How Clean Is Your Client’s Money?

More from  Lawyers Weekly USA

by Diana Digges
Lawyers Weekly USA
Feb. 2004

Gone are the days when a criminal defense attorney could accept a bag of cash from a client as a fee retainer – or even a check from the client’s grandma with assurances that the money was squeaky clean.

In the wake of the F. Lee Bailey fee forfeiture case, enforcement of the Money Laundering Control Act of 1986 can now be much stricter. The act gives the government the power to seize fees from attorneys if they are the fruit of illegal activities. The question created by the Bailey case is what constitutes tainted money?

“The answer to that question is markedly different now than just a year ago,” said John Henry Hingson, III, a sole practitioner in Oregon.

The precedent it established for pro-rated fee forfeitures has lawyers wondering just what constitutes due diligence.

“Lawyers are thirsting for guidelines to make sure they don’t cross the line. The line ought to be bright, but it is not,” said Hingson. “What has happened is that this shift has caused defenders to act more like inquisitors with their own clients. You have to run a paper trail two or three times back to make sure [the fee] is not washed money. Very few of us will accept cash any more.”

The ABA, through the chairman of the Criminal Justice Section, Albert Krieger, has been trying for years to get the Department of Justice to commit to a clear set of guidelines, but with little success.

The result is that attorneys are left in a bind: is it sufficient, as many lawyers still believe, to obtain the client’s assurance that the funds are not the fruit of some criminal enterprise? Or must they go further? And how far can they go without antagonizing the client?

“We’re just not getting answers,” said Irwin Schwartz, former president of the National Academy of Criminal Lawyers. “The code of professional responsibility requires that I represent my clients zealously. When a client comes in for representation, whether that’s someone on a marijuana charge or a senior corporate executive, the lawyer’s first job is to build trust and confidence. If you begin by cross-examining the client, it undercuts the attorney-client relationship.”

Although there are no reliable estimates of an increase in fee forfeiture cases, “the threat is real, and it has gotten worse,” according to Krieger.

“Steadily, we’ve seen a march of forfeitures starting from drug cases, moving into corporate cases, and now it’s a problem across the board,” said Schwartz.

The latest sector of the profession to feel its effects is the real estate bar. As the Department of Treasury seeks comments on money laundering regulations scheduled to be imposed on real estate transactions, attorneys in that practice area worry about increased due diligence, invasion of attorney-client privilege and the possibility of fee forfeitures.

“There’s no empirical data that a money laundering problem even exists in commercial real estate transactions,” said Kevin Shepherd, of the American College of Real Estate Lawyers. “On the basis of four appellate cases, the government wants to regulate a multi-trillion dollar industry. It doesn’t make sense. There will be dramatic consequences for lawyers if they run afoul of the regulations.”

The Bailey Alert
While attorneys in civil practice struggle with the “whiff of encroachment on attorney-client privilege,” as Shepherd puts it, their colleagues in the criminal defense bar have long been dealing with such constraints.

The most recent case to sound the alarm bell is U.S. v. McGorkle, which involved attorney F. Lee Bailey. After Bailey’s clients were found guilty of laundering proceeds of a fraudulent telemarketing scheme, an 11th Circuit judge ordered the forfeiture of $2 million in legal fees to Bailey, which had been placed in an offshore account.

Bailey has plenty of detractors in the bar. But many of them nevertheless express concern about the Feb. 18 decision. The court held that an attorney who, in the course of representing a client, discovers that the up-front fee was tainted is subject to forfeiture on a pro-rated basis. He may only keep that portion of the fees which were rendered for services while he met the “bona fide purchaser” test – a standard for demonstrating that the lawyer was, in fact, rendering legal services rather than participating in a money laundering scheme.

The court wrote:

“The point is this: a criminal defendant cannot pay an attorney for the rendition of future legal services with the expectation that the entire payment will be immune from forfeiture���For example, if an attorney receives an up-front payment of $5 million for his future legal services and the attorney loses his BFP status a week later (say, because the client is indicted, and the attorney learns additional information about his client’s guilt,) the attorney may keep only the reasonable value of his services prior to losing his BFP status; he may not keep the entire $5 million.”

The decision represents a crackdown on lawyers who directly or indirectly – knowingly or not – participate in money laundering. Attorneys complain that in the process, it creates a disincentive for finding out if a client’s fee is clean, thus making it easier for lawyers to stumble into wrongdoing.

Krieger argues that “a case like McGorkle gives so much power to the prosecution that it can destroy the private bar. Whether the fee is five million or $50,000 doesn’t matter. What Bailey did is what we all try to do – get paid up front. You do some preliminary vetting that leaves you satisfied the money is untainted. You then render service. As a result, you become aware of certain information that makes you know the money had a tainted provenance. And you’re asked why you didn’t inquire further in the beginning. This is a very dangerous situation for lawyers, and the courts are going to have to straighten it out.”

