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ETHICS IN EVOLVING COMPLIANCE REQUIREMENTS

PRESENTED BY:

GARTH JACOBSON, ESQ.

• 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 Rules of Professional Conduct• Rules 1.2, Representation,

• Rule 1.4 Communication

• Rule 1.6, Confidentiality

• Rule 1.9 Duties to Former Client

• 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

• Attorney Due Diligence of Clients

– ABA Voluntary Good Practices Guidance for Lawyers

• Case Studies

AGENDA (CONT.)

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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POLLING QUESTION 1

Did you see the Jan. 31, 2016, “60 Minutes” program on money laundering and attorneys?

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 JAN, 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.* * *”

MONEY LAUNDERING AND TERRORIST FINANCING

• Background

– Growing concern by federal government about money launderingand 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

Are you familiar with FATF?

A. Yes

B. No

POLLING QUESTION NO.2

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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

• 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 ON MONEY LAUNDERING (FATF)

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THE FINANCIAL ACTION TASK FORCE ON MONEY LAUNDERING (FATF)

• 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.

• 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 ON MONEY LAUNDERING (FATF)

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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

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

THE US ANTI-MONEY LAUNDERING CHARGE IS LEAD BY:

• House Task Force to Investigate Terrorism Financing

• Former Senator Carl Levin (D), Michigan

– 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

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.

TIMELINE ACTIVITIES

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

• 2006 Nov. FinCEN report denounces LLC shell company activities that promote money laundering activities.

• 2006 Senate Committee on Investigations Nov. 2006 hearing investigates “Failure to Identify Business Owners Impedes Law Enforcement.”

• 2007 Feb. National Association of Secretaries of State (NASS) Task Force convened to explore solutions to business entities and money laundering.

• 2007 Feb Senator Levin introduces SB 681 “Stop Tax Haven Abuse. Cosponsored by Sen. Obama. Places “business formation agents” under Bank Secrecy Act.

• 2007 April. Nevada passes MoRAA with provisions to respond to GAO and FinCEN/FATF criticism.

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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

TIMELINE (CONT.)

• 2007 July NCCUSL authorizes creation of Record Owners of Business Act (ROBA) committee to establish uniform solution.

• 2007 October. Association of Registered Agents (ARA) and the National Public Records Research Association adopt a “bests practices …” that includes client risk base assessment for the prevention of money laundering and other financial crimes.

• 2007 Nov. NCCUSL ROBA committee meets and develops first draft proposed legislation. Plans to fast track the legislation.

• 2007 Nov. National Conference of State Legislatures appoints task force to make recommendations about business entities and money laundering.

• Jan 2008 NCCUSL ROBA committee meets with Treasury officials to further develop legislation. “Beneficial Ownership” dropped and record owner custodian requirement agreed by all participants.

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TIMELINE (CONT.)

• Treasury and Justice Dept. reject ROBA legislation but said that there was no urgency to gain passage of uniform act.

• 2008 April. WY adopts its registered agents record keeping legislation. Increases regulation of commercial registered agents and requires RAs or SOS to keep list of managers of LLCs.

• 2008 May. Sen. Levin, Sen. Obama introduce S 2956 “Incorporation Transparency and Law Enforcement Assistance Act. Would have:

– Placed business formation agents (attorneys) under BSA

– Required Secretary of State Offices to maintain list of beneficial owners of business entities and make available to law enforcement

TIMELINE (CONT.)

• 2008 June NCCUSL ROBA Committee met to finalize recommendation for NCCUSL annual meeting. Amendment would require the disclosure of all officers, directors and managers in annual report filings. Some commissioners objected to requiring disclosure of member/managers of LLCs

• 2008 June. Delaware adopts legislation that strengthens its annual report requirements for corporations. The listing of officers and directors is no longer optional. There is no similar provision for LLCs.

• 2008 June FATF establishes risk base recommendations for “Trust Companies and Service Providers” to prevent the promotion of money laundering activities.

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TIMELINE (CONT.)

• 2009 Jan. OR proposes legislation to increase regulation of commercial registered agents and require beneficial ownership records of business entities. Legislation died

• 2009 Feb. The ROBA committee meets in Washington DC to further draft the legislation. Dept. of Treasury people participate in the drafting process and agree to support the legislation.

• 2009 March, Senator Levin introduces S 506 Stop Tax Haven Abuse (Similar to S 681) and S 569 (similar to S 2956) Incorporation Transparency and Law Enforcement Assistance Act. Both bills place “business formation agents” under the Bank Secrecy Act. S 569 requires the disclosure of entity beneficial ownership to be filed with the state filing offices but lacks any enforcement teeth to require the states to comply. It also requires vetting foreign owners’ of an entity through a business formation agent.

TIMELINE (CONT.)

• 2008 July. NCCUSL conducts “first reading” of ROBA.

• 2008 July NCSL adopts resolution opposing Levin legislation and supporting the efforts of NCCUSL ROBA legislation

• 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.

• S 2956 referred to Homeland Security Committee. No action taken. Bill dies at end of 110th Congress

• 2008 October. FATF establishes risk base recommendations for professionals for client screening and prevention of money laundering activities.

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TIMELINE (CONT.)

• 2009 The most recent redraft was distributed April 8, 2009. 2009 March The ROBA committee conducts three conference calls that result in redrafts and continued refinement of the act. The name of the act is changed to Uniform Law Enforcement Access to Entity Information Act.

