The planner’s liability – an expanding scope

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McDermott Will & Emery, Paris                                           

rdesmonts@mwe.com

Frédéric Epitaux

Oberson Abels SA, Lausanne

fepitaux@obersonabels.com

Report on session at the 25th International Private Client Conference

Tuesday 3 March 2020

Session Chair

Markus Zwicky Zwicky Windlin & Partner, Zug

Speakers

Olga Boltenko Boltenko Law, Zürich

Johannes Gasser Gasser & Partner, Vaduz

Ellen Kratzer Fiduciary Trust Company International, New York

Rachel Mainwaring-Taylor Farrer & Co, London

Inga-Kristin Zillmer Zillmer, Ludwigsburg

James Paladino South Dakota Trust Company, New York

As an introduction, the panel shared their personal experience with clients that have caused them great concern:

• clients concealing the true purpose of the advice they were seeking or coming from a high-risk jurisdiction;
• clients not disclosing all the facts and circumstances that would be relevant to the planner to give proper advice; and
• clients that are accompanied by a family member seemingly exercising pressure on the client or covertly recording the conversation with their counsels.

It was highlighted that the risks could also come from political or industry changes.

This led to the identification of typical situations or clients that should immediately attract the planner’s attention, and of areas where planners are at risk because they manipulate highly sensitive information. The panel unanimously agreed that new clients raised the most concern and that in any event planners should be extremely careful of the context in which a new client is seeking their services. Each new transaction or instruction from an existing client should also be considered carefully.

The bad client

The bad client is usually the client that hides their true motives and never gives the adviser a full picture of their situation. Such clients will usually take otherwise good advice purposely out-of-context to serve inappropriate needs that they do not reveal to the attorneys they are soliciting advice from. The risk for the attorney is three-fold: the risk of giving bad advice due to lack of context, the risk of having advice used for illegal or criminal purposes and therefore becoming an accomplice, and the risk of bad publicity.

Markus Zwicky shared an experience in this respect that taught him that due diligence and knowing your client (ie, identifying who your client really is) is paramount in order to mitigate the above risks. Olga Botalenko concurred, stressing that the need to know the client is even more vital when the client comes from a typically high-risk jurisdiction with an unclear past and potential political ramifications, so that the attorney can avoid getting involved in potentially criminal endeavours. The search process should be well documented, so that the attorney can demonstrate that he had no intention to work with a criminal. Rachel Mainwaring-Taylor insisted that due diligence on clients should be completed prior to starting any work and suggested that such due diligence could be outsourced to specialised firms that are equipped to make thorough background checks. According to Johannes Gasser, attorneys should require honesty from their clients and the timely payment of fees, so that they can remain independent and avoid getting personally involved in their clients’ legal issues.

Inga-Kristin Zillmer mentioned the example of notaries, who are increasingly under scrutiny with respect to their anti-money laundering obligations because real estate has been used extensively in Germany for money laundering in the past few years, especially through public auctioning. As a result, notaries should exercise extra caution when involved in a real estate transaction where the context is unclear. James Paladino added that employees of trust companies and law firms alike should be careful, and regularly trained in anti-money laundering, so that they can know what information to ask for from clients and how to remain compliant at all times.

As a closing remark on this topic, Zwicky asked for a show of hands on whether the members of the audience had implemented checklists for due diligence purposes, following which many hands rose.

The evolving client

The evolving client can represent a challenge for lawyers and trustees as past advice may no longer appear valid as context evolves. This is also true for clients who become vulnerable because of age or their entourage.

For James Paladino, attorneys and trustees should always act under a clear engagement letter that describes the current facts and circumstances, as well as precisely defining the scope of work. They should also ask themselves what flexibility they can add today for the future. Boltenko concurred that the engagement letter should always make it clear that the advice is only valid to the extent that the facts provided by the clients are complete and accurate. Zillmer warned that the most dangerous situation comes after the main project has been finished, when clients ask for on-the-spot advice for which the adviser remains liable while no longer having a full view of the situation; accordingly, the engagement letter should be updated from time to time. This is also why it is important, according to Mainwaring-Taylor, that lawyers do their best to remain apprised of evolving circumstances surrounding their clients.

In this category, Gasser mentioned the risk of the so-called ‘unknown client’. As an example, female clients with a Middle Eastern background can appear to be the client while in fact the husband or the brother is the actual client. Likewise, an attorney being involved with a client involving multiple firms may never meet the client or have to rely on a lead counsel. In both cases, the attorney can run the risk of no longer being able to identify who the client actually is.

The sudden change of law

In certain cases, a sudden change of law will make past advice completely ineffective or obsolete, and sometimes contradictory with a client’s objectives.

