Billions pass through AML-opaque trust accounts each year
FATF’s Mutual Evaluation Report on U.S. AML efforts was released last month, and there remains a glaring weakness: the lack of AML requirements for lawyers.
The report was positive overall, but FATF notes the continuing AML gaps, including “minimal coverage of certain institutions and businesses (investment advisers (IAs), lawyers, accountants, real estate agents, trust and company service providers (other than trust companies).”
The massive money laundering in high-end real estate has been well documented, but the unregulated role of U.S. lawyers has been getting more and more attention. This is especially true given that U.K. and E.U. lawyers have had to adhere to recommended AML Compliance standards for over a decade.
The Wall Street Journal in December led with a major feature story on the problem, noting in the lead that “tens of billions of dollars every year move through opaque law-firm bank accounts” without effective AML Compliance accountability.
Lawyers are not required to report suspicious activity, and they rely on attorney-client privilege to justify not disclosing anything at all about obviously suspicious transactions. The Journal provides multiple examples of law firms moving massive client funds quickly in and out of client accounts without any KYC/CDD or related AML Compliance controls. The banks that provide financial services to these law firms only see the name of the law firm rather than the actual owner of the funds.
Underlying this practice of pooled accounts is the “Interest on Lawyer Trust Accounts” program, which actually is mandated by many state legislatures or state court systems, according to the Journal. These IOLTA programs require law firms to contribute the interest on these murky pooled accounts to programs that deliver free legal services to the poor.
Investigations into various AML operations show that clients of law firms can transfer hundreds of millions of dollars into and out of these pooled-funds accounts held by the law firms. In 2015, those pooled accounts generated about $78 million of interest to help fund free legal services for the poor. The Journal investigation calculates that that means that a minimum of $36 billion passed through those pooled accounts in 2015.
Trade publication The American Lawyer also ran a story in December on the FATF warnings and the AML risks posed by the AML-opaque pooled accounts for IOLTA. The story acknowledges the AML gap in lawyers’ practices with clients, but it emphasizes the pushback by the American Bar Association to fight any regulation on lawyers related to AML. The gist of the argument is that any transparency requirements would harm attorney-client privilege and would not contribute greatly to improved anti-money laundering enforcement or AML Compliance gains.
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