known
business, residence, or mailing address of each member and manager.
Additionally, the LLC’s “communications contact” (liaison between [LLC or LP]
and registered agent) must have access to these updated records.
• 2015. S 174 Sen. Whitehouse. (Son of Levin Legislation)
• Feb 2016. HR 3331 Incorporation Transparency and Law Enforcement
Assistance Act Rep. Malone, King
• Feb. 2016. S 2489 Whitehouse (companion bill)
• July 2016 S 2368 Carper

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• S 1454. Sen. Whitehouse, Grassley, Feinstein. “True Incorporation
Transparency for Law Enforcement Act”
– Requires disclosure of beneficial ownership.
• HR 3089 Rep. Maloney, King Corporate Transparency Act of 2017
• OR 2191
– Grant Sec of State investigative powers
– Make Officers Director liable for fraudulent activities of shell company
– Requires RA to have a location and not a virtual office or mail forwarding service
– Involuntary dissolution for illegal or fraudulent activates.
• DE HB 404
– Requires Registered Agents to conduct customer CDD before filing documents for
a new customer
 Identification and SDN Check
– Must periodically review clients against SDN list
Timeline (cont.)

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Timeline (cont.)
• 2019 DC Ordinance requires the disclosure of BO with 10% interest or
more.
• 2019 H.R. 2513: Corporate Transparency Act of 2019, Maloney
– Requires corporations and limited liability companies disclose their true, beneficial owners to FinCEN
at the time the company is formed.
– Establishes minimum beneficial ownership disclosure requirements: must provide beneficial owners’
name, date of birth, current address, and driver’s license or non-expired passport number.
– Requires companies to file annually with FinCEN a list of its current beneficial owners, as well as a list
of any changes in beneficial ownership that occurred during the previous year.
– Provides civil and criminal penalties for persons who willfully submit false or fraudulent beneficial
ownership information, or who knowingly fail to provide complete or updated beneficial ownership
information
– Beneficial ownership information collected by Treasury or the states will only be available to: (1) law
enforcement (upon request); and (2) financial institutions, with customer consent, for purposes of
complying with their “Know Your Customer” requirements under Anti-Money Laundering law.
• S. 1978 (IS) - Corporate Transparency Act of 2019, Sen. Whitehouse,
Rubio, Wyden

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Timeline (cont.)
Proposed Legislation: Sen. Cotton, Warner, Jones, Rounds
• Creates BO registration
ABA Resolution 119
• constitutional rights and legitimate confidentiality interests must be protected;
• appropriate due process must be provided;
• the collection, maintenance, and verification of applicable beneficial ownership or record ownership
information must be an obligation of the entity;
• any definition of and reporting threshold for beneficial ownership must be clear, reasonable, and not
unduly burdensome;
• information concerning an entity’s records contact individual, and concerning the entity’s beneficial
ownership or record ownership or both, as applicable, should only be available to:
– (i)law enforcement agencies promptly, but only in response to a valid subpoena, summons, or warrant; and
– (ii)financial institutions, but only with the consent of the entity and subject to confidentiality protections when appropriate;
• all types of business entity structures, including corporations and limited liability companies, should
generally be subject to the same requirements, with appropriate exemptions or variations to recognize
differences in entity forms, risk levels, existing regulatory obligations, or other factors;
• any penalties for noncompliance must be calibrated to reflect the nature and degree of the
noncompliance; and
• any new requirements must not undermine the attorney-client privilege, the confidentiality of lawyer-
client communications, or the confidential lawyer-client relationship.

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This Got Our Attention
All organizations involved in the corporate registration process need to understand
OFAC regulations. Undertaking any type of business or financial transaction with a
sanctions target is illegal under federal law and the industry can make an important
contribution to the achievement of national security goals by identifying sanctioned
targets in order to block their ability to use the U.S. financial system or do business in
the United States.

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OFAC Sanctions programs are strict liability and apply to:
• U.S. persons, wherever located;
• Persons within the United States;
• U.S. origin goods, technology or services wherever located

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Types of Sanctions Programs
Jurisdictional,
(1) Jurisdictional sanctions impose restrictions on a particular geography
or location; for example, U.S. Persons are prohibited to export goods
to Iran.
List-based,
(1) List-based sanctions prohibit U.S. Persons from engaging in any
transactions (directly or indirectly) where there is an interest in
property of a sanctioned party identified on the SDN List.
Sectoral
(1) sectoral sanctions programs target an individual, entity, or industry
sector -- but only for certain types of activities.
(1) For example, Crimea do not restrict U.S. Persons from all dealings with
listed parties –

