The Wall Street Journal ran a front page story on December 27, 2016 reporting that lawyer trust accounts facilitate money laundering. Not only is the Journal correct, but there really is no need for these accounts. Receiving funds from third parties and holding them make lawyer-run trust accounts "financial institutions." But these are the only financial institutions that are wholly unregulated. The bar's regulations refer only to record keeping and prohibitions on commingling and taking money from clients.
While client funds for a specific project or deal may sit in a trust account for a short period of time, law firms often require a deposit as collateral for law firm billings, similar to a security deposit in a lease for real property. A company that is running $25,000/month in fees will be asked to keep this amount (or 2x this amount) in the trust account so the client can't get behind in payment. So that's $25 or $50k that is on deposit for the duration of the matter, which can sometimes take years.
Because the Bar has a financial interest in receiving interest from IOLTA accounts (the Journal called them "pooled" accounts) there is little institutional interest in change.
Lawyers do not need to be certified, bonded or undergo any special training to operate/function as a financial institution.
A law license is all that is needed. There is no training whatsoever required by accredited law schools (the national curriculum is the same) even on something as basic as double entry accounting, never mind operating a money transfer business, which is what these accounts are. Law students study only rules against commingling (mixing lawyer funds with client funds), not withdrawing fees until earned, and not stealing money. There are not only no KYC rules instead law firms have HYC (hide your customer) rules.
In reality, I can see no reason for a law firm to even have a trust account or to hold funds for clients. Trust departments at banks are quite adept at this, have bonded employees, are subject to federal regulations and know what double entry accounting is. It is just as easy for the Trust Department at a bank to operate these accounts as they do any other trust or estate account. If a client wants me to hold his money, I can send him to the bank's trust department which will vet him, receive his funds and hold on to them pending my authorization.
There is much for attorneys to gain by adopting this system. The majority of attorney discipline in this country is imposed because of trust account violations. Given the lack of training, this is hardly surprising. The federal government could end this tomorrow by prohibiting trust accounts or requiring law firms to register as financial institutions.
This must be accomplished at a federal level. There is no independent federal bar (this is somewhat of a simplification, but it is impossible to be admitted to federal practice without state certification). And every single state bar receives funds from the IOLTA program. Because the various state bars have a financial interest in the status quo, money laundering will continue.
Bar-mandated attorney fee schedules were abolished in one day by the Supreme Court. The Federal Reserve could accomplish the same with trust accounts. In the long run, attorneys will welcome the change.
Here's the link to the Journal article: https://t.co/qNsasfRBnQ
Is a company’s corporate culture important? Is there something about a company’s DNA that informs all their activities? Does Google’s well-publicized generous employee cafeteria, endorsement of pet projects and relaxed dress code mean that fundamentally it is different from IBM, where up until the 1980’s, male employees wore coats and ties?
FBI agents were once required to have a degree in accounting or law. Agents of the Bureau of Narcotics and Dangerous Drugs, now the DEA, were only required to have graduated from high school. Does this make the agencies different?
In their biography of Dr. Josef Mengele, the Auschwitz SS physician who selected Jews for the gas chamber, Gerald Posner and John Ware wrote:
“In 1939 Reinhard Heydrich, chief of the Gestapo, was voted president of Interpol. In December 1941, Interpol moved its headquarters to the fashionable Berlin suburb of Wannsee, where it shared a villa with the Gestapo.”
It was in this villa where the infamous Wannsee Conference was held and where the Final Solution was organized.
“Heydrich even made Interpol a division within the SD, the Security Police. When Heydrich was assassinated in Prague in June 1942, Himmler chose Heydrich’s successor at the Gestapo, Ernst Kaltenbrunner, to repace him as Interpol’s president.
"After Kaltenbrunner was hanged at Nuremberg in October 1946, a Belgian member of Interpol’s executive committee, Florent E. Louwage, became president. He was succeeded in 1956 by Jean Nepote, who had collaborated with the wartime Vichy government in France. In 1968 Interpol elected Paul Dickopf, a former SS officer who worked at the Wannsee headquarters, as president. He remained president until 1972."
Mengele: The Complete Story, Gerald Posner and John Ware, (London: Cooper Square Press (2000) at p. 131 (originally published in 1986).
