Minimising risk in law firms - Compliance
Law firms are having to become more compliant on a range of issues globally, says Michael Hatchwell of Globalaw.
Compliance is here to stay and given that lawyers facilitate billions of pounds of transactions annually and can in many jurisdictions operate client accounts, there is ample scope for lawyers wittingly or unwittingly to become engaged in practices that facilitate the commission of crimes or money laundering. Safeguards in the UK have been in place to protect client funds for many years. Generally law firms have been a very safe place for client funds, which is very important given almost all house purchases and large transactions involve lawyers holding funds pending completion of relevant formalities.
In more recent times the focus has switched to preventing money laundering, identifying source of funds, verifying that genuine business is being done and in general terms making sure there is clarity and clear understanding of what is going on in respect of a particular matter.Accordingly, in the UK there has been a big focus on the regulation of law firms, a trend reflected in other sectors such as banking, insurance and financial advisory.
The Solicitors Regulatory Authority introduced a new handbook on 6 October 2011, which introduced an outcomes focussed approach to law firm regulation. The purpose of this article is not to analyse the rules in detail but to deal with overriding principles and trends.
Understanding and adopting the objectives
It is absolutely clear that effective compliance requires an organisation to understand and adopt the objectives of compliance. In essence compliance is about an organisation managing and avoiding risks and complying with applicable laws and regulations. It therefore requires all employees to conform to a business culture that understands and respects the new compliance culture.
Training is the starting point, both with regards to applicable rules themselves but also the importance attached by an organisation to ensuring that that the compliance culture is understood by all. Ensuring that all members of a firm regularly attend courses and update their knowledge is important.
Sensible compliance policies are also essential. Effective compliance is a combination of sensible comprehensive procedures, knowledge of the rules and application of common sense. Achieving an environment where all members of a firm can effectively comply with procedures such as for file opening and know your client procedures is absolutely essential. This not only saves time in an environment where time is money but also encourages compliance. Procedures that are inefficient and slow simply discourage and just as importantly in this example, slow down the process of converting time to bills.
Lawyers within the Globalaw network corroborate that it takes a great deal of time and effort to devise sensible processes and systems that a) comply with all the rules and b) are effective and efficient. Such systems once devised need constant review as there is always room for improvement.
Sufficient investment is essential as compliance does not come cheap. There are also some useful cost effective resources available, to verify clients, individual and corporate identities. This saves time collecting paperwork from clients and again enabling file opening to proceed quickly. There will also be occasions when situations do not fit into the norm and careful judgements need to be made. Some years ago, particularly in the banking sector, it was not uncommon to hear that compliance departments simply prevented deals being done and profits being earned. It is now clear that such views have been displaced by the absolute imperative of running compliant businesses and at the same time, compliance departments are evolving to ensure business can be done and rules are not used as an excuse to say no wherever possible.
Partners need to take greater responsiblity
As compliance is here to stay, it is vital fee earners learn how to operate complying with the rules and that Compliance personnel implement a workable framework to enable their business to prosper. A recent Managing Partner inaugural risk management survey concluded that Partners need to take greater responsibility for risk management to better protect their firms and produced the following comments from two contributors: 'Too many partners see risk management as something which is a responsibility of others,' commented the general counsel at one international law firm.The risk director at a local UK firm stated: 'All partners have a part to play in supporting the risk director with the implementation and continual development of the risk management programme.'
The sanction culture has also changed. There have been notable fines levied against corporates for infringing compliance rules. BNP Paribas, France’s largest bank has been fined $9 billion for breaking US sanctions against trade with Sudan, Iran and Cuba. Fines at this level tend to propel compliance rather higher up the corporate agenda.
In the UK law firm environment, all solicitors in private practice can be personally disciplined for breaches of compliance rules, further underlining the importance of ensuring that everyone in a firm complies. The 2014 Compliance Trends Survey (Deloitte and Compliance Week) of companies in the US, found that more companies are employing a standalone Chief Compliance Officer (up 37 per cent from the previous year) and compliance budgets are increasing. However the general view is that budgets are not growing quickly enough to deal with the need to deal effectively with an increasingly regulated business environment. Interestingly, nearly half of those with the top compliance jobs did not have a seat on the executive management committee. Only one-third believe they were perceived as business partners throughout the whole enterprise.
Appointing a Compliance Officer
The Solicitor’s Regulation Authority (SRA) has dealt with this issue by requiring all law firms to appoint a COLP, (Compliance Officer for Legal Practices) and COFA (Compliance Officer for Finance and Administration). The COLP and COFA should be champions of risk management and compliance within a firm, as they are responsible for the law firm's systems and controls. They are responsible for ensuring processes are in place to enable the firm to comply with the requirements of the SRA handbook.
Making certain individuals directly responsible to the regulator, is certainly a good way of focussing attention on compliance, making all lawyers responsible for their own conduct is another.There remains a considerable gulf between law firms which have directly addressed the new regulations and implemented a sea-change from those that have taken a more laissez-faire approach. Some firms have effective and ongoing implementation of systems and processes and education while others have may not have allocated the time and resources necessary to deal with the very considerable compliance challenge.
It is very likely these more “relaxed” firms will face considerable difficulties, when failings become apparent. Law firms that concentrate their resources on developing legal expertise rather than improving administrative processes, will eventually need to allocate more resources to compliance.
Through my work with Globalaw, internationally, it is clear that there are few jurisdictions that have imposed rules as extensive as those introduced in the UK by the SRA. Nevertheless, increasingly law firms around the world are facing increasing regulation in the area of compliance and it is likely that most jurisdictions will in due course, adopt similar compliance regimes. As to whether these regulations will be similarly enforced, remains to be seen.
Gordon Dadds is the English member of Globalaw and has a compliance offering that regularly advises law firms and corporates on compliance laws and implementing effective procedures, including dawn raid programmes, at home and abroad, often working with Globalaw firms around the world. The writer, Michael Hatchwell is a senior corporate lawyer at the firm and Immediate Past President of Globalaw. He was assisted by Alex Ktorides, Partner of Gordon Dadds Consulting.