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OFAC sanctions:
• Country-based
– Cuba
– Iran
– Sudan
– Syria
– North Korea
• List-based
– Terrorists and their supporters
– Narcotics traffickers and their supporters
– Persons engaged in the proliferation of weapons of mass
destruction
– Government officials who suppress democracy
Types of Sanctions Programs

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Sanctional Lists
• Consolidated Sanctions List
– Foreign Sanctions Evaders (FSE) List
– Sectoral Sanctions Identifications (SSI) List
– Palestinian Legislative Council (NS-PLC) list
– The List of Foreign Financial Institutions Subject to Part 561 (the Part 561 List)
– Non-SDN Iranian Sanctions Act (NS-ISA) List
– List of Persons Identified as Blocked Solely Pursuant to Executive Order 13599
(the 13599 List)
32

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OFAC’s prohibitions are broad and include:
 Imports of goods, technology or services
 Exports of goods, technology or services
 Attempts to facilitate any of the above
 Importantly, OFAC’s sanctions programs – whether country-, sectoral-, or
list-based, also utilize the 50 percent rule (or “Shadow SDN” rule). This
concept holds that any entity owned 50 percent or more by a prohibited
party is also a prohibited entity – even though that “shadow” entity may
not appear on the SDN or SSI lists.
Prohibited Activity

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Specially Designated Nationals List (SDN)
• ALPHABETICAL LISTING OF SPECIALLY DESIGNATED NATIONALS AND BLOCKED PERSONS
("SDN List"): This publication of Treasury's Office of Foreign Assets Control ("OFAC") is
designed as a reference tool providing actual notice of actions by OFAC with respect to
Specially Designated Nationals and other persons (which term includes both individuals and
entities) whose property is blocked, to assist the public in complying with the various
sanctions programs administered by OFAC. The latest changes to the SDN List may appear
here prior to their publication in the Federal Register, and it is intended that users rely on
changes indicated in this document. Such changes reflect official actions of OFAC, and will be
reflected as soon as practicable in the Federal Register under the index heading "Foreign
Assets Control." New Federal Register notices with regard to Specially Designated Nationals
or blocked persons may be published at any time. Users are advised to check the Federal
Register and this electronic publication routinely for additional names or other changes to
the SDN List. 3MG (a.k.a. MIZAN MACHINE MANUFACTURING GROUP), P.O. Box 16595-365,
Tehran, Iran [NPWMD] 7TH OF TIR (a.k.a. 7TH OF TIR COMPLEX; a.k.a. 7TH OF TIR
INDUSTRIAL COMPLEX; a.k.a. 7TH OF TIR INDUSTRIES; a.k.a. 7TH OF TIR INDUSTRIES OF
ISFAHAN/ESFAHAN; a.k.a. MOJTAMAE SANATE HAFTOME TIR; a.k.a. SANAYE HAFTOME TIR;
a.k.a. SEVENTH OF TIR), P.O. Box 81465-478, Isfahan, Iran; Mobarakeh Road Km 45, Isfahan,
Iran [NPWMD] 7TH OF TIR COMPLEX (a.k.a. 7TH OF TIR; a.k.a. 7TH OF TIR INDUSTRIAL
COMPLEX; a.k.a. 7TH OF TIR INDUSTRIES; a.k.a. 7TH OF TIR INDUSTRIES OF
ISFAHAN/ESFAHAN; a.k.a. MOJTAMAE SANATE HAFTOME TIR; a.k.a.

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SDN Search Page

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Search Challenges

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OFAC Penalties
• Civil fines up to $302,000 (indexed to inflation) or twice the value of the
transaction, whichever is greater.
• Civil penalties can accrue even if a U.S. person has no knowledge of the
violation.
• Criminal provisions cover persons who willfully commit, attempt to
commit, conspire to commit, or aid or abet in the commission of an
IEEPA-related violation.
• U.S. persons that willfully violate sanctions regulations now face
potential criminal fines of up to $1 million and up to twenty years in
prison.

