Transcript Pot Presentation - KLShepherd edits

Money Laundering, Formal Opinion 463
and Legal Marijuana
Michael Francisco
Assistant Solicitor General, Colorado
Kevin Shepherd
Venable LLP, Baltimore
Paula Frederick
General Counsel, State Bar of Georgia
Dennis Rendleman
ABA Ethics Counsel
Rocky Mountain High
“This was obviously done by people who had never seen or
been to the Rocky Mountains, and also had never
experienced the elation, celebration of life, or the joy in living
that one feels when he observes something as wondrous as
the Perseid meteor shower on a moonless, cloudless night,
when there are so many stars that you have a shadow from
the starlight, and you are out camping with your friends, your
best friends, and introducing them to one of nature's most
spectacular light shows for the first time.”
--John Denver
Testifying before Congress in the “Parents Music
Resource Hearings” responding to the allegation that his
song was about drugs.
Marijuana
Recreational States
Medicinal States and D.C.
 Colorado












 Washington
Alaska

Arizona

California

Colorado
Connecticut 

Delaware

Hawaii

Illinois

Maine

Maryland
Massachusetts 
Michigan
Montana
Nevada
New
Hampshire
New Jersey
New Mexico
Oregon
Rhode Island
Vermont
Washington
District of
Columbia
Denver Post has entire section:
www.thecannabist.co
Michael Francisco
Proposed Amendment to Colorado
Rules of Professional Conduct
RULE 8.6. COUNSELING CLIENTS CONCERNING MARIJUANA
Notwithstanding any other provision of these rules, a lawyer shall
not be in violation of these rules or subject to discipline for counseling or
assisting a client to engage in conduct that, by virtue of (1) Article XVIII.
Miscellaneous, Section 14, Medical Use of Marijuana for Persons Suffering
From Debilitating Medical Conditions, or (2) Article XVIII,
Miscellaneous, Section 16, Personal Use and Regulation of Marijuana, The
lawyer reasonably believes to be either permitted or within an affirmative
defense to prosecution under state criminal law, and which the lawyer
reasonably believes is in compliance with legislation or regulations
implementing such provisions, solely because that same conduct,
standing along, may violate federal criminal law.
Colorado Supreme Court
Adopted March 24, 2014 (Justice Coats and Eid would not approve)
Rule 1.2 Scope of Representation and Allocation of Authority Between
Client and Lawyer
Comment
[14] A lawyer may counsel a client regarding the validity, scope, and meaning
of Colorado constitution article XVIll. secs. 14 & 16. and may assist a client in
conduct that the lawyer reasonably believes is permitted by these
constitutional provisions and the statutes, regulations, orders, and other
state or local provisions implementing them. In these circumstances the
lawyer shall also advise the client regarding related federal law and policy.
Arguments before
Colorado Supreme Court
• Ethics Committee of Colorado Bar Association – Formal Ethics Opinion 125
• Range of conduct
• Negotion of a contract or lease would violate RPC 1.2
• Objection: Rule change would send the wrong message and undermine
respect for the rule of law
• Issues: family law, employment, HOA, banking, chilling effect on lawyers.
• Issues: Attorney Regulation Counsel – ‘enforcement priorities,’ objections
• Arizona Model (1) not preempted; (2) reasonably believes compliance with
state law; and (3) advise client regarding possible federal law implications
Legal Issues involving marijuana
Legal Issues involving marijuana
1. Threat of Prosecution – DOJ Memorandum – Asset Seizure
2. Banking – perils of an all cash industry – FinCEN – uninsured co-op
3. Tax treatment – Section 280(E) and business deductions
4. Medical Research
5. Employment
6. Commercial Affairs - including advertising and licensure
7. State Law Compliance
District of Columbia recreational
decriminalization
--If one is carrying a small amount for
personal consumption with one foot on the
National Mall and one foot on District of
Columbia city property, what law and whose
authority governs?
--Is this a Supremacy Clause issue?
What is a Lawyer to Do?
Kevin Shepherd
Overview
 FATF RBA for Legal Professionals (adopted by FATF in