From a general perspective, Paladino felt that it was the duty of the adviser to be proactive and warn clients that their structure should be reviewed, especially when the adviser is in a continuing relationship with a client, such as with trustees. For this reason, structures proposed to clients should always have a minimum flexibility to permit necessary changes in the event of a sudden change of law.

Mainwaring-Taylor concurred that lawyers should anticipate as much as possible any change of law. She commented that tax advisers are used to dealing with retrospective changes and that advice should not be called back if it was correct at the time it was given. Zillmer gave Brexit as a typical example of a sudden change of law that could have lasting consequences on certain estate plans, especially those involving trusts, as their treatment in mainland Europe might become uncertain without the protection formerly bestowed by EU law.

Boltenko concluded that a change of law is eventually easier to handle for an adviser than a change of practice (by practitioners, authorities etc) following a change of attitude or sensitivity to certain matters in the public's opinion, which can be harder to explain to a client and to remedy.

The mobile client

The mobile client is, by definition, active in several jurisdiction and needs the advice of several lawyers. For Paladino, it is important that each lawyer covering a different jurisdiction collaborates in order to leave no stone unturned, and that the client’s residency and citizenship status be known at all times.

Gasser mentioned that a mobile client creates new areas of risk in the context of DAC 6 and that lawyers could fall victim to their own advice. Zillmer added that, like a sudden change of law, a change of circumstances due to mobility can make former advice irrelevant and require an entirely new estate plan. Mainwaring-Taylor concluded that a lawyer should always be prepared to react to changes in a client’s circumstances, especially for mobile clients.

Public exposure

Warren Buffet famously stated that it takes 20 years to build a reputation and five minutes to ruin it. Reputational risks have made law firms increasingly concerned with the public exposure and bad publicity that high-risk notorious clients can attract, such as politically exposed clients.

For Zwicky and Paladino, a politically exposed client can make access to background and intentions difficult, but such access remains necessary to enable the lawyer to give adequate advice and anticipate potential risks. For Boltenko, discretion is key for lawyers, who should refrain from seeking the limelight that notorious clients bring with them. Mainwaring-Taylor and Zillmer added that due diligence is key to prevent bad publicity and unwanted public exposure and that lawyers should make a point to ask even the most embarrassing questions to make sure that all bases have been covered. Lawyers should always explain to a notorious client that inadequate legal tax planning due to insufficient or inaccurate information is not in their best interest, especially if it ends up in the newspaper or in court.

According to Mainwaring-Taylor, reputation is the most important thing, both for the client and for the lawyer. In that context, it is possible that legal tax planning will not be in the best interest of the client from a reputational perspective. She concluded that media coverage in general is not necessarily bad but can be positive as well for the lawyer.

Dealing with a mistake

Mistakes happen; dealing with them can be an uneasy situation for an adviser. The panel agreed that advisers should acknowledge their mistakes immediately and do their best to make the client whole. Mistakes that have not been dealt with tend to become worse and to come with a much greater risk. As a panellist said, ‘bad news is not wine, it does not improve with age’. The professional liability insurer should be informed as soon as possible if necessary. In that respect, Mainwaring-Taylor noted that legal opinions should be reviewed by at least two sets of eyes, especially for complex advice. If a mistake is made, she advised to come clean, inform the insurers and seek to mitigate and correct the mistake as quickly as possible.

Disclaimers and liability insurances

Disclaimers are necessary to protect advisers against liability. Exculpatory clauses are pervasive in trust documents and can extend to gross negligence in order to protect the trustee in what would otherwise be a breach of trust. In engagement letters of law firms, liability can never be fully excluded, and in any event, they should always be brought to the client’s attention.

Paladino and Zillmer highlighted that malpractice insurance is necessary, and recommended keeping a good relationship with the insurer and having it vet liability exclusion clauses. Zwicky closed this topic by warning lawyers against insurance companies acting seemingly as judges of ethical behavior.

Compliance

The panel then addressed the issue of compliance rules before taking in a new client and shared their respective internal processes. Such processes range from the more formal, such as going through a risk or management committee, or a compliance department, to the less formal, such as exchanges of email or the partner making a judgement call. Boltenko noted that compliance is an unclear and unreliable set of rules, but the main objective is to help the adviser demonstrate an absence of fraudulent intent and thus avoid problems. Insurance companies should be made more aware of the issues faced by lawyers, and in this view should perhaps be invited to the IBA conferences.

Conclusion: lessons to learn

The panel concluded with a number of short takeaways:

• apply a ‘good business rule’ to client intake;
• do your due diligence and follow your inner compass;
• assess client plans, train employees and fire the client if necessary;
• business has changed and lawyers need to adapt to a more uncertain world; and
• ensure you collect all the facts, so that you can give good advice.

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