Risk Update

Risk Reading — SRA Annual Anti-money Laundering Report Out, US Law Journal on Non-lawyer Firm Ownership Onerousness, Opinion on EY Law

SRA: “Anti Money Laundering annual report 2021-22” —

  • “We take our role as an AML supervisor very seriously, as this review of our work in 2021/22 demonstrates. As part of that, we significantly increased the resource we dedicate to preventing and detecting money laundering in the last year.”
  • “These additional resources have allowed us to step up our supervision in this area to directly engage with more firms through 163 inspections and 109 desk-based reviews… We have also stepped up our work to make sure solicitors understand and comply with their obligations to uphold the financial sanctions regime. We issued guidance – with more to come in autumn, along with information on risks and red flags – and undertook a thematic review on what can be a tricky area to get to grips with.”
  • “We also undertook an exercise to identify a sample of firms with exposure to the Russian market and to screen their client lists for ‘designated persons’ – that is those who are subject to financial sanctions. In the coming year, we will continue to work proactively to make sure we help firms we supervise to comply with sanctions legislation, stepping in to take action where they don’t.”
  • “To those firms not doing enough to prevent money laundering, you need to take your obligations seriously and play your part. As we increase our inspection and desk-based review supervision now is the time to put your house in order.”
  • “Solicitors and law firms are attractive to criminals because they process large amounts of money, are trusted, and can make the transfer of money or assets appear legitimate. Most law firms work hard to prevent and to spot money laundering and take necessary action, but some get involved unknowingly. A very small number may even knowingly cooperate or work with criminals to launder money.”
  • “We record the reasons why a report has been made. In 2021/22 there were 252 money laundering-related reports with 393 reasons attached. Often, reports have more than one suspected breach that need investigating and these can change during the life of an investigation as we get more information.”
  • “Understanding the source of funds to be used in a transaction is a fundamental part of the risk-based approach. If you are clear around the legitimacy of the source of funds, the risk of money laundering is greatly reduced. While we have seen a slight improvement, firms need to do more in this area.”
  • “Flowing from FWRA, client/matter risk assessments prevent money laundering by making sure firms consider the risks posed by each, and whether firms can perform the correct level of CDD to mitigate those risks.”
  • “During the reporting period we reviewed 1,325 files. Of these, 20% did not contain a client/matter risk assessment, as necessary under the regulations. Where firms failed to undertake client/matter risk assessments, they were referred for an investigation.”
  • “In some cases, firms had a template matter risk assessment form, but this was not being completed correctly, or even used at all.”
  • “Many of the forms we saw were very basic and tick box in nature, where fee earners only had to mark whether a file was high risk, medium risk, or low risk. Often, these forms did not feature any commentary or justification where the fee earner could input how they had arrived at the risk level.”
  • “Similarly, many forms we looked at failed to set out high-risk factors, which fee earners need to consider when assessing the level of risk with the client or matter. These forms also failed to notify the fee earner when EDD was required. This is concerning, as matters subject to EDD are typically the highest risk.”
  • “We also reviewed a number of risk assessment forms which assessed the wider risk to the business as a whole. For example, reputational risk and whether the client had the ability to pay fees, as opposed to the AML risk. These forms would not constitute a client or matter risk assessment as needed under the regulations.”
  • “Some of the best examples we saw were where the matter risk assessment form set out factors which fee earners must consider when making an assessment of client or matter risk.”
  • “We also saw some good examples where firms used different matter risk assessment templates, depending on the type of work being carried out. For example, whether the matter was transactional or non-transactional. These templates contained guidance for fee earners around the various risks that could be present.”
  • “One firm adopted a client or matter risk assessment form that set out various risk factors which must be considered by fee earners. Each of these factors provided a risk weighting. Where a certain risk threshold was met the fee earners had to gain approval from the MLCO to proceed with the matter.”

The Yale Law Journal: “The Pitfalls and False Promises of Nonlawyer Ownership of Law Firms” —