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Sanctions Enforcement Guidelines
• Sanctions Enforcement Guidelines
– OFAC published “holistic” guidelines on September 8, 2008
– Establish the “egregious v. non-egregious case” distinction
– Provides a set of 11 factors on which to determine the appropriate
enforcement action
 Appears to eliminates the risk-based compliance model of the 2006 Banking
Procedures
 Reduces likelihood of mitigation for a “voluntary disclosure”
– New matrix for establishing a base civil penalty
– New procedures for issuing pre-penalty notices

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Base Penalty Matrix
EGREGIOUS CASE
(1)
One-half of
Transaction Value
(capped at $151,292 per
violation/$32,500 per
TWEA violation)
(2)
Applicable
Schedule Amount
(capped at $302,584 per
violation/$65,000 per
TWEA violation)
(3)
One-half of
Applicable
Statutory Maximum
(4)
Applicable
Statutory Maximum
VOLUNTARY
SELF-DISCLOSURE
Yes
YesNo
No

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Trends in Enforcement Actions
• What are the sources of information for OFAC enforcement actions?
– Routine Voluntary self-disclosures
– Blocking reports
– 31 C.F.R Section 501.602s Subpoenas
– 31 C.F.R. Section 501.603 Blocked Property Reports
– Whistleblowers
– Continued cooperation with bank regulators
– Memoranda of understanding
• Decentralization of prosecution
– New Enforcement Guidelines do not apply to DOJ
– There are 94 judicial districts
– An OFAC enforcement action can be a predicate for a money laundering
offense; we are also seeing sanctions cases giving rise to FCPA cases and
export controls cases

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Voluntary Self-Disclosures
• Voluntary self-disclosure substantially reduces the penalties OFAC will
impose
• “Voluntary self-disclosure” is a self-initiated notification to OFAC of an
apparent violation before any U.S. government agency learns of the
possible violation
• Notification does not constitute self-disclosure if a third party is required
to and does notify OFAC of the violation
– A report to OFAC by a U.S. correspondent bank of a blocked or rejected
transaction would prevent self-disclosure of that transaction, even if the
report is filed after the entity informed OFAC of the apparent violation
– Voluntary self-disclosure is possible if the third party did not report the
apparent violation to OFAC
• Disclosure must be on behalf of the entity, so that reports by whistle
blowers are not self-disclosure

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Voluntary Self-Disclosure (cont.)
• The benefits of voluntary self-disclosure may be largely illusory,
however
• If a transaction passes through the U.S. financial system, it may be
difficult to voluntarily self-disclose, because the U.S. correspondent
bank will report blocked or rejected transactions
– Even if you notify OFAC before the bank reports the transaction, it will not
count as self-disclosure

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Failure to Maintain Records
• Failure to maintain records in adequate manner: $50,000
– OFAC need not find a violation
– This penalty can be applied in addition to any penalty for a violation
• We are concerned that application of this penalty could become automatic
in any case OFAC finds a violation
– One of the charges against the U.K. bank was that, by altering SWIFT
messages, it prevented U.S. banks from maintaining accurate records
• This penalty effectively requires all parties to have a compliance program

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Current Focus: North Korea, Iran, & Syria
• OFAC and DOJ are making enforcement of Iran sanctions a priority
• Department of Commerce (DOC) is also increasing scrutiny of U.S.
exports to Iran
– DOC licenses and administers U.S. exports
• Cooperation between OFAC and DOC has been limited, but is increasing

45. CTWolters Kluwer
Iran Legislation – HR 1905, Pub.L. 112-158. (2012)
Expand sanctions against Iran (again) targeting anyone who:
• works in Iran's petroleum, petrochemical, or natural gas sector;
• provides goods, services, infrastructure, or technology to Iran's oil and natural gas sector, including financial
services, consulting, and maintenance & repair;
• conducts oil-for-gold or other swap transactions with Iran; insures or re-insures investments in Iran's oil
sector;
• engages in joint ventures with the National Iranian Oil Company (NIOC);
• provides insurance or re-insurance to the National Iranian Oil Company or the National Iranian Tanker
Company (NITC);
• helps Iran evade oil sanctions through reflagging, etc;
• sells, leases, or otherwise provides oil tankers to Iran, unless from a country that is significantly reducing its
oil purchases;
• transports crude oil from Iran, concealing the origin of Iranian crude;
• transports refined petroleum products to Iran; sanctioned vessels could be prevented from landing at a port
in the U.S. for up to two years;
• provides special financial messaging services to designated Iranian banks, or those who enable such activity;
• engages in uranium mining with Iran anywhere in the world.