October 2008)
ABA Voluntary Good Practices Guidance (adopted as
official ABA policy at 2010 ABA annual meeting in San
Francisco)
Architecture of Voluntary Good Practices Guidance
Analysis of risk categories
Implementation of effective client due
diligence/intake protocols
ABA Formal Opinion 463 (“Gatekeeper Opinion”)
Possible legislation?
What do you do?
 In Miami a man contacts a major national law firm
and asks for a partner in the business law section.
 The client explains that he anticipates a series of
transactions, but wants to maintain an anonymous
profile. He will be wiring in $5 million and will ask the
lawyer to act as nominee in a series of modest real
estate purchases and high dollar automobile
purchases.
 The client will send instructions on how to title later.
The client wants the lawyer to act with utmost
discretion and wants to pay a 15% premium to the
lawyer for prompt and discrete service.
 The lawyer agrees and proceeds.
What do you do?
 In a mid size town in rural Colorado, a client from New
York City contacts a general practitioner and claims to
have made a lot of money in hedge funds, but now
wants to diversify into farm land.
 The client plans to acquire a series of farms, but does
not want to set off speculation and artificial inflation
of prices. He will wire money into firm's trust account
over time, and the lawyer will create a series of LLCs to
make strategic acquisitions.
 The lawyer agrees to the representation.
FATF
What is it/Why does it Matter?
 Financial Action Task Force on Money Laundering (“FATF”)
 FATF is an intergovernmental body established by the G-7 Summit
in 1989 (36 members). Formed to develop and promote AML
policies, both at national and international levels.
 FATF does not have the power to enact legislation-but standard setter“soft law”-not a treaty
 USG/Treasury plays a leading role in promoting global AML
implementation
 Treasury’s Office of Terrorist Financing and Financial Crimes is the
head of delegation for the USG AML/CFT policy shop, works across
financial sector, and regularly engages with the ABA.
FATF--History
 1990-FATF issues Forty Recommendations
 October 2001 FATF issues 8 Special Recommendations
(later 9) in response to terrorist financing concerns
 June 2003 FATF amends Forty RecommendationsExtends application of various AML measures
described in the Forty Recommendations to designated
non-financial businesses and professions (“DNFBP”),
including lawyers
 Professionals are viewed as the “gatekeeper” to the
international and domestic financial system (when
carrying out certain services)
 February 2012-FATF revised Forty Recomendations
again-no change to DNFBP requirements
What is the Risk Based Approach?
 2008-FATF risk-based approach (“RBA”) Guidance for
DNFBPs, including lawyers
 RBA-premise that AML obligations should be proportionate
to AML risk--use reason and judgment as opposed to check
the box mentality
 U.S./FATF continuing to assess willful actors v.
unwittingly attorney involvement
 Treasury/ABA, ACTEC, ACREL, ACMA worked together to
make the FATF guidance more practical
 Basis for ABA “Voluntary Good Practices Guidance”
Treasury Role in Gatekeeper Issues
 Attorneys not covered under the BSA
 Raise awareness/Education -We encourage
ABA/private sector to implement Good Practices
Guidance
 Welcome the ABA 463 ethics opinion-highlighting
AML due diligence/existing ethics obligationsbelieve SRO approach makes sense.
 Reaching out to organizations such as State Bar
regulators
Current Gatekeeper Issues
 Role of Gatekeepers has garnered the attention of the Administration
and Congress
 Senator Levin-role of lawyers in facilitating foreign corruption-has
called for AML obligations for professionals, including lawyers
 G-8/US Action Plan on Company Formation-Beneficial Ownership
 Major vulnerability-criminal exploitation of U.S. shell companies a
range of crimes
 S. 1465-company formation legislation—BUT, Administration no
longer supports Levin legislation; Form SS-4 approach underway


Identify beneficial owners
AML obligations could extend to attorneys who form companies on
behalf of clients-carve-out if use formation agents
FATF RBA for Legal Professionals
 In October 2008, FATF adopted RBA for Legal
Professionals
 No suspicious transactions reporting (“STR”) and no
tipping off (“NTO”) rule—differs from RBA guidance
for other DNFBPs (e.g., accountants, trust and
company service providers). Critical decision point at
April 2008 Paris meeting.
 FATF developed separate RBA guidance for each
discrete DNFBP sector.
FATF RBA for Legal Professionals
 FATF Guidance is a complex document—126 separately




number paragraphs.
Addressed to different audiences: private and public
sectors.
High level guidance—FATF Guidance articulates
broad principles
Initial focus of FATF on financial institutions; efforts
resulted in modifications to Bank Secrecy Act and
other legislation in member nations
FATF turned focus in 1999 to role in money laundering
of DNFBPs, including most transactional lawyers
ABA Voluntary Good Practices Guidance
 FATF Guidance encouraged private sector to develop good
practices guidance to implement the FATF Guidance.
 ABA led the development of the voluntary good practices
guidance. Adopted as official ABA policy at 2010 annual meeting
in San Francisco (R. 116).
 Endorsed by the following specialty bar associations: American
College of Real Estate Lawyers, American College of Trust and
Estate Counsel, American College of Mortgage Attorneys, and
American College of Commercial Finance Lawyers.
 Endorsed by 6 ABA Sections: Real Property, Estate and Trust
Law, Taxation, International Law, Business Law, Law Practice
Management, and Criminal Justice.
ABA Voluntary Good Practices Guidance
 Tracks format/order of the FATF Guidance.
 ABA Guidance contains “practice pointers” designed to highlight or





