Time to Close The Lawyer BSA Loophole?
I am asking this question because of an article in the WSJ last week. The article highlighted the ease with which accounts overseen by lawyers can be used to facilitate money laundering activities. Keeping in mind that credit unions can now offer Interest on Lawyer Trust Accounts (IOLTA), this is one area of compliance that could impact your credit union in the future.
First, a refresher: Lawyers often take funds from clients for short-term purposes. Refundable retainers and money for real estate closings are two good examples. IOLTAs permit lawyers to place these funds in single trust accounts. As many of you probably know, it wasn’t until 2014 that credit unions were given the same rights as banks to establish these and other similar type of accounts.
In December, the Financial Action Task Force (FATF), an independent international body tasked with assessing international efforts to combat Money Laundering, concluded that the U.S. has to do more to clamp down on supervision of funds by lawyers, accountants and real estate agents. They complained that these professions are not subject to comprehensive AML requirements and are not systematically performing due diligence over account activities. The result is that they pose a “very significant risk” of money laundering.
The FATF has a point. Under the FFIEC’s Anti-Money Laundering Examination Manual, my bible for all things BSA, financial institutions are required to do due diligence on attorneys seeking to open an IOLTA account. But since credit unions often have no direct relationship with the clients whose funds are being combined in these accounts, it is the lawyer and not the financial institution that is best positioned to prevent money laundering. The legal profession has however steadfastly resisted attempts to impose AML requirements on attorneys administering IOLTA accounts. After all, there are legitimate confidentiality issues.
How big of a loophole is this? Think of it this way. While your credit union may be facilitating the business activities of a small law firm, major law firms that are international in scope can oversee billions of dollars.
This loophole has existed for decades and it’s possible that the scrutiny it is currently receiving may not result in additional mandates. But if it does, BSA requirements tend to flow downhill. I wouldn’t be surprised to see regulations inspired by the questionable conduct of large institutional players resulting in mandates with which even the smallest credit unions must comply.