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Law Firms’ Use of Trust Accounts under Scrutiny
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Photo courtesy of Law Sarasota.

Photo courtesy of Law Sarasota.

Summary: After the Department of Justice seized assets in an alleged misappropriation of public funds scheme, some major American law firms have faced scrutiny with their use of law firm trust accounts.  

The 1Malaysia Development Berhad (1MDB) scandal has tainted the reputation of nearly anyone who has come in contact with the Malaysian Prime Minister, Datak Seri Najib Razak. This includes his step-son, movie producer Riza Aziz, and two major United States law firms, DLA Piper and Shearman & Sterling.

  
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1MDB is a Malaysian-owned real estate company that was created to build projects around the country. However, there have been numerous reports that the company was actually a front for the Prime Minister and his friends to siphon state money.

Last month, the U.S. Department of Justice revealed that they had seized $3.5 billion of assets paid by allegedly laundered money that included yachts, a mansion, and ironically a stake in the movie “Wolf of Wall Street,” in which Aziz produced. However, one detail in the case that particularly struck Law.com was how the lawyers involved handled their client funds.

DLA Piper and Shearman & Sterling are not under any type of criminal investigation, but their links to 1MDB has put a “spotlight” on the use of law firm trust accounts, Law.com said. Both firms held hundreds of millions of dollars in this multi-billion dollar asset forfeiture, and some say that the use of the firm’s accounts to hold the money is unusual.

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“Both Shearman & Sterling and DLA Piper used so-called interest on lawyer trust accounts (IOLTA, or IOLA in New York State) to hold more than half a billion dollars that was allegedly part of a massive money laundering scheme,” Law.com said.

According to Law.com, IOLTA and IOLA accounts are typically used to pool small amounts of money related to their clients’ legal matters. These accounts are not subject to bank reporting requirements, including the Patriot Act screening, and interest earned goes to state supported legal assistance programs. DLA Piper held $218 million related to the case, and Shearman & Sterling held $368 million. Both firms deny misconduct and said they have procedures in place to ensure funds are handled properly.



While the two firms may have just been doing business as usual, Peter Coffey, an attorney and an editor with the New York State Bar Association, said the size of the deposits were unusually “ridiculous.” Other attorneys said that the massive amount should have raised some kind of suspicion.

The Department of Justice said that DLA Piper only held the 1MDB-related money for 13 days, but Shearman & Sterling held its funds for almost a year. According to Law.com, if the Shearman & Sterling money was held in a regular bank fund, the money would have earned hundreds of thousands of dollars.

Some critics have said that avoiding a regular bank account is often a sign of illegal activity. Because of the potential problems, Coffey said that law firms should avoid allowing clients to use IOLA/IOLTA accounts as personal bank accounts to pay expenses.

Shearman & Sterling and DLA Piper both issued statements that they were clear of any wrongdoing.

“The firm did not know and had no reason to believe that any funds transferred to Shearman & Sterling were the proceeds of unlawful activity. It is common practice for law firms to receive substantial funds from clients for disbursement in connection with real estate closings, as was the case here,” Shearman & Sterling said in a statement.

“As a large, global law firm, we are routinely involved in cross-border transactions and are occasionally called upon to hold client funds needed for the transaction. When we do, we have policies and procedures in place to ensure that we are fully compliant with all legal and ethical obligations and standards,” DLA Piper said.

The Department of Justice said that Sullivan & Cromwell and Greenberg Traurig also held allegedly laundered money but not in IOLTA or IOLA accounts.

What do you think of the actions of the firms mentioned? Let us know in the comments below.

Source: Law.com

Photo courtesy of Law Sarasota



 

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