Solicitors in partnership: three common regulatory issues for law firms and partners…

Following on from Andrew Cromby’s analysis of the top three issues cropping up in solicitors’ partnership disputes, this article looks at my top three common issues in relation to solicitors’ regulation. There are lots to choose from, but these are the big topics.

Each issue in my top three is a massive topic in itself, so this article is a whistlestop tour of top tips.

‘Dirty’ money

In the current regulatory climate, money laundering is, hands down, the hottest topic out there. The most complex, fast-moving and pervasive issue is also the one which attracts the highest level of scrutiny from the SRA.

Several text books are not enough to cover all there is to know about AML, let alone other related issues such as sanctions and economic crime. The main problem with AML is that it is a living beast — the current principal regulations were laid before parliament on 22 June 2017 and entered into force under considerable time pressure just four days later — not leaving much time for the profession to prepare, (and not to mention that the sectoral guidance was not even published in draft until several months later).

In the seven years since then, around 394 changes have been made to the regulations, averaging more than 50 individual changes per year, (most very minor, in fairness but hard to keep up with nonetheless). Add to that several major re-writes of the principal sectoral guidance for the legal sector (the LSAG Guidance) and it is easy to see how firms become swamped and details are missed.

It is fair to say that most of the recent AML decisions have come down to (largely) smaller firms not having compliant risk assessments, policies, controls and procedures (‘PCPs’) in place to prevent money laundering. This is understandable given that the SRA undertook a very significant proactive assessment of money laundering policies and controls. Such an endeavour will always uncover a certain level of technical or organisational failings.

Few published decisions involve proven money laundering, (as opposed to the perceived risk of money laundering), but it is worth remembering that the largest fines imposed by the SDT (and some of the largest SRA fines) have been in cases involving allegations of failure to comply with AML requirements where there is no direct harm or proof that money laundering occurred.

For firms, (and individual partners), the AML regime presents a number of practical challenges:

• AML is often seen as a compliance function. It is not. It is the responsibility of all fee earners on a matter to continually monitor developments and report changes in risk factors and ensure that Source of Funds and Source of Wealth checks are properly carried out and updated as needed
• training should be carried out regularly but, all too often, it is seen as a box ticking exercise that must be endured and promptly forgotten rather than an essential element of practice
• challenging clients to provide information can be difficult and commercial pressures can lead to questions being watered down or even ‘fudged’ to appease clients
• the risk profile of a transaction for AML purposes may change in many ways. Introducing new clients, a change in instructions, a request to pay funds to a third party, an indication of a gifted deposit, funds passing outside of client account when they shouldn’t have or going into client account without proper reason, excessively easy settlements. It is impossible to second guess all issues.

What is essential is to teach staff to ask ‘Does it fit?’ Does this new piece of information fit within my understanding of the client, its structure and economic aims? Does it have a proper explanation and place within the transaction? Alternative versions of this test are “DIMS” — Does It Make Sense? or “the smell test” — is there something that smells off about this change?

Staff should be encouraged to be inquisitive and to report any unusual features up the chain. For their part, firms and management should ensure that risk assessments, policies and procedures are treated as living documents, regularly reviewed and updated with a clear audit trail of changes. Any changes should be proactively and timeously circulated to relevant staff and updated training provided to ensure staff remain informed and engaged.

Sign up for, read, and circulate good quality newsletters and LinkedIn feeds to help keep up to speed on changes which affect your practice. People talk a lot in the AML space and there is always something new to learn.

“Inappropriate behaviour”

This category includes the dreaded Christmas party, office relationships, and unwise comments on social media. The SRA has made clear that its starting point for cases which fall within its definition of “sexual misconduct” is that such conduct is so inherently serious that it warrants a suspension from practice.

It is hard to pin down top tips for mitigating the risk of sexual misconduct because it covers such a wide range of behaviour and has an element of subjectivity, particularly in relation to where the line is drawn in relation to flirtation and jokes. People have individual experiences and sensitivities, and what is entirely inoffensive to you may be heard very differently by your listener. Accordingly, it is easy to transgress without meaning to offend. That said, there are some general tips which may help navigate this difficult issue:

• promoting a culture of respect and professionalism is essential
• challenging attitudes before they turn into incidents may be helpful — although it is important to do so sensitively as this can potentially be counterproductive if it leads to resentment and the feeling that employees cannot communicate freely
• making resources available to support low/no alcohol events and initiatives and/or educating staff on responsible approaches to alcohol
• remember that law firms are both hierarchical and professional. A culture of friendliness and openness may be important but so is leadership and accountability
• teach staff to recognise signs of discomfort and withdrawal. Those who feel most uncomfortable are often least likely to speak out
• treat reports of bad behaviour seriously.

The “cover up”

This is a rather sad category. Everyone makes mistakes, but not everyone reacts in the same way. Those who own up, make reparations, and take the consequences of the mistake will be in a far better position — in regulatory terms — than those who try to cover it up.

The tribunal has dealt with many cases of solicitors who have panicked after a mistake has been made and acted dishonestly in an attempt to cover it up. This may be by falsifying a document, or lying to a client, or blaming others. It is never a sound strategy, and the regulator could take action if a dishonest mistake is discovered even many years later.

Implementing a dishonest cover up is usually an individual issue and often motivated by fear of employment consequences, or unpleasant scenes with clients, rather than regulatory consequences. Fostering a culture that supports speaking up and immediately reporting mistakes is the only protection firms have against this sort of misconduct.

It is very likely that there will be non-regulatory consequences from making a mistake — it may amount to professional negligence, it may mean some fees need to be reduced or written off, remedial action taken and apologies made. It may mean that an individual should lose their job. However, these consequences will usually be manageable with assistance from the compliance team, insurers or external advisers.

Where an employee has engaged in dishonest conduct, it is very likely that they have put their practising certificate at risk — sometimes because they couldn’t face an uncomfortable conversation with their client or their employers. The cover up could also aggravate the underlying issue and cause additional loss to clients, employers, and third parties.

Having a clear reporting policy, supporting those who have made mistakes and, most importantly, focussing on solutions rather than blame will all help to minimise the risks of this type of conduct occurring in your firm.

Next week we will consider what happens when regulatory issues spill over into partnership disputes — and vice versa.