Law Firm Group Newsletter – Winter 2022
Thomas Pierce, Justin L. Sylvan
Save Money by Shifting Credit Card Fees
THOMAS E. PIERCE, CPA
The acceptance of digital forms of payment, including credit cards, has become ubiquitous across industries. But some law firms have yet to get on board — even though electronic payments can often improve collections. The hesitation is usually due to a resistance to shouldering the processing costs that typically range from 2% to 5% on every transaction.
In many states, though, law firms can have the best of both worlds: Higher collections and minimal processing costs. The secret? Putting the responsibility for the fees on clients.
Related Read: Beyond Checks: Alternative Methods of Payment are Gaining Ground
Several techniques are available. The easiest method is to provide discounts to cash-paying customers and charge more for those clients who pay by credit or debit card. Cash discounts are generally permissible in all states.
Alternatively, you could add a surcharge to transactions. This approach can be complicated, though, because payment processors have varying fee structures and rules for merchants that surcharge. If you go this route, it is wise to work with a payment processor that will compute the surcharge and automatically add it, so that your firm does not have to manually perform the calculation.
A few firms that accept credit card payments with a surcharge also allow payment by debit card without any extra fee — so clients feel like they have a “free” option. Other firms that apply a surcharge also accept payment by electronic check with no fee to the client (the processing fees for e-checks are typically lower than those for credit cards). But some firms simply accept only credit card payments, with the fees shifted to clients, and enjoy a corresponding bump in revenues.
Understanding rules and regulations
Several states have laws prohibiting or restricting the shifting of processing fees for credit cards. No states permit such fee-shifting for debit cards.
Attorneys must also take into account limits imposed by rules of professional conduct. Rules regarding the reasonableness of fees, trust accounts and confidentiality can come into play when imposing surcharges.
For a fee to qualify as “reasonable,” you likely cannot add a surcharge that exceeds your actual costs. Processing fees must be paid out of the operating account, not a client’s account — but not every processor will permit this. And, you must take care to use general language like “services rendered” to describe charges, rather than “Smith divorce” or “Jones termination case.”
In addition, several states have ethics opinions addressing the issue. It is worth noting that some of these opinions came out before a class action settlement of an anti-trust case brought against credit card processors. Under the settlement, U.S. merchants could begin adding surcharges to specific transactions starting in January 2013. The settlement raises questions about how binding the earlier opinions are, especially in states without laws explicitly banning surcharges.
Finally, the payment processors have rules merchants must satisfy to shift the fees to clients. For example, you generally must notify the processor at least 30 days before you begin the practice. The amount shifted is typically limited to your merchant discount rate for the applicable card. You also must notify clients. That means disclosing the surcharge dollar amount on every receipt.
Shifting processing fees to clients is not right for every attorney or firm. Some clients might resent such charges and feel nickel-and-dimed. If you determine that your clients will not rebel, though, you can see a positive financial impact.
For more information, contact Tom Pierce at [email protected] or 312.670.7444. Visit ORBA.com to learn more about Law Firms and Lawyers Group.
Anti-Money Laundering for Law Firms: The Risk Is Real
JUSTIN L. SYLVAN, CPA, MST
In 2016, the U.S. Department of Justice alleged that the perpetrators who embezzled billions of dollars from the Malaysian government laundered some of those funds through the client accounts of some major U.S. law firms. The firms were not prosecuted, but the case illustrates one of the ways law firms can unwittingly fall prey to money launderers. A risk-based approach may help them reduce the odds.
Risks for attorneys
The American Bar Association (ABA) has long opposed anti-money laundering (AML) legislation that targets attorneys. It argues that such laws would be burdensome and undermine confidentiality and attorney-client privilege. But the ABA has supported the guidelines developed by the Financial Action Task Force (FATF), an inter-governmental body whose recommendations are recognized as the international AML and counter-terrorist financing standard.
