A not-so-hypothetical thought experiment: What if the US Government sanctioned law firms?

The US government has taken an unprecedented step in restricting government contracts and suspending security clearances for two global law firms: Perkins Coie LLP and Covington & Burling LLP. While these actions don’t officially constitute sanctions and, to be absolutely clear, are not labelled as such by the US government, they bear some striking similarities in effect: isolating these firms from economic opportunities, discouraging clients and partners from working with them and creating significant operational roadblocks.

But what if this went further? What if the government outright sanctioned a law firm? Would this be a constitutional crisis, an economic restriction, or simply a new tool in political warfare? And what would it mean for businesses, particularly those in heavily regulated industries subject to AML compliance?

 A de facto sanction? The economic and political consequences

At its core, a sanction is a political and economic tool designed to restrict an entity's ability to operate, forcing behavioural change or enacting a punishment. Traditionally, sanctions target countries, individuals, or companies engaged in activities deemed harmful to national interests. However, one could argue that the restrictions placed on Perkins Coie and Covington & Burling LLP display some eerie similarities:

• Government contracts suspended
  The firms have lost access to federal agency work.
• Security clearances revoked
  The firms can no longer handle sensitive matters.
• Client loss and reputational damage
  Major corporate clients, fearing regulatory scrutiny or backlash, may reconsider working with these firms.
• Isolation from legal and business networks
  Other firms, wary of association, might hesitate to collaborate on cases or refer clients.

Effectively, this mirrors how sanctions work: economic isolation, reputational damage and loss of business opportunities. While not formally labelled as sanctions, these restrictions are forcing clients to rethink their engagements, just as they would with sanctioned individuals and entities.

The AML compliance dilemma: What if you're a reporting entity?

 For regulated entities under AML rules, such as financial institutions, law firms, real estate firms, high-value dealers, etc, this situation could introduce a compliance gray area.

Imagine you’re an asset manager, a commercial real estate agency or even another law firm engaged in ongoing transactions where Perkins Coie or Covington & Burling represents a counterparty. If the US government effectively discourages interactions with these firms, how do you handle the following:

 Existing transactions

• Can you proceed with deals where the targeted firms are the legal counsel, or does this introduce an unforeseen compliance risk?
• Will other regulated entities hesitate to process transactions involving a firm facing de facto restrictions for fear of future implications or retaliation?

Joint clients or shared legal matters

• If a major corporate client is represented by a targeted law firm, is it now at risk of secondary effects?
• Could regulated entities conducting joint transactions be flagged for dealing with a politically targeted firm?  

New business with these firms

• Should financial institutions and other regulated entities treat these law firms as high-risk entities in due diligence?
• Will firms relying on these lawyers for regulatory guidance now seek alternatives, fearing conflict with US government directives?

AML frameworks require firms to assess reputational and operational risks of their counterparties. If a law firm is "sanctioned" in practice, it creates uncertainty over compliance obligations, much like dealing with clients in sanctioned jurisdictions.

The client impact: Disrupting legal services across the board

 Perkins Coie’s lawsuit against the Trump administration reveals just how disruptive this situation is. The firm states it has nearly 1,000 active client matters requiring interactions with more than 90 federal agencies. If the government’s actions make these interactions impossible, what happens to those cases?

• Regulatory and compliance risks
  Companies relying on targeted firms for federal regulatory matters may be left stranded, unable to obtain necessary legal opinions.
• Corporate deals and transactions
  Mergers, acquisitions, and financings that require federal agency sign-offs could be delayed or jeopardised.
• Litigation and enforcement defence
  Clients facing government investigations may be forced to change legal teams mid-case, weakening their defence.
• Contractual fallout
  If firms are unable to meet obligations due to lost government access, are clients entitled to terminate agreements?

A full sanction scenario would amplify these issues. Large corporations, especially those in government-adjacent industries like aerospace, defence and tech, would be motivated to replace legal counsel, likely favouring firms that remain in the administration’s good graces.

A dangerous precedent?

The suspension of government clearances and contracts for Perkins Coie and Covington & Burling may not officially be a sanction, but its effects mirror one. The loss of clients, reputational damage and operational disruption are strikingly similar to what sanctioned entities experience.

For businesses, particularly those in regulated industries, this situation forces a re-evaluation of risk. AML compliance teams now face a new consideration; should politically targeted law firms be treated as high-risk counterparties? And if this practice expands, how will companies ensure their legal teams remain untainted by government intervention?

The bigger question, however, is what this means for legal independence. If governments can unilaterally isolate law firms through economic and reputational means, the implications go beyond business risk. It challenges the very foundations of a free and fair legal system.

This thought experiment is no longer hypothetical. It’s unfolding in real time.