The duty to inquire about a fraud — it’s real and it’s spectacular

Burying your head in the sand could be pretty lucrative for a lawyer.  Some lawyers over the years got pretty wealthy that way.  They were the kind of lawyers who talked to a shady client and said things like, “I didn’t hear you say that,” or, “Don’t tell me anything. If you tell me I can’t continue to represent you, so I don’t want to know.” 

Lawyers who are willing to put on earmuffs like that are pretty popular with a particular kind of client. Criminals.

Well, recently the ABA issued an ethics opinion that made it clear that the days where a lawyer could ignore a client’s bad deeds are a thing of the past. While the opinion contains an interesting ethics analysis, the reason it is truly notable is because it signals a paradigm shift. The opinion makes it clear that lawyers can’t bury our heads in the sand anymore.

ABA Formal Opinion #491 (April 2020) deals with a lawyer’s obligation to avoid counseling or assisting a client in the commission of a crime or fraud. This issue appears to have gained importance recently because of an increased risk to lawyers. Governments around the world are putting more pressure on terrorist groups and other nefarious actors. That pressure has created a greater need for the bad guys to try to conceal their financing, and that increases their need for elaborate money laundering transactions.  Oftentimes those bad guys will need a lawyer to help them carry out their scheme, and that’s when the lawyer can have problems. That’s when a lawyer might be put in the position to assist that client in committing a crime. 

There is no question that lawyers can not assist in their client’s illegal activities.  Rule 1.2(d) explains that a lawyer “shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent.”  If a lawyer knows that’s happening, they need to withdraw, at the very least.  But what if a lawyer isn’t sure? The client’s tactics might smell like money laundering — maybe they’re paying with large amount of cash or routing money through a jurisdiction where laundering is common. But in some situations there might not be much more evidence than that.  In those cases there might not be enough evidence on the surface to confirm that the client’s objectives are fraudulent.  The question the ABA is wrestling with in Opinion 491 is, does a lawyer have to dig deeper? Does a lawyer have a duty to ask the client whether the objectives that smell bad are actually bad? The answer is yes. 

In explaining their reasoning, the opinion starts with the easy stuff. If the lawyer “knows” that they are getting involved in a client fraud — if the facts are so strong that the fraud is obvious — a lawyer has an obligation to talk to the client about it. That’s clear from Rule 1.2(d), and it’s been confirmed over the years. Both the rules and advisory opinions have established that lawyers aren’t allowed to avoid the obvious. 

But the opinion went further. It explained that a lawyer has to make inquiry even if the facts aren’t so strong that the fraud is obvious. A lawyer is required to check into the matter if there’s a “high probability” that the client is engaging in fraudulent conduct. The opinion explained that, “When a lawyer deliberately or consciously avoids knowledge that a client is or may be using the lawyer’s services to further a crime or fraud, discipline is imposed.” Op. 491 at 5, citation omitted. 

And the opinion didn’t stop there. Yes, a lawyer needs to inquire if she knows the client is pursuing a fraud. Yes, a lawyer also needs to inquire if there is a high probability that the client is pursuing a fraud. Well, the opinion further noted that some cases held that a lawyer should make an inquiry if there is a suspicion that the client’s actions might be fraudulent. And some jurisdictions have an even broader requirement. States like South Carolina require a lawyer to consult with a client if they “reasonably should know” that the client is getting the lawyer to assist in a crime or fraud. Op. 491 at 5.

All of that begs the question — when is a lawyer deemed to have a “suspicion” sufficient to require further inquiry? When can it be said that a lawyer “should have known”? The answer, as usual, is that it depends on the circumstances.  Unfortunately the drafters don’t give us a clear explanation of when this duty to investigate is triggered. It seems like they’re saying, “if it smells bad, ask.” But while the trigger might be murky, there is one thing that’s clear. The lawyer’s obligation to inquire about whether a client is asking the lawyer to assist in a fraud exists.  And Opinion 491 states clearly that a lawyer would be facing disciplinary action if an inquiry is required and they don’t do it.

Interestingly, I don’t think the unanswered questions here are so concerning. That’s because I don’t think this opinion is really about defining when a lawyer must make this inquiry. I think this opinion is really about sending a message. 

Think about it— the actual ethics issue is pretty basic and not all that controversial. A lawyer can’t assist in a client’s fraud, they should talk to the client about whether they are engaging in a fraud, and if they learn the client is doing so the lawyer should withdraw. Not exactly earth shattering.  But consider the “feel” of the opinion. 

The opinion spends a tremendous amount of time establishing the ethical justifications for requiring the lawyer inquiry.  They explain the nuances of Rule 1.2, they talk about criminal law, and they note a variety of other rules which can be read to require that a lawyer inquire further. That effort — which goes on for several pages — is extensive. They put a lot of effort into a pretty basic concept. It’s almost like the drafters are making their case. It seems as if they know that the audience will be skeptical. They know that lawyers will question whether this duty is real. Maybe the drafters realized that they would face resistance, so they felt the need to go to great lengths to make it abundantly clear that the duty to inquire exists. They nearly overdo it with the justifications. It’s as if they are saying, “let there be no mistake about it. This duty exists. It’s real.” 

Why would they need such overkill? Maybe it’s because they are signaling a paradigm shift. The drafters seem to be saying that the game-playing days are over.  The days where you could bury your head in the sand and remain willfully ignorant are a thing of the past.  

Maybe they spent so much time talking about the duty to inquire because that’s the only way they can make it obvious that they want us to behave differently — they want us to shed the old ways. They’re saying, times have changed and we really mean it. Look. We put a lot of ink on the paper. That shows we’re serious. We gave you all of this research because we want to send a clear message. The old days are over. Get with the program. In today’s practice they expect more from you.

There are other opinions which confirm this shifting paradigm and they’ve got to do with enhanced obligations being put on lawyers because of international money laundering. But let’s talk about that on another day…