How are law firms managing increased accountability?

Risk management standards in law firms have improved over the years. While this has been a positive development, regulatory changes and rising client expectations have also led to firms and lawyers being held more accountable for perceived wrongdoing.

The Solicitors Regulation Authority (SRA) has recently made allegations against a number of firms of breaches of money laundering regulations. These have underlined the concerns law firms have about protecting and defending themselves in the current business environment.

It also raises concerns about which anti money laundering standards are being applied – those in force at the time of the alleged misdemeanor, or those currently in force. This featured in a recent money laundering case dismissed by The Solicitors Disciplinary Tribunal.

As scrutiny of firms has increased, so have the resources firms are devoting to responding to potential risks. At offshore law firms in particular, there is intense scrutiny through organisations including the anti-money laundering body MONEYVAL and the Financial Action Task Force.

Because of this, many law firms have dedicated whole teams to respond to audits, inspections and requests for information.

Protecting your firm from increased risk

Firms with a presence in England and Wales are regulated by the SRA. This means they face the risk of disciplinary investigation or enforcement action.

Firms will have to consider the financial and reputational consequences of those risks, while they aim to create environments where employees feel more comfortable owning up to mistakes before they become major problems.

Sharon Glynn, managing director at Travelers Europe says: “Law firms feel pressure to manage their risks carefully enough so they can successfully defend themselves against scrutiny, yet they also feel the need to create judgment-free working environments in which employees feel comfortable making mistakes and taking responsibility for their actions.

“This can feel like an impossible line to walk, but when a law firm succeeds in encouraging employees to get mistakes out in the open early, they give themselves far better opportunities to manage and mitigate their risks.”

Striking the right balance

The steps that firms and lawyers take before accepting a client impact their ability to manage risks and defend themselves against criticism. This is also the case throughout the life of the retainer with that client.

For example, a firm’s risk management committee or senior management can have discussions to decide which clients they can accept from a risk and compliance perspective. They can carry out due diligence on potential clients using a risk management framework to anticipate possible exposures, as well as conflicts with their culture and values.

Once a firm begins working with a client, solicitors can record details of their day-to-day work with the client so they can defend themselves in the event of an audit.

Avoiding surprises

Taking these steps along with recommendations from regulators and other advisory bodies can help ensure that a firm operates in a way that avoids risk-related surprises later on.

Such efforts have succeeded for a number of offshore firms. For example, MONEYVAL praised Jersey’s progress in improving measures to prevent money laundering and the financing of terrorism, according to a recent report from the Council of Europe.

Sharon Glynn says, “Solid risk management structures serve as safety nets – and they can provide both security and freedom within a law firm. They protect firms from the consequences of business risk and raise awareness among employees about the risks they decide to take on.

“This gives firms more room to manoeuvre. When employees have protective structures in place, they can operate more confidently within them, knowing they have taken the steps needed to guard against their exposures.”