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Russian Sanctions Legislation
• H.R.3364 - Countering America's Adversaries Through Sanctions Act
(Enacted Aug 2017)
• This bill directs the President to impose sanctions against:
– Iran's ballistic missile or weapons of mass destruction programs,
– the sale or transfer to Iran of military equipment or the provision of related
technical or financial assistance, and
– Iran's Islamic Revolutionary Guard Corps and affiliated foreign persons.
• Continues Russian Sanctions

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• Established in 1990 to support law enforcement agencies by collecting,
analyzing, and coordinating financial intelligence information to combat
money laundering
• In 1994, expanded to administer the Bank Secrecy Act
• The BSA was amended by the USA PATRIOT Act in 2001
• Is the U.S. Financial Intelligence Unit

48. CTWolters Kluwer
• Apply to Financial Institutions
– Banks, credit unions and thrifts
– Brokers or dealers in securities
– Certain insurance companies
– Money services businesses
– Casinos and card clubs
– Dealers in precious metals, stones or jewels
The Bank Secrecy Act Regulations

49. CTWolters Kluwer
• Risk-based Anti-Money Laundering (AML) Program
– Written policies, procedures, and internal controls that are based on the
results of the risk assessment
– A compliance officer responsible for ensuring that the AML program is
effectively implemented, the program is updated when necessary, and
that the appropriate persons are trained
– Ongoing training of appropriate persons
– Independent testing on a periodic basis to monitor and maintain the
program
• Suspicious Activity Reporting (in some cases)
The BSA Regulations Require

50. CTWolters Kluwer
• Identify the customer and verify the customer’s identity
• Confirm that the customer is not fronting for another person or entity
• Identify the nature of the business relationship
• Confirm that the relationship reflects the company’s knowledge of the
customer’s activities and needs
• Create a risk profile that includes:
− Basic information on the customer
− The customer’s geographical location
− The geographical sphere of the customer’s activities
− The nature of the customer’s activities
− The customer’s method of payment
“Know Your Customer” & Risk Profiles

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• Risk assessment determines the extent to which a financial institution
is vulnerable to exploitation by:
− Money launderers
− Terrorist financiers
− Persons seeking to evade economic sanctions
• A risk assessment includes a comprehensive evaluation of the level of
risk for a company’s:
− Products
− Services
− Customers
− Geographic locations
• For each category, the assessment will determine whether the
company is exposed to low, moderate, or high risk
Risk Assessment

52. CTWolters Kluwer
• Section 352 of the USA PATRIOT Act requires that financial
institutions establish AML programs.
• Financial institutions includes “persons involved in real estate
closings and settlements
• FinCEN’s proposed rule solicited assistance from the private sector to
craft the AML Program Rule:
– What are the Money Laundering Risks in Real Estate Closing and
Settlements?
– How should Persons Involved in Real Estate Closings and Settlements be
Defined?
– Should any persons involved in real estate closings or settlements be
exempted from coverage under Section 352?
– How should AML program requirements for persons involved in real
estate closing and settlements be structured?
2003 Proposed Rule: AML Program Requirements for
Persons Involved in Real Estate Closings and Settlements

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• 52 Comments
• Result: Final Rule Never Published
• Implications for the future
− The Stop Tax Haven Abuse Act would amend the BSA Regulations to
include persons involved in corporate formation process.
− Final Rule published within 180 days
Public Response

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FinCEN Geographic Order, May 2019
• Geographic Targeting Orders” Require Identification for High End Cash
Buyers of Real Estate (300K or more)
– Escrow companies must identify individuals behind entities making all cash
purchases of high end real estate.
1. The Texas counties of Bexar, Tarrant, or Dallas; 2. The Florida counties of Miami-Dade, Broward, or
Palm Beach; Geographic Targeting Order Covering TITLE INSURANCE COMPANY May 14, 2019 2 3. The
Boroughs of Brooklyn, Queens, Bronx, Staten Island, or Manhattan in New York City, New York; 4. The
California counties of San Diego, Los Angeles, San Francisco, San Mateo, or Santa Clara; 5. The City and
County of Honolulu in Hawaii; 6. The Nevada county of Clark; 7. The Washington county of King; 8. The
Massachusetts counties of Suffolk, or Middlesex; or 9. The Illinois county of Cook;
• Program is spreading to other parts of the country
• Sen. Graham included it in S 3366

55. CTWolters Kluwer
New Beneficial Ownership
Info Requirements for Banks
• (b) Identification and Verification. With respect to legal entity customers,
the covered financial institution’s customer due diligence procedures
should enable the institution to:
– (1) Identify the beneficial owner(s) of each legal entity customer, unless
otherwise exempt pursuant to §1010.230(d). * * *
• (2) Verify the identity of each beneficial owner identified to the covered
financial institution, according to risk-based procedures to the extent
reasonable and practicable.

