BigLaw firms say protocols followed after US claims two trust accounts held $586M in stolen money
A civil asset forfeiture case involving $3.5 billion in assets allegedly diverted from a Malaysian-owned economic development company has raised questions about the use of law firm trust accounts.
The case filed by the U.S. Justice Department is getting press attention partly because one of the targeted assets consists of profits from the film The Wolf of Law Street, which was allegedly financed with diverted funds.
But some experts are expressing surprise because of allegations that hundreds of millions of dollars were temporarily held in interest on lawyer trust accounts—known as IOLTA or IOLA in New York state, Law.com (sub. req.) reports. The accounts are often used to hold small amounts of money, and interest on the accounts is used by states for programs such as legal aid.
The money in the forfeiture case was allegedly misappropriated from 1Malaysia Development Berhad, also known as 1MDB, before being laundered and spent. Some of those funds were temporarily placed in law firm trust accounts, including $368 million held in a trust account at Shearman & Sterling, and $218 million allegedly held in a trust account at DLA Piper. Neither law firm is accused of wrongdoing.
The money held at Shearman & Sterling was allegedly received in 11 wire transfers over about a one-year time period, according to the Law.com story. The money in the DLA trust account was allegedly held for 13 days.
The Law.com story identifies two potential problems with holding large sums of money in IOLA accounts. First, New York’s judiciary law says IOLA accounts should only be used for client money “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.”
Second, IOLA accounts receive special tax treatment that isn’t taxed to the client. But the IRS ruling allowing such treatment was based on an understanding that the accounts would be used for a small amount of funds or for a small amount of time.
Both law firms issued statements.
Shearman issued this statement: “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 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. 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. 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 statement from DLA says: “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. 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.”