illustrate practical impact of particular point.
Practice pointers reflect insights into the intent of particular
provisions. Approach allows legal profession to engraft gloss on FATF
Guidance.
ABA Guidance is not static—will be continually revised to reflect new
or better insights (and to reflect 2012 Forty Recommendations).
Particular focus on various risk factors and their identification and
evaluation.
Sensitivity to widely varying practice settings of US lawyers.
Practical explanation of risk based approach, “specified activities,” and
client due diligence.
ABA Voluntary Good Practices Guidance
 US Treasury issued statement in support of ABA
Guidance:
“The Treasury Department welcomes this Good
Practices paper as a useful step in protecting the legal
profession as well as the broader financial system from
the risks of money laundering and terrorist financing.
Treasury looks forward to continuing engagement
with the ABA to facilitate implementation of effective
policies and procedures to protect against money
laundering and terrorist financing.”
Who are covered by the ABA Guidance?
 Lawyers/legal professionals.
 Notaries are included, but not the “American” type
notaries.
 In-house counsel excluded!
Who are covered by the ABA Guidance?
 Lawyers who “prepare for or carry out specified activities.”
 Phrase “prepare for or carry out” not defined in Forty
Recommendations.
 5 categories of “specified activities,” such as “buying and
selling of real estate.”
 Lawyer Guidance does not define “buying and selling of
real estate”: does it include financing or leasing
transactions?
 Another specified activity is the “creation of companies”
(company formation agents) and “buying and selling
business entities”—Not defined.
Who are covered by the ABA Guidance?
 Remaining specified activities:
 Managing of client money, securities, or other assets
 Management of bank, savings, or securities accounts
 Organizing contributions for the creation, operation, or
management of companies
 What about local counsel? May not be covered
because they may not be preparing for or carrying out
a specified activity—role is peripheral to overall
specified activity.
What are the risk categories?
 Lawyer Guidance requires lawyers to assess risk as part
of client due diligence.
 Three major risk categories:
 Country/geographic risk
 Service risk
 Client risk
Risk Factor #1:
Country/Geographic Risk
 No universally agreed definition of whether a
particular country or geographic area represents a
higher risk.
 Higher risk countries: countries subject to sanctions
or embargoes and countries identified by credible
sources as generally lacking appropriate AML/CFT
laws, regulations, and other measures.
Risk Factor #2: Client Risk
Lawyer Guidance identifies about a dozen categories of potentially higher risk clients.
 PEPs—politically exposed persons. Based on 2012 changes to Forty Recommendations,
PEPs are high level officials both domestically and internationally! Report issued in
February 2010 by Senate Permanent Subcommittee on Investigations focuses on PEPs
(e.g., Equatorial Guinea, Nigeria, Angola, and Gabon).
 Structures with no apparent legal or legitimate tax, business, economic, or other reason.
 Masking of beneficial ownership.
 Cash intensive businesses.
 Clients with certain criminal convictions—convictions for “proceeds generating crimes”
such as embezzlement.
 Clients with no address/multiple addresses.
Risk Factor #3: Service Risk
 “Touching the money”—lawyers acting as financial
intermediaries—handling receipt and transmission of funds.
 Concealment of beneficial ownership—lack of transparency
concerns FATF. “Beneficial ownership” remains a hot issue in
both the US and within FATF.
 Accelerated real estate transfers.
 Inadequate consideration.
 Out of character transactions.
Variables that affect risk—
the balancing test
 Concept of proportionality—”variables” tell the lawyer whether
to increase/decrease level of client due diligence. No situation
where risk is zero!!
 Think about it—every client presents some risk of money
laundering or terrorist financing.
 Nature and regularity or duration of client relationship.
 Local counsel—providing limited legal services may be
considered a low risk factor.
 “One shot” transaction.
Can you represent a high risk client?
 Neither the FATF Guidance nor the ABA Guidance
prohibits a lawyer from representing a higher risk
client.
 In representing a higher risk client, lawyer needs to
make sure he/she has appropriate controls in place—
perform enhanced client due diligence (as opposed to
basic or reduced/simplified client due diligence).
Client Intake Protocols
 Appendix contains example of client intake protocols
designed to implement ABA Guidance.
 One size does not fit all—need to tailor protocols to
specific practice setting.
 Standard level CDD, reduced/simplified CDD, and
enhanced CDD.
FATF Typologies Report
 In response to criticisms from the legal profession, FATF
issued a “typologies” report in June 2013 containing
examples of where lawyers have been involved in money
laundering—both unwittingly and knowingly
 ABA and other bar associations (IBA and CCBE) have
criticized the report as being not useful and too dense—
lacks educational value.
 ABA asked that FATF’s report focus on unwitting
involvement—FATF declined to modify hypos to address
concerns
 Bar groups producing own typologies report—issue at 2014
IBA annual meeting in Tokyo (October 2014)
Paula Frederick
ABA Ethics Opinion 463
 In September 2011, ABA Gatekeeper Task Force
requested that the ABA Standing Committee on Ethics
and Professional Responsibility issue an advisory
opinion on Gatekeeper issues.
 Committee issued opinion May 23, 2013 (Formal
Opinion 463)
 Focus on Model Rules 1.2(d) (lawyer cannot knowingly
counsel or assist client to commit crime or fraud) and
1.16 (withdrawing from representation if client persists
in course of action involving lawyer’s services that
lawyer reasonably believes is criminal or fraudulent.
Robust Educational Efforts
 ABA strongly focused on widespread educational
efforts.
 On-going CLE programs, both locally and nationally.
 Posting of ABA Voluntary Good Practices Guidance on
state, local, and specialty bar association websites.
 Publication of articles on CDD and Gatekeeper issues.
State Based Regulation of Lawyers
 Strong resistance to federal regulation of the legal profession.
 ABA opposes federal legislation (S.1465) that would impose
burdensome and intrusive gatekeeper regulations on lawyers
(Incorporation Transparency and Law Enforcement Assistance
Act)
 Bills would subject lawyers and law firms to AML and SAR
requirements of the Bank Secrecy Act when they help clients
establish companies, trusts, or certain other entities, and would
undermine the attorney-client privilege, the confidential lawyerclient relationship, and traditional state court regulation of
lawyers
 S.1465 would impose burdensome, costly, and unworkable
“beneficial ownership” reporting requirements on lawyers, their
clients, businesses, and states.
State Based Regulation of Lawyers
 Strong resistance to federal regulation of the legal
profession.
 Bills contain a vague and unworkable definition of
“beneficial ownership” that would sow confusion into
the company formation process and would be ineffective
in fighting money laundering and terrorist financing.
State Based Regulation of Lawyers
 Model Rules of Professional Conduct Rule 1.2(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.
Federal Laws and Response to
State Marijuana Laws