  • “Whether nonlawyers should have ownership roles in law firms has been and remains a hotly debated topic. The debate concerns potential reforms to Rule 5.4 of the American Bar Association’s Model Rules of Professional Conduct, which sets guidelines for maintaining the professional independence of lawyers, as well as the impact of those revisions on the legal profession.”
  • “Advocates for such reform, such as Ralph Baxter,4 claim that reforming Rule 5.4 and similar restrictions on nonlawyer involvement in the practice of law is the only viable option for increasing access to justice and fostering innovation in the legal field.”
  • “Although advocates for such reform argue that nonlawyers must be allowed ownership roles in law firms in order to foster innovation and increase access to legal services, many lawyers have raised significant concerns about the impact that nonlawyer ownership would have on the independence of lawyers.”
  • “Lawyers have concerns about allowing nonlawyers—who have not sworn to uphold the ethical obligations that attorneys promise to uphold when becoming members of the bar—to have decision-making authority in the day-to-day practice of law.”
  • “There is also no evidence that nonlawyer ownership actually improves access to justice for the needy. This Essay argues against rewriting Rule 5.4 to allow nonlawyer ownership of law firms. It concludes that nonlawyer ownership not only fails to solve the problems that advocates of reform promise it will address but in fact creates meaningful risks for the legal profession.”
  • “An overriding concern relates to fee sharing, which lawyers worry will lead to less control over their practices, particularly when it comes to decisions about settling contested litigation. For example, nonlawyer owners of law firms, who are not bound by legal-ethics rules, may be incentivized to push for a settlement in which they have an interest in sharing fees rather than continuing litigation to obtain the best result for the client. Other concerns include advertising for legal services in a way that violates the Rules of Professional Conduct,55 the unauthorized practice of law,56 conflicts of interest arising from the lawyer’s connection with nonlawyers,57 and the preservation of client confidences through attorney-client privilege.”
  • “Similarly, in Florida, a proposal to allow NLO and fee sharing with nonlawyers was unanimously opposed by the Florida Bar’s Board of Governors in 2021 and by many Florida lawyers who commented on the proposal. Members of the state’s Board of Governors expressed their substantial concerns over the proposal at its November 2021 meeting.87 These included ‘profound conflicts of interest… between lawyers and their ethical obligations and nonlawyers that the court can’t regulate who are entirely driven by profits.'”

Will EY Law Change The Legal Delivery Paradigm?” —

  • “EY’s leadership recently green lighted a major restructuring, ending months of heated speculation. The plan has two key prongs: (1) EY’s audit and advisory businesses will split; and (2) the advisory business will replace its partnership model with a publicly traded corporate structure.”
  • “The restructuring presents a unique opportunity for EY Law to expand the scope and meaning of “legal services,” reinvent how they are delivered, broaden the range of legal careers for licensed attorneys and allied legal professionals, and extract greater value from the legal function by aligning and integrating it with business.”
  • “Cornelius Grossmann, EY Global Law Leader, shared: ‘The transition away from the partnership model and the removal of audit independence restrictions are fundamental to our vision to create the world’s leading enterprise legal services provider.’ The opportunity to achieve this bold vision is real, but so too are a host of challenges. This article will examine both.”
  • “Independence from audit restrictions will also reduce the substantial administrative burden on EY and, sometimes, its clients. The spin-off will also allow EY Law to develop relationships with audit clients. This will open up partnering arrangements that produce new products and services helpful to customers. For example, EY Law can soon engage with several leading technology companies it audits.”
  • “EY Law’s structural reboot provides an opportunity to create a flatter, more nimble, customer-centric, data-backed, capitalized, collaborative, integrated, and merit-based organization than the partnership model it will replace. It will have access to institutional capital to fund long-term investments in technology, process improvement, new services, collaborative ventures, acquisition (including law firms where regulatory permitted), and talent.”
  • “This contrasts with the partnership model where decision-making is slow and often driven by how close a partner is to retirement. Resistance to long-term investment, likewise, is linked to the absence of a residual economic interest in the business. This promotes stasis, a short-term horizon, and discourages creativity and innovation.”

‘Plagiarism’ Common in Brief-Writing, but When Is It Too Much?” —

  • “It often takes more than what people usually think of as plagiarism in a legal brief for a court to sanction an attorney.”
    “Some degree of “borrowing” in legal writing is tolerated, if not expected, in the context of litigation, where persuasiveness and efficiency are usually more important than originality.”
  • “Though frowned upon, there is no uniform standard for determining when a lawyer who copies arguments from another lawyer violates professional obligations.”
  • “Lawyers are more likely—but not guaranteed—to run into trouble when they copy-and-paste language written by another firm’s lawyers.”
  • “A formal ethics opinion issued in 2018 by the Association of the Bar of the City of New York’s Committee on Professional and Judicial Ethics concluded that plagiarizing another lawyer’s brief isn’t per se professional misconduct.”
  • “The committee noted that generally when courts have sanctioned or admonished attorneys for copying and pasting prior work, it’s because of some aggravating circumstance that independently implicates or compromises an explicit professional obligation.”
  • “The US District Court for the Eastern District of Pennsylvania recently sanctioned a lawyer for the Borough of West Chester after she plagiarized much of opposing counsel’s legal arguments in briefing for a motion to preclude lay opinion testimony.”