Money Laundering Case Puts Spotlight On Law Firms' Use of Trust Accounts

Such accounts do not trigger federal bank reporting requirements on clients' behalf, and they are typically used to pool small amounts of funds related to the legal matters of multiple clients. The interest is used by the state to support legal assistance programs.

According to a series of complaints filed July 20 in Los Angeles federal court, Shearman & Sterling held $368 million in its IOLA account, and DLA Piper held more than $218 million. The DOJ claims that money in the accounts was used for lavish spending sprees by Riza Aziz, the stepson of Malaysia's prime minister, and by another Malaysian, Low Taek Jho.

The forfeiture suits seek to recover assets and do not include civil or criminal claims against individuals or companies. Neither Aziz nor any other others named in the suits have been separately charged.

One of Aziz's businesses, the film production company Red Granite Pictures Inc., which made The Wolf of Wall Street, stated that it “is confident that when the facts come out, it will be clear that Riza Aziz and Red Granite did nothing wrong.” Low could not be reached for comment. His attorney had no further comment. The Business Times Singapore reported that “Mr. Low has previously denied any wrongdoing.”

Both Shearman & Sterling and DLA Piper said they have protocols in place to ensure that client funds are handled properly. They also said that law firms regularly hold funds related to client transactions, and noted that they have not been accused of misconduct.

'A Lot of Questions'

Two leading authorities on interest on lawyer trust accounts in New York said they were taken aback by the idea that more than a half billion dollars would be placed in two firms' IOLA accounts.

Peter Coffey, the editor of the New York State Bar Association's most recent guide to attorney escrow accounts, said the size of the deposits was highly unusual. Coffey, a partner at Englert, Coffey, McHugh & Fantauzzi in Schenectady, NY, and a frequent author on IOLA-related issues, called the sums “ridiculous.”

Anne Reynolds Copps, the assistant editor for the NY Bar's IOLA guide, said deposits of that size would raise numerous questions. “I'm thinking, why in the world would you give me that kind of money?” said Copps, of Albany, NY's Copps DiPaola.

A partner at a major New York firm who has extensive experience with IOLA accounts was also surprised at the large sums in question. “It's hard for me to figure out how I'd ever be convinced that this much money should go into an IOLA account,” he said. (He did not want to be named because of his relationships with lawyers at Shearman & Sterling and DLA Piper.)

When lawyers receive money from clients as a retainer or to hold for a transaction or deal, they typically open an interest-bearing account at a bank for the client, Coffey and Copps said. But in some cases the amount is so small that it wouldn't make sense to open a separate account, because fees and expenses would exceed any interest.

In those instances, the money can go into the firm's IOLA account, which holds funds from multiple clients. The state uses the interest generated by these pooled funds to support civil legal aid programs for the poor, and to compensate clients defrauded by lawyers. (Every state has its own version of an IOLA program.)

One difference between opening a regular trust account and an IOLA account is the information that is reported to the government. A regular trust account opened at a bank must include the client's taxpayer identification number, and a Patriot Act screening will be run on the account. When money is put into a law firm's IOLA account, the account carries the taxpayer ID number of the New York State IOLA fund, and a new Patriot Act check is not performed. The client's identity is not reported to the government.

What the Law Says

The use of an IOLA account for large amounts of money could violate the state statute that governs these accounts. For example, New York State Judiciary Law Section 497 states that IOLA accounts should only be used for “qualified funds,” which is “money received by an attorney from a client that is too small in amount or will be held for too short a time to generate sufficient interest to justify the expense of creating a separate account for the client.”

In one of the few rulings on the proper use of an IOLA account, a New York state court in 2003 addressed whether a lawyer should have put $2.73 million of client funds in an IOLA account where it was expected to be held for about three months. In denying a motion to dismiss, the court stated that “it would not appear that these significant amounts of monies deposited constitute 'qualified funds'” that could be put into an IOLA account. (The ruling was later reversed on other grounds.)

While the issue was not raised in the complaint, the improper use of an IOLA account might also run afoul of federal tax rules. In 1998 the Internal Revenue Service published a ruling allowing the special tax treatment of IOLA accounts so that the interest isn't taxed to the client who supplied the funds. But it did so with the understanding that these accounts would be used only for funds that are “nominal in amount or are to be held for a short period of time.” PLR-110527-98.