56. CTWolters Kluwer
New Rules for Financial Institutions
• (c) Beneficial Owner. For purposes of this section, Beneficial Owner
means each of the following:
• (1) Each individual, if any, who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, owns 25% or
more of the equity interests of a legal entity customer;
• (2) A single individual with significant responsibility to control, manage, a
legal entity customer, including
– (i) An executive officer or senior manager (e.g., a Chief Executive Officer, Chief
Financial Officer, Chief Operating Officer, Managing Member, General Partner,
President, Vice President, or Treasurer); or
– (ii) Any other individual who regularly performs similar functions.

57. CTWolters Kluwer
New IRS Rule, T.D. 9796 for
Foreign Disregarded Entities
• Domestic disregarded entities wholly owned by foreign persons are now
subject to new reporting obligations.
• T.D. 9796) treats such entities as domestic corporations rather than as
disregarded entities for purposes of the reporting requirements under
Sec. 6038A. Eft. Jan. 1, 2017, and ending on or after Dec. 13, 2017.
• Foreign owned domestic disregarded entities must obtain (EIN) and file
Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation
or a Foreign Corporation Engaged in a U.S. Trade or Business

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The Gatekeeper Initiative
• Originates from the Moscow Communiqué issued at the 1999 G-8
Finance Ministers
• Calls upon countries to consider various means to address money
laundering through the efforts of professional gatekeepers of the
international financial system including lawyers, accountants, company
formation agents and others
• Following the Moscow Communiqué, FATF created a working group that
has identified several professions as “gatekeepers” with respect to
money laundering
• Within the U.S., an inter-agency working group was established to
develop a U.S. position on the Gatekeeper Imitative. It includes the
Departments of Justice and Treasury, the SEC and FinCEN

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The Gatekeeper Task Force
• The ABA created the Gatekeeper Task Force in 2002 to address the
Gatekeeper Initiative
• Mission: to respond to initiatives by the USG task force and others that will
impact on the attorney-client relationship in the context of AML
enforcement
• Reviews ABA policies/procedures
• Develops educational programs for legal professionals and law students
• Prepared Risk-Based Guidance for Lawyers
• ABA Ethics Committee endorsed Voluntary Good Practices

60. CTWolters Kluwer
FATF’s Risk-Based Guidance for Legal Professionals
• Based on the “40+”, FATF issues Risk-Based Guidance for “gatekeepers”
• Published on October 23, 2008
• 125 paragraph “high-level” document addressing private and public sector
• Outlines the risk factors lawyers must consider when developing a risk-
based compliance system
• It does not take into account practical realities of the practice of law; nor
does it address jurisdictional variations among FATF member countries

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Federal Legislation
• Proposal places Business Formation Agents under the BSA
• Exclusions for:
– Attorneys
– Government (filing) offices

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Uniform Law Enforcement Access to Entity
Information Act - Formerly Known as ROBA
• Cradle to grave requirement for entity record retention of management and
ownership records and operational agreements.
• Creates New filing requirements for ALL privately held business entities
with 50 or fewer shareholders/members.
– Exclusion also applies for regulated entities i.e. banks insurance co. etc.
• Entity must designate a “Records Contact” who has access to the entity
records and can deliver them to law enforcement upon an “appropriate
request”
• Entity must designate a “Responsible Individual” who
– “Directly or indirectly, participates in the control or management of an
entity or, in the case of an entity being formed, will participate in the
control or management of the entity.”

63. CTWolters Kluwer
Unintended Consequences of
Incorporation Transparency Act or ULEAEIA
• May have a chilling effect on filing and increase costs of filing and
maintaining records
• May cause entities to organize and file in foreign jurisdiction instead of in
the US
• A World bank study concludes that barriers to the formation of business
entities impedes economic development
• May cause the “die off” of entities failing to comply, after the transition
into the new requirements.

64. CTWolters Kluwer
Ethical Issues for Attorneys
• Does this act create possible liabilities of attorneys acting as business
formation agents and thereby create conflicts between the attorney
and his or her client?
– Given the increased liability for false information in entity formation
documents it is necessary for attorneys to conduct greater due diligence
on their clients before performing the services?
• Are attorneys potentially in violation of rule 1.6 if they serve as a
records contact/documentation agent or a responsible individual?
– Should attorneys obtain a client waiver before serving in that capacity,
even just for the purpose of assisting and organizing the entity?
• Should attorneys serve as responsible individuals on behalf of
corporations they work for or entities that hire them?
– The RI is the person who answers questions from law enforcement?

65. CTWolters Kluwer
Ethical Issues for Attorneys (cont.)
• What happens if an attorney serves as a Records Contact/Documentation
Agent and knows the records received from the entity are not correct?
– Is resignation good enough?
– Can that attorney continue with an attorney-client relationship?
• If S 1465 passes should attorneys as formation agents vet foreign
ownership interests in business entities?
• What are the ethical consequences of Attorneys regulated under the BSA?

