The Top 5 Law Firm Compliance Challenges (and Solutions)
April 20, 2023
In today's ever-evolving regulatory environment, law firm compliance has become a top priority for practices of all sizes. Failing to comply with laws and regulations can result in severe consequences, including reputational damage, financial penalties, and even the loss of a law firm's license to practice. Therefore, law firms need to have robust compliance programs in place to ensure that they operate within legal and ethical boundaries.
In this blog post, we will explore the importance of compliance for law firms, the challenges it poses, and the steps law firms can take to establish effective compliance programs.
Compliance challenges for law firms
Law firms face a range of compliance challenges that can be complex and costly to navigate. As regulatory requirements expand, staying on top of compliance can be a daunting task. Let's take a look at some of the most significant issues that law firms face, including limited resources, globalization, cybersecurity concerns, poor due diligence, and lack of ethical infrastructure.
1. Limited resources at small law firms
For small law firms, one of the main compliance challenges is limited resources. Without a dedicated compliance team, full human resources department, adequate IT systems and large budget, small law firms often struggle to uphold strict compliance processes.
While these challenges are understandable, the truth is that compliance regulations apply regardless of a firm's size. So even with fewer resources, smaller law firms are just as responsible for meeting compliance requirements as larger law firms are and could face legal consequences if they don't.
Without a full staff in place to ensure compliance, it's important for legal firms to train their entire team in essential processes, so that everyone knows how to avoid risk.
2. Legal services are going global
According to a Statista survey, the global legal market is projected to reach roughly $860 billion in 2023. Legal professionals now operate internationally and offer their services beyond the jurisdictions where they were originally trained and qualified. Plus, larger legal firms often represent clients in multiple jurisdictions, which can pose significant compliance obstacles for global lawyers.
More jurisdictions mean more regulations to keep up with, which can lead to a number of compliance risks and data security breaches. And ISO releases thousands of new standards every year in every practice area—so to really become a player in the global market, law firms need to put in a considerable effort when it comes to data protection and compliance duties.
3. Cybersecurity concerns
Cyberattacks are on the rise in all industries, and law practices are no different. Law firms manage a vast amount of client information, which makes them a prime target for data breaches. And because legal professionals handle more confidential case details than other businesses might, data protection can be an even bigger challenge.
Even the most compliant law firms might experience a data breach at some point. So what should they do when that happens? The Lawyers’ Obligation After an Electronic Breach or Cyberattack outlines the general data protection regulation and security duties for law firms. The document is a roadmap for the legal profession, offering guidelines for what a legal firm should do before and after a breach.
Data security has become a bigger concern in the last few years, thanks to the pandemic. As law firms move to hybrid work arrangements and access client data from home computers and Wi-Fi networks, the threat of cybersecurity attacks has grown.
That makes eliminating compliance risks even more expensive. When sensitive data is dispersed across many locations and offices, it's more difficult to keep secure, which means law firms may need to increase their investment in IT and compliance teams. Again, that means smaller law firms might not be able to afford adequate protection.
4. Poor customer due diligence
Customer due diligence (CDD) is an integral part of the anti-money laundering (AML) and counter-terrorist financing (CTF) compliance regime that law firms are required to adhere to. Poor customer due diligence can make compliance difficult for law firms in a number of ways.
Firstly, inadequate CDD processes can result in the identification of high-risk clients being missed. This can expose law firms to regulatory sanctions and significant financial penalties. Law firms are responsible for conducting CDD on all their clients to ensure that they are not involved in illegal activities, and to verify the source of their funds. Without proper CDD, law firms cannot meet these regulatory obligations and may be subject to regulatory action.
Secondly, poor CDD can create compliance risks for law firms by increasing the likelihood of inadvertently facilitating money laundering or terrorist financing activities. By not verifying the identity of their clients or the source of their funds, law firms can become unwittingly involved in illegal activities.
Thirdly, law firms that do not conduct thorough CDD can also face reputational risks. Clients and potential clients may view the firm as less trustworthy and may be less likely to engage with them. This can have a significant impact on the firm's ability to attract and retain clients, which can impact revenue and growth prospects.
Fourthly, inadequate CDD can also result in legal risks for law firms. Failure to comply with AML and CTF regulations can result in lawsuits from clients or other stakeholders who have suffered losses as a result of the firm's actions or inactions.
5. Lack of compliance culture and ethical infrastructure
Creating compliance functions and policies is a good start. But simply creating a rule book for your law firm isn't enough to ensure compliance. Law firm leaders must enforce an ethical culture from the top down and set expectations that all employees will uphold compliance laws and best practices.
That starts with education. Guidance like the Solicitors Regulation Authority (SRA) and Legal Sector Affinity Group (LSAG) are hard to dissect and can be time-consuming and expensive to put in place. Without education and ethical infrastructure in place, it can be tempting to ignore confusing regulations, putting the law firm at risk. So, it's important to schedule ongoing trainings to ensure staff members are up to speed.
Compliance challenges by practice area
Compliance is an essential aspect of any law firm's operations. However, the compliance process can vary depending on a law firm's practice area. Here are a few examples of the compliance challenges different law firms may face:
- Corporate Law: Law firms specializing in corporate law face significant compliance challenges due to the numerous laws and regulations governing corporate activities. Law firms must ensure that their clients comply with laws related to corporate governance, securities, antitrust, and intellectual property. They must also monitor changes in these laws and advise clients accordingly.
- Intellectual Property: Law firms that specialize in intellectual property face challenges related to data protection, cybersecurity, and privacy regulations. They must also ensure that their clients' patents, trademarks, and copyrights comply with applicable laws and regulations.
