Can a lawyer run client funds through an attorney escrow account to help a foreign client get money out of a country in a way that evades that country's currency controls?

Plain-English summary

A New York lawyer represented four affiliated companies in a multi-step transaction meant to move funds out of China to invest in a U.S. enterprise, where the amounts exceeded China's currency-control limits and a direct transfer would be unlawful there. The plan ran U.S. dollars through the lawyer's escrow account while an offsetting renminbi transfer happened inside China, so that the net effect matched transfers that, made directly, China's law forbids. The lawyer asked whether helping the client invest this way was permissible and, if so, whether the lawyer could charge a fee of 1 to 2 percent of the escrowed amount.

The committee analyzes Rule 8.4(c), which bars conduct involving dishonesty, fraud, deceit, or misrepresentation, and the Rule 1.0(i) definition of fraud. Looking at the structure, it finds the paired transfers had the purpose and effect of letting the companies circumvent the currency controls, with the offsetting "investment" between two of the companies set exactly equal to the real investment and supported by no genuine investment motive. The opinion states the goal of the scheme would be to disguise the true nature of the transfers and deceive government authorities and counterparties, and that the inquirer's proposed use of the escrow account would be an important part of it. It concludes the proposed conduct is sham conduct involving dishonesty, fraud, deceit, or misrepresentation.

Because Rule 8.4(c) resolves the question, the committee declines to decide two further points. It does not resolve whether Rule 1.2(d) (assisting illegal or fraudulent conduct) and Rule 8.4(b) (illegal conduct reflecting on fitness) reach conduct illegal only under foreign law, noting the Rules and Comments do not distinguish domestic from foreign law and that it found no authority holding a lawyer accountable for violating foreign law alone; it leaves that question for a future day. Having found the conduct impermissible, it also has no occasion to address whether a percentage-of-escrow fee under Rule 1.5(a) would be proper.

In practice

Under this opinion, a lawyer may not structure or facilitate a transaction, including by lending an attorney escrow account to it, whose purpose and effect is to disguise transfers and deceive authorities so a client can evade a country's currency controls; Rule 8.4(c) prohibits the deceptive conduct regardless of how the steps are labeled. The committee expressly declined to opine on whether conduct illegal only under foreign law triggers Rule 1.2(d) or Rule 8.4(b), and declined to reach the propriety of the proposed percentage fee.

Common questions

Q: Is it the foreign-law violation or the deception that makes this improper?

A: Per the opinion, the deception. The committee rests on Rule 8.4(c) because the scheme's purpose is to disguise the transfers and deceive authorities and counterparties; it expressly left open whether a foreign-law violation alone would implicate Rule 1.2(d) or 8.4(b).

Q: Does running the money through an attorney escrow account make it acceptable?

A: Per the opinion, no. The committee identifies the proposed use of the escrow account as an important part of the sham, not a cure for it.

Q: Did the committee decide whether the percentage fee was allowed?

A: No. Having concluded the underlying conduct was impermissible, the committee said it had no occasion to consider whether a fee calculated as a percentage of the escrowed amount would be proper under Rule 1.5(a).

Background and rules framework

The opinion turns on New York Rule 8.4(c) (no conduct involving dishonesty, fraud, deceit, or misrepresentation), read with the Rule 1.0(i) definition of fraud. It discusses but does not apply Rule 1.2(d) (a lawyer may not counsel or assist conduct the lawyer knows is illegal or fraudulent) and Rule 8.4(b) (illegal conduct adversely reflecting on the lawyer's honesty, trustworthiness, or fitness), leaving open whether they reach foreign-law illegality. These correspond to ABA Model Rules 8.4 and 1.2.

Citations and references

Rules of Professional Conduct:

• New York Rules of Professional Conduct 8.4(c); 1.2(d); 8.4(b); 1.0(i) (definition of fraud); 1.5(a) (referenced but not reached)
• ABA Model Rules 8.4, 1.2 (analogues)

Other authorities cited:

• Mike Donaldson, "Lawyers and the Panama Papers: How Ethical Rules Contribute to the Problem and Might Provide a Solution," 22 Law & Bus. Rev. of the Americas 363 (2016): arguing the Model Rules should clarify the domestic-versus-foreign-law question

See also

• NY State Bar Op. 1188: Estate Funds in an Attorney Trust Account
• NY State Bar Op. 1176: Nominal Own-Funds Deposit to Keep an Escrow Account Open

Source

• Landing page: https://nysba.org/ethics-opinion-1171/