The dilemma, according to Kreiger, is that if a lawyer accepts a criminal case and, in the process of developing the case, realizes the client has been laundering money, he has two bad choices: Continue working the case knowing his fees could be seized or drop the case like a hot potato, and in so doing, signal his client’s guilt. The end result, critics say, could be a decline in private lawyers willing to take on criminal cases.

The Bailey case comes on the heels of several others that have alarmed defense attorneys in recent years. One of the most troubling (United States v. Ferguson) involved a Florida criminal defense attorney and former federal prosecutor. Donald Ferguson’s client wanted money for defense costs; Ferguson contacted a third party for assistance. He received four cash payments, filed the appropriate IRS forms for the money and was indicted under the “receiving and depositing” statute. He was the first lawyer prosecuted on the theory that in receiving a fee he engaged in money laundering.

The government’s position is that criminally derived funds can’t be used for any purpose; attorneys in the defense bar counter that blocking clients from hiring attorneys destroys the presumption of innocence and violates the accused’s Sixth Amendment right to counsel. The tension between the two positions was recognized when Congress passed an amendment to the 1986 Money Laundering Control Act recognizing a “safe harbor” provision for attorney fees, thus protecting the defendant’s right to an attorney.

In 1989, however, a pair of narrowly decided U.S. Supreme Court decisions, (Caplin & Drysdale v. United States and United States v. Monsanto) held that there was no exception for payment of attorney’s fees.

“There’s a lot of free-floating anxiety out there,” said David Smith, author of a treatise on forfeitures and a former associate director in the DOJ’s Asset Forfeiture Office. “I get a lot of calls from criminal defense attorneys who are worried about their fees, and mostly what I do is calm them down.”

“This Justice Department is hostile to defense attorneys – the most aggressive we’ve seen in a while,” he added. “There are efforts to undermine attorney-client privilege on a number of fronts.”

Smith believes that while the threat of fee forfeiture is minimal, the hostile environment created by the government has created a “bit of hysteria” within the criminal defense bar.

What Lawyers Can Do
In the current climate, lawyers have to be extremely careful regarding the origin of their fees, cautions Martin Weinberg, of the National Association of Criminal Defense Attorneys. “Too many lawyers simply believe that all of their relations to their clients are privileged, whereas in fact the courts have carved out financial transactions as a largely unprivileged domain and therefore susceptible to government subpoena.”

To demonstrate a good faith effort, experts suggest that attorneys:

Demand verification of the origins of the fees, particularly if they are in the form of cash or money orders.

“Obviously, if a kid comes into your office charged with drug importation and dumps an attach�� case with your $500,000 fee, alarm bells go off,” said Krieger. “But if he gives you a check from Grandma? It’s reasonable to say, give me some kind of proof of where the money came from. If Grandma just mortgaged the house, give me that information. If you borrowed it from a lender, give me that information. If they say it’s an inheritance or won it on the lottery, give me proof.”

Include a clause in your retainer agreement in which the client assures the money is clean. “I routinely include a clause, but sometimes that’s not enough,” said Hingson. “At times, I quote a fee that includes the money to hire a retired IRS criminal investigation division agent to assist me in assuring the bonafides of the fee.”

That, however, can backfire, points out Joel Hirschhorn, a Florida attorney and president of the American Board of Criminal Lawyers.

“Let’s say you come into my office, and I decide I’d like to represent you. But the first thing you have to prove to me is that the money for my fee did not come from ill-gotten gains. Oh, and by the way, you also need to pay me [in case the government tries to seize my fees.]”

That’s no way to develop trust in the attorney-client relationship, he said.

Examine the indictment and the dates for alleged illegal conduct.

“Probe the client about what assets they had before the indictment; look to those pre-indictment assets for payment of fees,” said Hirschhorn.

Pick up the phone and call a professor of ethics or senior practitioners. “The best way for an attorney to protect himself or herself is to demonstrate that if an alarm bell has gone off, it was not ignored,” said Schwartz, who routinely educates young lawyers on “self-defense.”

“I believe that if the lawyer can demonstrate that a good faith effort was made to keep both feet inside the line – wherever that line may be – he can protect himself before a jury.”

Be careful to avoid even the appearance of greed.

“Make sure your moral compass is pointed to true north. Make sure there’s no willful blindness; doctor your eyes,” said Hingson. “To make sure you don’t have blindness, let there be light. Put the ever-loving light on this money, and make sure it doesn’t have one iota of dirt on it.”


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