- Employment Law: Law firms specializing in employment law face compliance challenges related to labor laws, employment contracts, and workplace safety regulations. They must also ensure that their clients are compliant with laws related to discrimination, harassment, and employee benefits.
- Environmental Law: Environmental law firms face compliance challenges related to federal and state regulations, such as the Clean Air Act and the Clean Water Act. They must also monitor changes in these laws and advise clients accordingly.
- Tax Law: Law firms specializing in tax law must ensure that their clients comply with federal and state tax laws. They must also stay up to date with changes in tax laws, such as the Tax Cuts and Jobs Act of 2017.
- Healthcare Law: Law firms specializing in healthcare law face compliance challenges related to the Health Insurance Portability and Accountability Act (HIPAA) and other healthcare regulations. They must also ensure that their clients comply with regulations related to Medicare and Medicaid.
How to overcome compliance challenges for law firms
Overcoming compliance challenges is essential for the success of law firms. By staying up to date with regulations, protecting sensitive information, using ethical behavior and implementing effective compliance measures, firms can ensure their clients' trust and confidence. Here's how:
Conduct proper diligence
Taking on a new client subjects law firms to AML risk. The first step to overcoming compliance challenges is to carry out proper customer due diligence with every client. It's paramount that law firms find out who their clients are and where their money is coming from.
While CDD can be a complicated process, it's a crucial step to maintain compliance and avoid potential legal and reputational ramifications. The last thing legal firms need (especially if they're small) is a connection to money laundering and organized crime. So, taking the time to put CDD processes in place can't be stressed enough.
Outsource the compliance process
Outsourcing can also be a valuable solution to compliance challenges, especially for small firms that don't have a dedicated compliance team. Hiring a third-party advisor or consultant to handle compliance regulations can help law firms save valuable time and money in the long-term.
Compliance issues can be incredibly complex, so many law firm leaders lean on outside experts to navigate the process. Outsourcing also reduces disruption in compliance management, especially when staff turnover happens.
Invest in education and training
Non-compliance can happen when legal teams aren't properly educated or trained. So at the very least, make sure compliance training is a part of your law firm's onboarding process when new hires join.
But compliance education isn't just a one-and-done affair, either. Most legal professionals are up to speed on major regulations, but compliance laws evolve. It's important to schedule ongoing trainings to keep staff members aware of changes and remind them about data security measures—especially if they're working from home.
Lean on technology like legal case management software
Case management software like Smokeball can help law firms ensure compliance with regulatory requirements by providing tools to manage deadlines, track client information, and monitor case progress. With customizable workflows and automated reminders, law firms can ensure that all necessary steps are taken on time and in accordance with regulations. The software can also track all communications and documentation, ensuring that records are up-to-date and easily accessible for audits. Additionally, case management software can provide reporting capabilities, allowing law firms to analyze their compliance efforts and identify areas for improvement.
Fixing commingled trust funds with trust accounting software for lawyers
Commingling is another compliance issue that legal teams may face. Commingling can take a few different forms:
- Mixing trust account funds with the funds used for the law firm’s operations.
- Losing track of individual client account balances
- Overdrawing trust accounts due to the commingling of funds
While different trust funds can be kept in a single bank account, they need to be recorded separately in a law firm's ledger. In certain instances, law firms might want to open a separate trust account for their client. That's an especially good idea when you're handling large amounts of money that will stay in the client's account for a long time. Regardless of the system a firm uses, funds must be managed by matter.
Lawyers have been disbarred for failing to manage trust accounts properly so remaining in compliance is of critical importance. Fortunately, small law firms don’t need to make large technology infrastructure investments to reach compliance standards.
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Legal trust accounting software exists that can help law firms easily manage their trust accounts and remain in compliance with the various rules and regulations governing how client money is handled. And Smokeball’s legal billing software supports IOLTA trust accounts and helps lawyers easily track client money so that they don’t fall out of compliance with rules.
Automating Manual Systems
As surprising as it may be, many law firms are still reliant on manual systems, at least partially. They may have some files in the cloud while others are on hard drives. They may also have a patchwork of software held together by their legacy manual systems that some associates and partners refuse to stop using. This can create serious risks in terms of compliance. Manual systems are vulnerable to errors and data breaches. This is especially the case when tracking client trust account funds and the management of emails. Some law firms have learned the hard way that failing to use secure email management systems can leave them vulnerable to all types of abuse. A Manhattan law firm that advises on mergers suffered a data breach when hackers stole partner emails and used client insider information to illegally earn more than $4 million dollars trading.
Again, case management software and other legal technology helps law firms automate their processes so that compliance regulations don't fall through the cracks.
Securing client communication
Law firm client portals Smokeball's offer a central location online for legal teams and their clients to connect, manage case information and review tasks and timelines.
Client portals are an important way for law firms to enhance their compliance, by making sure clients' communication and legal data is stored securely. And while our client portal is easy to use, our customer success team will support your firm throughout onboarding and beyond so that everyone all staff members know how to use the technology and can train clients on compliance requirements and best practices as well.
Final thoughts on upholding law firm compliance
In conclusion, technology has become an essential tool for law firms seeking to ensure compliance with legal and regulatory requirements. With the help of software solutions, law firms can streamline their operations, automate repetitive tasks, and ensure that they are meeting their obligations as legal professionals. From case management software to legal trust accounting systems and client portals, the right technology can help law firms can reduce the risk of non-compliance, improve their client service, and ultimately enhance their reputation in the legal marketplace.
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