Lawyers with international practices can speak knowledgeably about the New York Convention for the Enforcement of Arbitral Awards and the domestic enforcement of foreign judgments. But ask questions about international law enforcement and the answers usually descend into embarrassed silence. There is really no such thing as universally recognized criminal law. International practice lags far behind civil enforcement.
This can’t be too surprising, given that one of the few agencies tasked with implementing international law enforcement has a questionable pedigree.
Should Entrapment be a Defense to Copyright Infringement? And what does Star Trek have to do with Jorge Luis Borges?
On New Year’s Eve Paramount Pictures filed a lawsuit against a group of Star Trek fans who put together a fan film called Prelude to Axanar. The short fan film, posted on Youtube, drew several million views. A Kickstarter project was initiated in order to fund a full-length film.
Axanar’s writers, actors and backers have asked, “what did we do wrong?” They broke the law. Or did they?
Axanar is a derivative work under copyright law. Unauthorized derivative works are by definition, infringing. A Catcher in the Rye fan film would be banned as soon as the Salinger estate heard about it. The Nabokov Estate sued the author of Lo's Story for re-telling the events written about in Lolita.
So why is Axanar different?
Axanar is different because Paramount and Lucasfilm, makers of Star Wars, have over the years invited fans to make fan films. While no formal licenses were ever issued, both Paramount and Lucasfilm have stated publicly and repeatedly that the makers of fan films would be left alone as long as their work was created on a non-profit basis. At biennial Star Wars conventions, Lucasfilms even holds a fan film film festival with prizes awarded for the best efforts.
Similarly, there have been dozens of Star Trek fan films. Paramount has left them alone. Why the change? Why the New Year’s Eve lawsuit?
It’s all about the money, of course.
Axanar proved to be too popular. The Axanar project derives revenue from Youtube, a Google advertising site. The Kickstarter campaign similarly put cash into the pockets of the fan film makers. But wait--that cash was to be used to make the movie. No one is suggesting that the Axanar folks were skimming funds from the project. But the team was working on the project, and maybe, just maybe, getting paid for their work.
Let me point out that Paramount believes that someone was getting paid. I think this is what spooked them. The distinction between profit and loss in Hollywood is a slippery one. Because the IRS and accounting boards tolerate creative accounting, blockbuster films are almost never profitable. Even the original Star Wars, according to the studios, has never made a profit.
The Hollywood profit/loss accounting system is threatened by this case. It would be extraordinarily easy for the Axanar team to show that they had not profited and would not profit from release of the fan film. That might attract attention by others who have contractual rights triggered only when a film makes a profit.
This is the heart of the case: Paramount alleges that the Axanar team “enjoys a direct financial benefit” from Axanar. This will come as a shock, I am sure, to all of those who volunteered their time to make the project a success with no compensation. Studio executives earn their salaries on the back of their so-called unprofitable films.
The lawsuit claims, “[the Axanar team] knew or had reason to know that the Axanar works are unauthorized derivative works...” This allegation is ridiculous. The Axanar team had every reason to believe that their work was authorized, based on Paramount’s past practice. Can Paramount, having publicly invited fan films, now obtain damages from those who believed the studio's representations? Should a movie studio (or any creative artist) invite the creation of derivative works only to later pull the plug in federal court?
Creators of derivative works are on slippery ground at best. While the Argentine author Jorge Luis Borges was alive, his English translator was Norman Thomas diGiovanni. DiGiovanni’s translations were popular and helped bring Borges to the wider, English-speaking world. But Borges married late in life and his widow was unhappy with the fact that DiGiovanni continued to earn from her husband's work. Or maybe she just didn’t get along with the translator. In any event, she pulled the plug, commissioned new translations, and now you will have a hard time finding any of DiGiovanni’s once popular work.
What Paramount has done here is legally correct but unfair. You should not be able to invite people to your platform and then shut it down when they do a good job. Maybe the Axanar producers could set their tale in the Star Wars universe. They might win a prize at the fan film festival.
Paramount Pictures v. Axanar Productions, Case No. 2:15-cv-09938-RGK-E (C.D.Cal.), available at http://www.documentcloud.org/documents/2660454-Startreklawsuit.html and on PACER.
The graphic illustration is from the fan film, Prelude to Axanar.
2018 Update: Paramount and Axanar settled. Paramount issued strict new guidelines for fan films. The Axanar project has not released its promised film. For the moment the derivative work issue is not paramount (sorry). But then there's The Orville...