KNOW YOUR CUSTOMER
By Dwight Hill - Executive VP - Sabadell United Bank
When terrorists attacked the U.S. on September 11, 2001 we were all put on notice that action was needed to keep our country safe. Within months of the attack, the U.S. Congress passed the USA PATRIOT Act. This law, combined with the Bank Secrecy Act and ongoing efforts to track and eliminate money laundering, placed new burdens on banks and financial institutions across the nation. For some time, attorneys and their activities did not receive much attention, but the legal profession was soon labeled as high risk for potential money laundering, and banks were required to dig deeper into the activities of law firms and the funds coming in and out of trust accounts.
Today, law firms are facing ever-greater scrutiny and questioning by their banks. In turn, they must know more about their clients and the sources of funds transferred into their accounts. The impact on lawyers and their firms can be seen in several areas.
Currency Transaction Reporting (CTR), in place for close to 30 years, requires financial institutions to complete and submit paperwork for any cash transaction that exceeds $10,000. At times, clients may ask you to deliver their settlement proceeds to them, or deliver cash payments for fees to you, in multiple transactions, each below the $10,000 to avoid filing a CTR. This is known as “structuring,” and if you participate in these transactions, you can be unwittingly implicated in a crime or at least asked to close your accounts with the bank and find a new financial institution.
Financial institutions are required to have sophisticated transaction monitoring systems in place in order to detect suspicious transactions. You may have been the recipient of a request from your bank to explain the nature of the transaction, the identity of your client, or the origin of the funds in question. In some recent instances, lawyers have been accused of money laundering or have been compelled to forfeit attorney’s fees, due to the original source of the funds, the behavior of their clients or the types of transactions that flowed through the firm.
Why are lawyers and law firms considered high risk by government agencies, regulators and your bank? Although you are the client of the bank, and have passed the required Know Your Customer requirements, you represent unknown third parties that have no association with the financial institution. In many instances, there is little or no information about your client or the source of your client’s funds.
If a transaction in one of your firm accounts triggers the transaction monitoring system in your bank, then the bank is obligated to investigate the transaction and the parties involved. After conducting an investigation, a “Suspicious Activities Report” will be filed if information cannot be found or if negative information is identified. These confidential reports can be avoided if you can supply your bank with information on the client and the transaction that positively answers the questions raised by the investigation.
How can you protect yourself? Just the way banks have to “Know Their Customers,” you should do the same. Have policies and procedures in place in your firm requiring due diligence to know who your clients truly are, where your clients obtain the funds that ultimately run through your accounts, and the full story behind the transaction or case in which you are representing them.
When your banker questions a transaction running through your trust account, remember that he or she is legally required to do so and be prepared to find out the answers — it is for your own protection.
By Dwight Hill
Executive Vice President
Sabadell United Bank
1111 Brickell Avenue, 30th Floor
Miami FL 33131
South Florida Legal Guide Midyear 2010