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BANK SECRECY ACT



Financial institution inquiries regarding your trust account transactions

By Lewis R. Cohen

The Financial Recordkeeping and Reporting of Currency and Foreign Transactions Act of 1970 (31 U.S.C. 5311 et. seq.) is referred to as the Bank Secrecy Act (“BSA”). The BSA requires U.S. financial institutions to maintain specified records involving currency transactions and the financial institution’s customer relationships. In particular, U.S. financial institutions are required to develop and maintain knowledge of the institution’s customers and develop systems that predict the type and frequency of transactions in which its customers are likely to engage. When account activity varies from a customer’s profile (e.g., significant increases in the number or amount of transactions) the financial institution must ascertain whether the transaction has a legitimate and lawful purpose, and keep a record of its due diligence for examination by regulators. Many attorneys have received BSA inquiries from their banks regarding trust account activity involving large or frequent transactions.

 Rule 4-1.6 of the Rules Regulating The Florida Bar provides that “a lawyer shall not reveal information relating to the representation of a client.” The rule’s commentary makes clear that an attorney’s ethical duty of confidentiality is broader in scope than the well-founded principle of attorney-client privilege, and extends not merely to matters communicated in confidence by the client to the attorney, but “to all information relating to the representation of the client, whatever its source.”

A financial institution’s BSA inquiry into an attorney’s account activity, including trust account activity, often gives rise to concerns regarding attorney-client privilege and confidentiality. Transactions that are lawful but deviate from an attorney’s normal account activity patterns may trigger the filing of a Suspicious Activity Report (SAR) with the federal government, unless the financial institution can satisfactorily complete and document its due diligence and establish a reasonable explanation for the account activity. Failure to detect “out of profile” activity and to conduct and document its due diligence can result in severe penalties for the financial institution.

Federal regulatory agencies and bar associations have been less than sympathetic to each another’s positions with respect to the potential conflict between a financial institution’s duty to inquire and an attorney’s duty to maintain confidentiality. As a result, attorneys and financial institutions alike may find themselves in a quandary regarding how to enable a financial institution to document that a flagged transaction has a legitimate and lawful purpose while at the same time allowing an attorney to comply with his or her obligation to maintain the confidentiality of information relating to the representation of a client.

Federal case law regarding attorney disclosures has generally favored federal law over state law or custom, and has frequently involved a “balancing of harms” test in weighing both the benefits and harm of disclosure, and the public policy implications involved. See, for example, United States v. Goldberger & Dubin, P.C. 935 F.2d 501 (1991). A similar “balancing of harms” approach was taken by The Florida Bar when, in Ethics Opinion 93-5 {October 1, 1994) {revised 8-24-11) the committee stated:

“An attorney who is an agent for a title insurance company may not permit the title insurer to audit the attorney’s general trust account without consent of the affected clients. The attorney, however, need not obtain client consent before permitting the insurer to audit a special trust account used exclusively for transactions in which the attorney acts as the title or real estate settlement agent.”

In rendering Opinion 93-5, The Florida Bar’s committee reasoned that one of the exceptions to the Rule 4-1.6 duty of confidentiality is “to serve the clients interests” and that audits by title insurance underwriters help ensure the safety of the deposited funds. In equating “the clients interests” to the general safety of deposits, The Florida Bar committee applied a public policy approach to make an exception to the confidentially rule.

While one may argue whether the BSA’s goal of fighting money laundering and terrorist financing serves the public good, The Florida Bar has made no such “public policy” exception for BSA inquiries, and until there is some reconciliation between the two mandates, attorneys and financial institutions alike remain challenged to find common ground on the issue.

Here are some suggestions to help solve the dilemma. First, communicate with your relationship manager. If your financial institution understands the general nature of your practice and the types of transactions and volume of activity to expect, this can assist your financial institution in completing its due diligence while minimizing the need for inquiry. Second, understand that a financial institution’s BSA inquiries are not challenges to your honesty or integrity. By understanding the recordkeeping and reporting requirements that the BSA imposes on financial institutions, and familiarizing your relationship manager with the nature of your practice and the frequency and volume of transaction activity to anticipate, you can help facilitate your financial institution’s compliance with its obligations under federal law without compromising your ethical obligations under Rule 4-1.6 of the Rules Regulating The Florida Bar.

Attorney Lewis Cohen is a shareholder in the Miami office of GrayRobinson, P.A. He has more than 25 years of experience in the areas of banking, commercial finance, real property finance, real estate transactions and commercial litigation.


South Florida Legal Guide 2012 Financial Edition


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