66. CTWolters Kluwer
MODEL RULES OF PROFESSIONAL CONDUCT
No Assistance in Illegal or Fraudulent Activities
Rule 1.2(d)
• (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.

67. CTWolters Kluwer
MODEL RULES OF PROFESSIONAL CONDUCT
Rule 1.4(5) Communication
1.4 (a) A lawyer shall:
• (5) consult with the client about any relevant limitation on the
lawyer’s conduct when the lawyer knows that the client expects
assistance not permitted by the Rules of Professional Conduct or
other law.
NY Rules Same

68. CTWolters Kluwer
MODEL RULES OF PROFESSIONAL CONDUCT
Model Rule 1.6 Confidentiality
Client-Lawyer Relationship
Rule 1.6 Confidentiality Of Information
• (a) A lawyer shall not reveal information relating to the representation of a client
unless the client gives informed consent, the disclosure is impliedly authorized in
order to carry out the representation or the disclosure is permitted by paragraph (b).
• (b) A lawyer may reveal information relating to the representation of a client to the
extent the lawyer reasonably believes necessary:
– (1) to prevent reasonably certain death or substantial bodily harm;
– (2) to prevent the client from committing a crime or fraud that is reasonably certain to
result in substantial injury to the financial interests or property of another and in
furtherance of which the client has used or is using the lawyer's services;
– (3) to prevent, mitigate or rectify substantial injury to the financial interests or property of
another that is reasonably certain to result or has resulted from the client's commission of
a crime or fraud in furtherance of which the client has used the lawyer's services;
– (4) to secure legal advice about the lawyer's compliance with these Rules;
– (5) to establish a claim or defense on behalf of the lawyer in a controversy between the
lawyer and the client, to establish a defense to a criminal charge or civil claim against the
lawyer based upon conduct in which the client was involved, or to respond to allegations
in any proceeding concerning the lawyer's representation of the client; or
– (6) to comply with other law or a court order.

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MODEL RULES OF PROFESSIONAL CONDUCT
Rule 1.9 Duties to Former Clients
1.9 Duties to Former Clients
• (c) A lawyer who has formerly represented a client in a matter or whose present
or former firm has formerly represented a client in a matter shall not thereafter:
(1) use information relating to the representation to the disadvantage of the
former client except as these Rules would permit or require with respect to a
client, or when the information has become generally known; or(2) reveal
information relating to the representation except as these Rules would permit
or require with respect to a client.
NY Rules Very Similar

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MODEL RULES OF PROFESSIONAL CONDUCT
Rule 1.18 Duties to Prospective Client
Rule 1.18 Duties to Prospective Client
• (a) A person who discusses with a lawyer the possibility of forming a client-lawyer
relationship with respect to a matter is a prospective client.
• (b) Even when no client-lawyer relationship ensues, a lawyer who has had
discussions with a prospective client shall not use or reveal information learned in
the consultation, except as Rule 1.9 would permit with respect to information of a
former client.
NY Rule Same

71. CTWolters Kluwer
MODEL RULES OF PROFESSIONAL CONDUCT
Model Rule 1.13 Organization as a Client
Client-Lawyer Relationship
Rule 1.13 Organization As Client
• (a) A lawyer employed or retained by an organization represents the organization
acting through its duly authorized constituents.
• (b) If a lawyer for an organization knows that an officer, employee or other person
associated with the organization is engaged in action, intends to act or refuses to
act in a matter related to the representation that is a violation of a legal obligation
to the organization, or a violation of law that reasonably might be imputed to the
organization, and that is likely to result in substantial injury to the organization,
then the lawyer shall proceed as is reasonably necessary in the best interest of
the organization. Unless the lawyer reasonably believes that it is not necessary in
the best interest of the organization to do so, the lawyer shall refer the matter to
higher authority in the organization, including, if warranted by the circumstances
to the highest authority that can act on behalf of the organization as determined
by applicable law.

