Risk Update

Conflicts, Compliance & AML — German Legal Reforms in Force, Anti-money Laundering Developments in US (Rules) and UK (SRA Fines)

Professional regulation of lawyers and law firms in Germany: Comprehensive reform comes into force” –

  • “Almost two years after the publication of the draft legislation, the reform of the professional regulation of lawyers and law firms in Germany comes into force today. The reform brings significant changes regarding greater freedom of organisation under company law for law firms and regarding the regulation of law firms.”
  • “Foreign law firms also benefit from the reform of the Federal Lawyers’ Act, as it expands their freedom to act within the scope of their activities in Germany, subject to compliance with certain requirements. However, the increased requirements for admission in Germany and compliance with professional duties must be considered.”
  • “Foreign law firms that have their registered office in the UK, the USA or any other member state of the World Trade Organization may also provide legal services in Germany under certain conditions (Section 207a Federal Lawyers’ Act).”
  • “The reform of the Federal Lawyers’ Act also introduces some innovations in the structure of professional service firms. For example, professional service firms as legal entities can now themselves be partners in other professional service firms, provided that both entities meet the requirements of professional law.”
  • “The previous requirement that a majority of the partners should be lawyers is now dropped due to the other guarantee of compliance with professional duties, in particular through Section 59d Federal Lawyer’s Act. However, the reform still does not permit a pure capital participation in a professional service firm. In this respect, it remains to be seen whether the legislator will act again in the current legislative period and relax the prohibition on third-party ownership that has continued to apply up to now.”
  • “Whereas current professional law and regulation solely apply to individual professionals, the Federal Lawyer’s Act now introduces a dualistic approach which is more in line with practice outside of Germany: in the future, the entity through which the individual professionals exercise their profession will also be subject to regulatory requirements and have professional duties of its own.”
  • “The other side of the coin is that, under the Act, a law firm will be obliged to ensure the adherence of its professionals to their individual professional duties. Law firms will have to ensure through their management boards and, where appropriate, through their supervisory boards that violations of professional obligations are detected at an early stage. The firm must provide appropriate mechanisms for this purpose.”
  • “In cases of violations of the law firm’s regulatory obligations, particularly its culpable omission to put in place appropriate organisational, personnel and technical measures, the law firm itself can be sanctioned (Section 113 Federal Lawyers’ Act). According to Section 114 para 2 Federal Lawyers’ Act, sanctions can range from warnings to fines of up to EUR 500,000 or in a worst-case scenario to disqualifying the law firm from providing legal services.”
  • “One of the core pieces of the reform is the new regulation of the provisions on lawyers’ conflicts of interest… What remains unchanged is that the scope of application extends to all lawyers and legal staff of the entire law firm. The prohibition on the entire law firm acting can now be lifted, but the individual lawyer cannot be exempted from it. Where it is lifted (such that another lawyer from the same firm can act), the new provisions stipulate the appropriate precautions which must be taken to maintain confidentiality.”

Update: Congress Seeks To Impose Some AML Obligations On CPAs, Law Firms, And Others” –

  • “On July 7, 2022, Arnold & Porter published an Advisory on the Establishing New Authorities for Businesses Laundering and Enabling Risks to Security Act (ENABLERS Act) that was attached to the National Defense Authorization Act (NDAA) on June 23, 2022. Since the previous Advisory, the House has made substantial amendments to the ENABLERS Act, particularly with respect to the categories of professions that would be subject to the due diligence and reporting obligations under the Bank Secrecy Act. This Advisory highlights the recent amendments.”
  • “The amendment removes attorneys, law firms, or notaries involved in financial or related activity on behalf of another person, as well as certified public accountants, and public accounting firms from the list of covered professions;”
  • “The key takeaway from the amendment is that the Act’s focus has shifted to the relevant services rather than professions as a whole. For example, rather than impose BSA requirements on any attorney or law firm involved in financial activity on behalf of another person (as proposed in the June 23, 2022, version of the ENABLERS Act), the amended Act would impose BSA requirements only on those attorneys or law firms providing legal entity arrangement, association, or formation services; trust services; or third-party payment services; that is, the types of services that potentially create the transparency concerns that the ENABLERS Act seeks to address. This shift avoids some of the concerning implications we raised in our previous Advisory.”
  • “Second, the rule of construction provision provides that privilege, ethics, confidentiality, privacy, or related matters should not limit or impede the covered parties’ obligation to comply with the Act. FinCEN would need to address how lawyers and certified public accountants could address AML program reporting obligations without jeopardizing their respective ethical duties of confidentiality and other professional conduct responsibilities to their clients. And with the extraterritoriality provision, the dilemma also would arise for foreign professional, who are subject to their own professional responsibility requirements. The implication of this provision is that compliance with federal obligations should win out over other territorial, state, and local laws when a conflict arises between a lawyer or accountant’s obligations.”

Number of law firms fined by SRA increases following anti-money laundering compliance crackdown” —

  • “The number of fines against law firms, handed out by the UK’s solicitors’ watchdog, has increased six-fold over the past five years following an anti-money laundering compliance crackdown, according to data obtained by City A.M.”
  • “The Solicitors Regulation Authority (SRA), which regulates more than 11,000 law firms in England and Wales, gave out just six fines in the financial year 2017/18 compared to 37 in 2021/22.”
  • “The uptick in fines came after the SRA launched a clampdown on firms that had fallen behind on their anti-money laundering obligations, after new rules were introduced in 2017.”
  • “The clampdown – which saw the SRA ask every law firm that it regulates to declare that they had a firm-wide risk assessment in place to help prevent and detect money laundering by January 2020 – led to 23 law firms being fined for anti-money laundering failures last year.”
  • “The two enforcement sweeps saw the SRA review firms’ compliance with anti-money laundering standards, and check whether firms were breaching transparency rules, which require law firms to publish basic information about complaints, and the prices of certain services, for example.”
  • “However, Andrew Pavlovic, a partner at law firm CM Murray, argued the SRA’s ‘focus on organisations is likely to continue’ as the watchdog finds itself tasked with ensuring law firms’ compliance with sanctions that were introduced following Russia’s invasion of Ukraine.”
  • “The total value of fines issued against law firms more than tripled in five years, from £87,000 in 2017/18 to £299,925 last year. But the total value fines against firms last year is heavily skewed after law firm Mishcon de Reya was hit with a £232,500 fine for anti-money laundering failures, which were not picked up as part of the sector sweep.”