1MDB probe: did lax regulation of lawyers make it easier for funds to be laundered?
While bankers are required by law to ask questions about their customers, lawyers are shielded by attorney-client privilege
When US prosecutors moved this week to seize US$1 billion in assets they say were stolen from
a Malaysian development fund, they detailed a money flow through a New York law firm that renews questions about whether lack of regulation on lawyers encourages money laundering.
Money allegedly stolen from the investment fund 1Malaysia Development Berhad, or 1MDB, was used to buy luxury assets and to finance a high-flying lifestyle, prosecutors said. Of that cash, US$368 million allegedly moved through a trust account at Shearman & Sterling LLP to produce a Hollywood movie, The Wolf of Wall Street, and to buy a jet and a Beverly Hills hotel.
The ABA voluntary guidance is a joke because there are no consequences
Prosecutors also allege that Malaysian financier Low Taek Jho and his friends transferred dirty funds through Shearman accounts to finance their lifestyle, paying for junkets to Las Vegas casinos, luxury yacht rentals, business jet rentals and a London interior decorator. The money flowed into Shearman from an account controlled by Low and followed a complex trail to buy a variety of assets and luxury services, the US government said.
The civil lawsuits didn’t accuse Shearman or any of its lawyers of wrongdoing, nor were they accused of knowing, or even suspecting, the money was tainted or used for illegal conduct.
Still, the case exposed what lawmakers say is a soft underbelly in US efforts to combat money laundering. While bankers are required by law to ask questions about their customers, inquire about the source of their money and report suspicious activity, lawyers are shielded by attorney-client privilege.
Voluntary guidelines adopted by the American Bar Association (ABA) encourage lawyers to follow its “good practices guidelines” on combating money laundering.
That guidance, adopted in 2010, counsels lawyers to conduct due diligence on each client, understanding their circumstances and the source of their money. Lawyers are encouraged to be satisfied they’re not abetting fraudulent or criminal conduct. The ABA says oversight of the 50 state supreme courts, and the threat of prosecution, is enough. Some lawyers are sceptical.
“The ABA voluntary guidance is a joke because there are no consequences unless you’re prosecuted and that happens once every five years,” said Bruce Zagaris, an attorney at Berliner Corcoran & Rowe LLP in Washington.
President Barack Obama and some members of Congress want lawyers to do more to stop money laundering and terror financing.
Representative Carolyn Maloney, a New York Democrat, proposed a bill that would subject lawyers to so-called gatekeeper obligations that would require them to report suspicious transactions to the Treasury. Senator Sheldon Whitehouse, a Rhode Island Democrat, has introduced legislation to require people who form corporations to disclose the beneficial owners.
The ABA warns that requiring lawyers to report on their clients would “undermine the attorney-client privilege and the confidential lawyer-client relationship by discouraging the full and candid communications between clients and their lawyers,” the group’s president, Paulette Brown, wrote May 24 to the House Financial Services Committee.
In May, Obama sought legislation to require reporting to the Treasury on the beneficial ownership of corporations, a provision that could affect lawyers who set them up. While the proposals are unlikely to become law in this election year, the ABA has warned that lawyers should be “extremely concerned” about “intrusive gatekeeper regulations”.
The US is a member of the Financial Action Task Force on Money Laundering, a multinational body formed in 1989 that is coordinating efforts to crack down on dirty money. The task force has recommended for a decade that lawyers should be among those who should file suspicious transaction reports on customers or clients.