Most of the money in DLA Piper's account was held for only 13 days, according to the DOJ's complaint, but significant interest still could have been earned. The DLA account received $218 million on Nov. 12, 2013, and $202.2 million was transferred out the following Nov. 25, according to the DOJ. (The complaint does not specify what happened with the remaining $15.8 million.) Even at a 1% interest rate, the $218 million would have earned more than $71,000 in interest in those 13 days.

The $368 million that the government claims was received by the Shearman & Sterling IOLA account remained for longer periods, according to the complaint. Starting in October 2009, the money was received in 11 wire transfers over the course of roughly a year. The first installment, $148 million, was allegedly sent on Oct. 21, 2009, and the first payment out of that account, for $10 million, didn't occur until Dec. 21, 2009. During those two months, the money could have earned $240,000 in interest at a rate of 1%.

Hotels, Jets and a Manhattan Penthouse

Shearman & Sterling represented Aziz and a company called the Wynton Real Estate Group in at least six major transactions, according to the DOJ. These deals included the purchase of the L'Ermitage hotel in Beverly Hills for $44.8 million in January 2010, the acquisition of a Bombardier jet for $35.4 million in March 2010, and the purchase of a penthouse in the Time Warner Center in Manhattan for $30.5 million in March 2011.

Money was also wired out of Shearman's IOLA account at least 11 times for other expenses for Low and his associates, including $25.4 million sent to two Las Vegas casinos, $4 million to a luxury jet rental service and $2.7 million for luxury yacht rentals, the government claims.

The firm said in a statement that it has cooperated fully with the DOJ, and it noted that several other law firms and financial institutions did business with individuals named in the complaint, “apparently unaware of any illegal conduct.”

“Shearman & Sterling followed its anti-money laundering protocols with respect to the clients at issue in this matter. In fact, the firm adheres to anti-money laundering standards in excess of U.S. legal requirements,” the statement said. “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 also rejected the idea that its use of an IOLA account might have served to conceal improper activity.

“The Shearman & Sterling IOLA account referred to in the government's forfeiture complaint was not used to hide funds or transactions; in fact, our clients' names were included in the account documentation,” the firm said. “In addition to the IOLA account, separate interest-bearing accounts were also opened in our clients' names, again demonstrating that there was no effort to hide funds or transactions.”

The DOJ's complaint mentions DLA Piper in connection with three large real estate transactions, but only one in which it used an IOLA account to hold funds. In that deal, Low allegedly purchased an interest in the Park Lane Hotel in New York when it was sold to an investor group for $654 million. A portion of the price ' $281 million ' passed through DLA Piper's IOLA account, according to the government.

DLA Piper also defended its conduct 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,” the firm said. “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. Like the other law firms mentioned in this matter, we have not been accused of any improper conduct. We have fully cooperated with the Department of Justice in their investigation and will continue to do so.”

'Don't Be a Banker'

Coffey said that any lawyer trust account, regardless of whether it's an IOLA account, shouldn't be used as a bank account for a client to pay expenses.

“Don't be a banker,” he said. “This account is supposed to be used for funds received in the course of the attorney's practice of law.”

A partner at a major New York firm agreed. “The fundamental rule is that you should not [hold a client's money] unless it's connected to a legal matter,” he said. “It could be an attempt to defraud. The bottom line ' it has to be related to legal work. If not, it's problematic.”

The DOJ claims that two other firms, Sullivan & Cromwell and Greenberg Traurig, also held allegedly laundered funds in client accounts. See, “Money Laundering Case Highlights ABA Stance on Lawyers' Obligations,” AmLaw Daily (Aug. 1, 2016). But these two firms did not use IOLA accounts for these funds, according to the government's complaint. Greenberg Traurig said in a statement that it “did not represent any entity or person who allegedly misappropriated or misused money that the government is seeking to recover in this action.” Sullivan & Cromwell did not respond to a request for comment.

Another partner involved in management at a major New York firm said that most firms don't want to hold client money, especially if it's not for a real estate closing. Instead, they'll arrange for a bank to do that.

“I never wanted to take a client's money,” said this lawyer. “It puts you in a position to have to ask questions, and that's not a good position to be in.”

Susan Beck writes for The American Lawyer, an ALM sibling of this newsletter in which this article also appeared. She can be reached at [email protected].