• 2009 June, Homeland Security Committee holds hearing on “Examining State Business Incorporation Practices: A Discussion of the Incorporation

Transparency and Law Enforcement Assistance Act (S 569)

• 2009 July NCCUSL adopts the Uniform Law Enforcement Access to Entity Information Act ULEAEIA

– Act not recommended for adoption pending federal legislative actions

• 2010 January, Permanent Subcommittee on Investigations hearing: Keeping Foreign Corruption Out of the United States: Four Case Histories

• 2010 August, HR 6098 introduced. Sponsored by Rep Maloney, Rep. Frank

TIMELINE (CONT.)

• 2011 July, Stop Tax Havens S 1346, HR 2669

• 2011 July, Incorporation Transparency and Law Enforcement Assistance Act, S 1483

• FATF Conducting a Review of Standards preparing for the 4th Round of Mutual Evaluations (US 2014).

– Require transparency in beneficial ownership

• Ownership

• Control

– Access to the records

– Updated and kept current

• 2012 March, Levin introduced S 2075

• 2012 Feb., Treasury announces advanced notice of proposed rule making (ANPRN) on Beneficial Ownership

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TIMELINE (CONT.)

• Feb 2013 S 268 Sen. Levin Tax Bill

• March 2013 OR HB 336

• March 2013 MA legislation

• May 2013 Nev. SB 60 passes

• May 2013 ABA Ethics Formal Opinion 463

• August 2013 SB 1465 introduced

• Feb 2014 IA SSB 3064 introduced

• 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

• 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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TIMELINE 2017

• 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 activites.

POLLING QUESTION NO. 3

Are you familiar with OFAC or the SDN list?

• Yes

• No

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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.

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 –

OFAC sanctions:

• Country-based

– Cuba

– Iran

– Sudan

– Syria

– North Korea (limited sanctions remain)

• 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)

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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.

SDN SEARCH PAGE

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OFAC PENALTIES

• Civil fines up to $289,000 (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.

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 $125,000 per

violation/$32,500 per TWEA violation)

(2)Applicable

Schedule Amount(capped at $250,000 per

violation/$65,000 per TWEA violation)

(3)One-half of Applicable

Statutory Maximum

(4)Applicable

Statutory Maximum

VoluntarySelf-disclosure

Yes

YesNo

No

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

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

CURRENT FOCUS: N. 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

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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.

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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POLLING QUESTION NO. 4

Are you familiar with FinCEN or the BSA?

A. Yes

B. No

• 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

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• 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

• 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

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• 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

• 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

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• 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

• 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, JANUARY 2016

• Geographic Targeting Orders” Require Identification for High End Cash Buyers of Real Estate

– Escrow companies must identify individuals behind entities making all cash purchases of high end real estate.

– Miami metropolitan area

– California (including Los Angeles, San Francisco, and San Diego),

– Texas county that includes San Antonio

– Honolulu, Hawaii (City and County)

• Program is spreading to other parts of the country.

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.

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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.

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

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

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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

FEDERAL LEGISLATION

• Proposal places Business Formation Agents under the BSA

• Exclusions for:

– Attorneys

– Government (filing) offices

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S 3268 2016

• Introduced by DE delegation

• Requires all filing entities to obtain EINs

• IRS information shared with law enforcement Money Laundering and Anti Terrorism.

• Alternative to entity transparency acts.

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.”

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ENTITY INTEREST HOLDERS FROM OUTSIDE THE US

• Must provide to the entity the name and address of their RI

• Must provide updates when RI changes

• Incorrect info does not jeopardize existence of entity or its actions. (No piercing the corp. veil)

• The foreign entity that fails to provide the certified information regarding its RI may not maintain an action in court related to that entity

– It cannot enforce its rights as an interest holder in court until it complies with the RI disclosure requirement

RECORDS REQUIREMENTS

• Name and address of each known

– Transferee

– Current interest holder

– Any person to whom the entity has been instructed to send distributions

• Name and jurisdiction of any public filing entity that is a transferee or interest holder of entity

• Name and address for each governor of the entity

– Governmental Id of any foreign residence governor

• Information on how governors are elected or otherwise designated

– Bylaws, operating agreement etc.

• Voting power of interest holders and how determined

• Individuals responsible for preparing records

• Must be certified (under penalty of perjury) by entity that information accurately reflects current records.

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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.

FUTURE ENFORCEMENT

New Administration Priorities Emerging,

Attorney General Sessions takes a prosecutor attitude.

• Sessions is likely to consider anti-money laundering prosecutions a law enforcement priority, particularly in cases where potential terrorism or national security issues are implicated. He has sought to expand the federal RICO statute to include the operation of illegal money transmission businesses as a predicate act. (Published in The National Law Review

http://www.natlawreview.com/article/white-collar-crime-law-enforcement-trump-justice-department-8-predictions)

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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?

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?

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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.

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.

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MODEL RULE 1.6 CONFIDENTIALITY

Client-Lawyer RelationshipRule 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.

RULES 1.9 1.18 DUTIES TO PROSPECTIVE/FORMER CLIENT

1.9 Duties to Former Client(c) A lawyer who 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.

• 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.

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MODEL RULE 1.13 ORGANIZATION AS A CLIENT

Client-Lawyer RelationshipRule 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.

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.

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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.

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.

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MODEL RULES 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.

MODEL 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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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

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)

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

CASE STUDY 2

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CASE STUDY 3

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

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ETHICS IN EVOLVING COMPLIANCE REQUIREMENTS

PRESENTED BY:

GARTH JACOBSON, ESQ.

THANK YOU FOR ATTENDING