May 5, 2020

ABA Issues Formal Opinion on Lawyers' Duties Regarding Clients' Fraudulent, Criminal Behavior

Holland & Knight Alert
Trisha M. Rich | Nellie Q. Barnard | Colin P. Smith

Highlights

  • The American Bar Association (ABA) on April 29, 2020, issued Formal Opinion 491 that arguably expands the obligations of lawyers when they have reason to believe that their clients may be involved in fraudulent or criminal behavior.
  • Model Rule 1.2(d) prohibits lawyers from counseling a client to engage, or assisting a client, in conduct that the lawyers knows is criminal or fraudulent.
  • However, Model Rule 1.2(d) allows lawyers to discuss the consequences of a client's proposed course of action, and, in good faith, counsel clients about the validity, scope and application of certain laws as it applies to the client's conduct.

In its recent Formal Opinion 491, issued April 29, 2020, the American Bar Association (ABA) has arguably expanded the obligations of lawyers when they have reason to believe that their clients may be involved in fraudulent or criminal behavior.  The opinion applies only to transactional representations, and not to representations involving litigation.  

Model Rule 1.2(d) prohibits lawyers from counseling a client to engage, or assisting a client, in conduct that the lawyers knows is criminal or fraudulent. However, lawyers can discuss the consequences of a client's proposed course of action, and can, in good faith, counsel clients about the validity, scope and application of certain laws as it applies to the client's conduct. "Knows," according to the Rules, denotes "actual knowledge," which "may be inferred from the circumstances." Model Rule 1.0(f). As the U.S. Supreme Court recently explained, "to have 'actual knowledge' of a piece of information, one must in fact be aware of it." Intel Corp. Inv. Policy Comm. v. Sulyma, 140 S. Ct. 768, 776, 206 L. Ed. 2d 103 (2020)

Formal Opinion 491, however, states that where a situation shows a "high probability" that the client is seeking the lawyer's services in a transaction to further criminal or fraudulent activity, lawyers have an affirmative duty under Rule 1.2(d) to ask their client for additional information to avoid assisting such activity.  Failure to make a reasonable inquiry is "willful blindness" and is punishable under the rules. If a client refuses to answer the lawyer's questions, the lawyer is to "remonstrate with the client", and if that does not lead to additional information, decline the representation or withdraw. The opinion also makes clear that the duty to inquire extends beyond information that the client is willing to share. In other words, lawyers must seek information from other sources if they can do so without disclosing confidential information, or if disclosure is required, seek informed consent. The rule does create a safe harbor of sorts in which a lawyer who has conducted a "reasonable inquiry" can "credit an otherwise trustworthy client" if information from outside sources does not resolve the issue.

Formal Opinion Background and Examples

The opinion is grounded in its reference to a number of court opinions, ethics opinions and disciplinary opinions, from a variety of jurisdictions, each of which effectively concurred that willful blindness under suspicious circumstances may amount to "actual knowledge." Further, the ABA noted that this duty was consistent with a number of other Model Rules, including the rules governing competence, diligence, communications, declining or terminating representation and misconduct. Model Rules 1.1, 1.3, 1.4, 1.13, 1.16 and 8.4. While this latest opinion can be read to impose additional obligations on lawyers, the ABA certainly tries to establish instead that Formal Opinion 491 is a natural consequence of long-standing principles.

The opinion also provides a few non-exclusive examples intended to help clarify circumstances that may require additional follow up.

Further Inquiry Required

  • A prospective client has significant business interests abroad, and has received substantial payments from sources other than his employer. Those funds are held outside the U.S., but client wants to bring them here in a way that minimizes tax liability. Additional facts: a) the client tells you that he is employed outside of the U.S., but does not say how, b) the money is in a foreign bank in the name of a foreign entity, but the client will not identify the bank or corporation, c) client has not disclosed the payments to his employer or anyone else, and has not included the amounts on his U.S. tax return.
  • A prospective client wants to buy a piece of property on behalf of another anonymous party from a high-risk jurisdiction,1 wants the property to be owned by undisclosed beneficial owners, and the source of the funds is vague or questionable.

Further Inquiry Likely Not Required

  • A long term client wants to buy a property in the name of a limited liability company (LLC).
  • A new client discloses that he just won several million dollars and wants to form an LLC to buy property in the lawyer's jurisdiction.
  • A prospective client living in another state wants to acquire several property in lawyer's own state. The source of prospective client's funds is clear, and the prospective client tells the lawyer that he wants to pay for the properties by wiring money into the law firm's trust account over time so the law firm can facilitate the purchase of the land through LLCs, for the purpose of making the property acquisitions look unrelated and prevent price inflation.

The "further inquiry not required" cases depend largely on contextual facts, including the lawyer's familiarity with the client or the jurisdiction where the work is to be done.

Conclusion and Takeaways

So what is the practical application for practitioners? The ABA is telling lawyers that they can't stick their head in the sand when something does not quite add up. "Actual knowledge" of wrongdoing is not required if it was avoided by willful blindness. If you have any indication that a client may be involved in wrongful conduct, it is time to start asking more questions and to the extent necessary, consult with ethics counsel.

Finally, remember that ABA ethics opinions are only advisory, but they are very persuasive authority for state bar prosecutors and judges. For additional information or questions on Formal Opinion 491, contact the authors or another member of Holland & Knight's Legal Profession Team.

Notes

1 Higher risk jurisdictions include countries that are subject to sanctions, embargoes or similar measures issued by, for instance, the U.S. or United Nations, along with countries identified by credible sources as having significant levels of corruption. American Bar Association Task Force on Gatekeeper Regulation and the Profession, Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing 15-16 (2010). 


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.


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