Controlled Substance Act, 21 USC § 811
Schedule I, 21 USC § 812
Conspiracy 18 USC § 371
Deputy Attorney General James M. Cole, August
29, 2013, memorandum to All U.S. Attorneys
regarding marijuana enforcement.
 Department of Treasury Financial Criminal
Enforcement Network Guidance, FIN-2014G001, issued February 14, 2014.
Miami
2. Colorado
1.
Miami
 In Miami a man contacts a major national law firm and
asks for a partner in the business law section.
 The client explains that he anticipates a series of
transactions, but wants to maintain an anonymous profile.
He will be wiring in $5 million and will ask the lawyer to act
as nominee in a series of modest real estate purchases and
high dollar automobile purchases.
 The client will send instructions on how to title later. The
client wants the lawyer to act with utmost discretion and
wants to pay a 15% premium to the lawyer for prompt and
discrete service.
 The lawyer agrees and proceeds.
Colorado
 In a mid size town in rural Colorado, a client from New
York City contacts a general practitioner and claims to
have made a lot of money in hedge funds, but now
wants to diversify into farm land.
 The client plans to acquire a series of farms, but does
not want to set off speculation and artificial inflation
of prices. He will wire money into firm's trust account
over time, and the lawyer will create a series of LLCs to
make strategic acquisitions.
 The lawyer agrees to the representation.
Colorado variation
 The same facts, but the client wants to participate in
the marijuana industry:
 Supplier?
 Dispensary?
 Recreational Distributor/Store?
Arizona Ethics Opinion 11-01
 “A lawyer may ethically counsel or assist a client in legal
matters under the Arizona Medical Marijuana Act (‘Act’),
despite the fact that such conduct may violate applicable
federal law.”
But:
Advice or assistance may be given only if
 “no court decisions have held that the provisions of the Act
relating to the client’s proposed course of conduct are
preempted, void or otherwise invalid”; and…
 “the lawyer reasonably concludes that the client’s activities
or proposed activities comply fully with state law
requirements”;
and…
 “the lawyer advises the client regarding possible
federal law implications of the proposed conduct if the
lawyer is qualified to do so, or recommends that the
client seek other legal counsel regarding those issues
and appropriately limits the scope of the
representation.”