72. CTWolters Kluwer
MODEL RULES OF PROFESSIONAL CONDUCT
Model Rule 1.13 (cont.)
• (c) Except as provided in paragraph (d), if
– (1) despite the lawyer's efforts in accordance with paragraph (b) the highest authority that can act on behalf of the organization
insists upon or fails to address in a timely and appropriate manner an action, or a refusal to act, that is clearly a violation of law,
and
– (2) the lawyer reasonably believes that the violation is reasonably certain to result in substantial injury to the organization,
– then the lawyer may reveal information relating to the representation whether or not Rule 1.6
permits such disclosure, but only if and to the extent the lawyer reasonably believes necessary to
prevent substantial injury to the organization.
• (d) Paragraph (c) shall not apply with respect to information relating to a lawyer's representation of an
organization to investigate an alleged violation of law, or to defend the organization or an officer,
employee or other constituent associated with the organization against a claim arising out of an alleged
violation of law.
• (e) A lawyer who reasonably believes that he or she has been discharged because of the lawyer's actions
taken pursuant to paragraphs (b) or (c), or who withdraws under circumstances that require or permit the
lawyer to take action under either of those paragraphs, shall proceed as the lawyer reasonably believes
necessary to assure that the organization's highest authority is informed of the lawyer's discharge or
withdrawal.
• (f) In dealing with an organization's directors, officers, employees, members, shareholders or other
constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should
know that the organization's interests are adverse to those of the constituents with whom the lawyer is
dealing.
• (g) A lawyer representing an organization may also represent any of its directors, officers, employees,
members, shareholders or other constituents, subject to the provisions of Rule 1.7. If the organization's
consent to the dual representation is required by Rule 1.7, the consent shall be given by an appropriate
official of the organization other than the individual who is to be represented, or by the shareholders.

73. CTWolters Kluwer
MODEL RULES OF PROFESSIONAL CONDUCT
Rule 1.16 Declining or Terminating Representation
• (a) Except as stated in paragraph (c), a lawyer shall not represent a client
or, where representation has commenced, shall withdraw from the
representation of a client if:
– (1) the representation will result in violation of the Rules of Professional
Conduct or other law;
– (2) the lawyer’s physical or mental condition materially impairs the lawyer’s
ability to represent the client; or
– (3) the lawyer is discharged.

74. CTWolters Kluwer
MODEL RULES OF PROFESSIONAL CONDUCT
Rule 1.16 (cont.)
• (b) Except as stated in paragraph (c), a lawyer may withdraw from representing a
client if:
– (1) withdrawal can be accomplished without material adverse effect on the interests of
the client;
– (2) the client persists in a course of action involving the lawyer’s services that the
lawyer reasonably believes is criminal or fraudulent;
– (3) the client has used the lawyer’s services to perpetrate a crime or fraud;
– (4) the client insists upon taking action that the lawyer considers repugnant or with
which the lawyer has a fundamental disagreement;
– (5) the client fails substantially to fulfill an obligation to the lawyer regarding the
lawyer’s services and has been given reasonable warning that the lawyer will withdraw
unless the obligation is fulfilled;
– (6) the representation will result in an unreasonable financial burden on the lawyer or
has been rendered unreasonably difficult by the client; or
– (7) other good cause for withdrawal exists.

75. CTWolters Kluwer
MODEL RULES OF PROFESSIONAL CONDUCT
Rule 4.1: Statements to Others
Rule 4.1 Truthfulness In Statements To Others
• In the course of representing a client a lawyer shall not knowingly:
• (a) make a false statement of material fact or law to a third person; or
• (b) fail to disclose a material fact to a third person when disclosure is
necessary to avoid assisting a criminal or fraudulent act by a client, unless
disclosure is prohibited by Rule 1.6.

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MODEL RULES OF PROFESSIONAL CONDUCT
Rule 8.4 Misconduct
Rule 8.4 Misconduct
• It is professional misconduct for a lawyer to:
– (a) violate or attempt to violate the Rules of Professional Conduct, knowingly assist or
induce another to do so, or do so through the acts of another;
– (b) commit a criminal act that reflects adversely on the lawyer's honesty,
trustworthiness or fitness as a lawyer in other respects;
– (c) engage in conduct involving dishonesty, fraud, deceit or misrepresentation;
– (d) engage in conduct that is prejudicial to the administration of justice;
– (e) state or imply an ability to influence improperly a government agency or official or
to achieve results by means that violate the Rules of Professional Conduct or other law;
or
– (f) knowingly assist a judge or judicial officer in conduct that is a violation of applicable
rules of judicial conduct or other law.