The FATF has identified several legal activities that are particularly susceptible to money laundering, including:
- Buying and selling real estate or business entities;
- Managing client money, securities or other assets;
- Managing bank, savings or securities accounts;
- Organizing contributions for the creation, operation or management of companies; and
- Creating, operating or managing legal persons or arrangements.
The vulnerability may be intensified when these activities are conducted across borders.
Three types of risk
All organizations at risk of money laundering, including law firms, must establish and comply with AML compliance programs. The most important component of the AML program is the risk-based approach. It proposes a risk-based approach for regulators, such as the FATF and the European Union, to enable liable entities to combat financial crime effectively. According to the FATF, the cited activities should be subject to a comprehensive risk assessment. The assessment typically considers three types of risks:
- Country or Geographic Risk
This type of risk relates to the location(s) of the client, the transaction and the source of the wealth or funds. A higher risk generally is associated with certain kinds of countries, including those that provide funding or support for terrorist activities, are rife with organized crime or corruption, or are subject to sanctions imposed by organizations such as the United Nations.
- Client Risk Factors
The FATF has developed a lengthy list of the characteristics of clients whose activities might pose a higher risk, including if they are politically exposed persons (PEPs), conduct the attorney-client relationship in an unusual way, have a structure that makes it difficult to determine the controlling interest or true beneficial owner, or are cash-intensive businesses.
- Service Risk Factors
The list of service risk factors is similarly long. It includes services where an attorney may effectively vouch for the client’s standing, reputation and credibility, without an appropriate knowledge of the client’s affairs. Other examples are services that could conceal beneficial ownership from relevant authorities, services where the attorney lacks expertise and real estate transfers that are executed in unusually short periods of time.
A collaboration among the ABA, the International Bar Association and the Council of Bars and Law Societies of Europe developed a multi-step procedure for attorneys concerned about money laundering activities, sometimes referred to as client due diligence (CDD). It begins at the client intake process.
An attorney should identify and verify the identity of the client and the beneficial owner. The attorney also must understand the client’s circumstances and business, based on information obtained during the normal course of the client’s instructions. Inadequate due diligence and lack of identity checks have been major weaknesses in law firms in previous years.
From there, the attorney should evaluate whether assisting the client would risk committing money laundering. This can be done by conducting a risk assessment of any red flags and clarifications from the client. If the attorney decides to proceed with the engagement, he or she should continue to monitor the client’s profile for signs of money laundering, especially if the client is a PEP or from a higher-risk country.
When an attorney has grounds for suspecting criminal proceeds are being used in a transaction or in engaging the attorney, he or she should, where required or permitted, make a suspicious transaction report (STR) to the appropriate authority. The attorney must avoid tipping off the client about the filing of an STR.
Effective CDD is not an isolated activity. Attorneys should engage in ongoing CDD to ensure that the information collected remains current and relevant, especially for higher-risk clients.
Sidebar: A framework for small firms and solos
The Financial Action Task Force (see main article above) has outlined a “practical” approach to identifying and assessing money laundering risk for smaller firms and solo practitioners. It includes the following recommendations:
- Adopt Client Acceptance and Know-Your-Client Policies
Identify the client, its beneficial owners, the true “beneficiaries” of the transaction, the source of funds and the transaction’s purpose.
- Adopt Engagement Acceptance Policies
Understand the exact nature of the work and how it could facilitate the movement or hiding of criminal proceeds. Do not accept work if you lack the requisite experience.
- Understand the Rationale for the Work
You should be reasonably satisfied that a commercial or personal rationale exists. But you are not required to objectively assess that rationale.
- Exercise Vigilance for Red Flags
Identify and carefully review aspects of the transaction where you have reasonable grounds to suspect that funds are criminal proceeds. Such circumstances may trigger reporting obligations.
- Consider Appropriate Action
Determine what, if any, actions must be taken.
Adequately document and record the previous steps.
For more information, contact Justin Sylvan at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Law Firms and Lawyers Group.
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