Article on Due Diligence
Kristen, a junior partner with a 90-lawyer law firm in a Midwest city, specializes in commercial real estate and corporate law. Her clients are principally local real estate developers with a sprinkling of domestic institutional pension funds. Kristen receives a call from Brittany, a former law school classmate on the West Coast, who wants to refer a potential client to Kristen to handle a real estate transaction in Kristen’scity. In a dour economy, Kristen is thrilled to receive the referral. Brittany relates to Kristen that Brittany has been representing the client, an operator of a local warehouse distribution center, for about five years in labor and employment law matters but now the client wants to acquire a strip shopping center in Kristen’s city. Brittany informs Kristen that the potential client has a good payment record with Brittany’s firm and thinks that Kristen and the potential client would be a good match for the new real estate matter. Kristen thanks Brittany for the referral and tells Brittany that she will call the potential client as soon as she runs a conflicts check. To assist Kristen in that effort, Brittany e-mails the potentialclient’s name, address, and telephone number to Kristen.
The conflicts check is clear, and Kristen promptly calls the potential client. Kristen inquires into the name of the shopping center owner so that she can complete her conflicts check. The potential client indicates that a domestic insurance company now owns the shopping center pursuant to a foreclosure that occurred last year. Kristen immediately runs the owner’s name through conflicts and confirms that no conflict exists. Kristen then informs the client that the conflicts are clear and that Kristen’sfirm can handle the new engagement.
Kristen and her client then discuss the terms of the proposed shopping center acquisition. Kristen learns the deal is on a fast-track and that she is to review the draft contract of sale later that day, which the client will immediately forward to her. The client informs Kristen that anew entity will need to be formed to enter into the contract and to take title to the asset, and Kristen and the client discuss the pros and cons of the various forms of entities before deciding on a limited liability company(“LLC”). The LLC will be managed by the client but will have a number of “silent” investors. Kristen assures the client that she can form the entity quickly and prepare a standard member-managed operating agreement. Kristen does not push the client to identify the investors in the LLC. Kristen concludes the call by expressing her appreciation for the client’s business and that she looks forward to working with him on this transaction.
The above scenario has played out countless times with transactional lawyers across the United States. Kristen is pleased to have the new business and the client is delighted to have a lawyer recommended by Brittany, his regular attorney. Kristen feels she has discharged her ethical obligations by running the standard conflicts check. Based on Brittany’s assurances that the client is creditworthy, Kristen waived the need for a credit report on the client or the need for a retainer.
What is wrong with the above scenario? Although Kristen has performed the level of client due diligence (“CDD”) that most lawyers would perform under similar circumstances, she has not undertaken a risk-based analysis of the client to assess whether that client presents a risk of money laundering or terrorist financing. At first blush, that may seem to be a far-fetched notion. But efforts by the international community and federal authorities to impose anti-money laundering(“AML”) and counter-terrorist financing (“CFT”)1 obligations on lawyers portend significant changes in client intake and monitoring by U.S.lawyers and potential encroachments on the attorney-client relationship,including the attorney-client privilege and the duty of client confidentiality.These efforts are referred to as the “Gatekeeper Initiative.”