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New York City Bar Formal Opinion 2018-4
• Duties When an Attorney Is Asked to Assist in a Suspicious Transaction
• QUESTION: When an individual client asks a lawyer to provide legal
assistance in a transaction, and the lawyer suspects that the legal services
may assist the client’s crime or fraud, to what extent must the lawyer
investigate to allay or confirm the suspicions, and what other conduct
must the lawyer undertake under the Rules? 1

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NYCB Formal Opinion 2018-4 (cont.)
• A lawyer represents a client in the sale of a business in New York. The
client advises the lawyer that the proceeds of the transaction will be used
to purchase a different business. The client directs that after the first
transaction closes, all payments be sent to a bank in a well-known secrecy
jurisdiction. The client then asks the lawyer to proceed with the purchase.
In preparing the documents and doing general due diligence, the lawyer
realizes that the proposed purchase price is much more than the business
is worth. The lawyer also learns inadvertently that the client has two
passports, each from a secrecy jurisdiction different than the one in which
the bank is located. The lawyer suspects, but does not know, that the
transaction will involve a fraud or crime, such as money laundering or tax
evasion, on the part of the client.

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NYCB 2018-4 Conclusion
Conclusion: When asked to represent a client in a transaction that a
lawyer believes to be suspicious, the lawyer has an implicit duty under
some circumstances to inquire into the client’s conduct. If the lawyer
believes that her client is entering into a transaction that is illegal or
fraudulent, the lawyer ordinarily must attempt to inquire in order to
provide competent representation to the client under Rule 1.1. Further,
under Rule 1.2(d), which forbids knowingly assisting a client’s illegal or
fraudulent conduct, a lawyer has the requisite knowledge if the lawyer is
aware of serious questions about the legality of the transaction and
renders assistance without considering readily available facts that would
have confirmed the wrongfulness of the transaction.

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NYCB 2018-4 Conclusion (cont.)
• Implicit in the rule, therefore, is the obligation to take reasonably
available measures to ascertain whether the client’s transaction is illegal
or fraudulent. The lawyer’s inquiry must be consistent with the
confidentiality duty of Rule 1.6, which governs disclosures the lawyer may
make to third parties during the inquiry, as well as with the duty to keep
the client informed during the representation. If the lawyer concludes
that the client’s conduct is illegal or fraudulent, the lawyer must not
further assist the wrongdoing and may undertake remedial measures to
the extent permitted by the exceptions to the confidentiality rule.

81. CTWolters Kluwer
Client Due Diligence: ABA Good Practices
• Client Intake Concerns
– Client Identity
 Know your client or verify his or her identity
 Natural Person Client
- Name, Age, Address, Phone numbers, SS Number, Drivers License other
identifying information
 Entity Client
- Parent and Subsidiary entities, Directors/Officers/Managers,
- Know the beneficial owners or at least the majority owners
– Client Due Diligence
 OFAC SDN Check
 Google Search
 Background Checks
 Periodic Updates

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Client Risk Assessment
• Know the clients circumstances, business activities and services provided
– Consider the money laundering risks involved with the transaction
– Look for the red flags such as money flowing through trust account
• Client risk factors
– Country geographic risk
 Client from countries engaged in questionable activities or on watch lists
– Client risk considerations
 Politically Exposed Person
 Unusual circumstances
 Hiding beneficial ownership
 Cash intensive businesses
 Entities with no legal purpose
 Clients with no or multiple addresses

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Client Risk Assessment (cont.)
– Service Risk
 Touching the money
 Concealment of beneficial ownership
 Unusual transactions
 Cash payments
 Shell companies
• Establish Client Due Diligence Training for Law firm or Company
• Be Careful out there (Hill Street Blues)

84. CTWolters Kluwer
Case Studies
• Used by permission of the State Bar of Montana published in the
“Montana Lawyer” Feb 2010.
• Taken from an article “Global Scammers now aiming to rip off Montana
Attorneys.”

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Case Study 1

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Case Study 2

87. CTWolters Kluwer
Case Study 3

88. CTWolters Kluwer
Sources Links
• OFAC Regulations for Corporate Registration Industry
http://www.ustreas.gov/offices/enforcement/ofac/regulations/facreg.pdf
• Specially Designated Nationals List (SDN)
http://www.ustreas.gov/offices/enforcement/ofac/sdn/sdnlist.txt
• OFAC website location for SDN list
http://www.ustreas.gov/offices/enforcement/ofac/sdn/index.shtml
• Title 31- CFR CHAPTER V--OFFICE OF FOREIGN ASSETS CONTROL,
DEPARTMENT OF THE TREASURY
http://www.access.gpo.gov/nara/cfr/waisidx_08/31cfrv3_08.html#500
• Links to State Rules of Professional Conduct
http://www.abanet.org/cpr/links.html

89. CTWolters Kluwer
Wolters Kluwer CT
Ethics in Evolving
Compliance Requirements
PRESENTED BY:
GARTH JACOBSON, ESQ.
Thank You For Attending