1. Chapter 2: Governance of conflicts
and new business intake
By Meg Block or a tight-knit clearance committee.
This team has no personal stake in the
Introduction outcome of the clearance decision; it
For many law firms, conflicts management places the interests of the firm above
is one of the most challenging elements of the special interests of the practitioner.
risk management. In the Risk Roundtable This team also assesses business ethical
2009 Law Firm Risk Management Survey, conflicts; it analyzes the quality of the
41 percent of respondents ranked conflicts work, considers client relationships, and
management as their top concern, and weighs the associated business risks as
three-quarters of respondents included it in well as ethical ones.
their overall list of concerns.1 The following discussion describes the
Conflicts clearance can no longer distributed hub-and-spoke and centralized
be managed as a hub-and-spoke process pyramid models in absolute terms. The truth
with clerical staff and lawyers. This is more complex: these two models are the
traditional model’s clerical core produces endpoints of a spectrum of solutions. I find
– because of lack of training and authority the contrast illuminating, not just simplistic,
– over-inclusive and under-analyzed and hope you do too.
reports. The distributed recipients of these
reports are time-constrained lawyers who Background
are strongly incentivized not to look at The need for changes to the governance
conflicts issues too closely; they want the of conflicts clearance has been growing
work. Involvement in conflicts clearance by for 65 years. First, there has been an
an ethics lawyer or general counsel is by unrelenting drive towards corporate
invitation only. globalization since World War II, resulting
The risks associated with this model in complexly structured multi-national
are simply too high to continue: party corporations. The breadth of these
relationships in a global economy are too corporate families makes the ethical duty
complex; competition for business and legal of loyalty a complicated one to navigate.
talent is too fierce; practicing lawyers are not Second, in the past twenty years there
specialists in ethics; and the consequences have been an unprecedented number of
of a mistake in terms of expense and law firm mergers,2 which has increased
professional reputation are catastrophic. law firm size,3 the breadth of their client
The new governance model is a base, and the likelihood of conflicting
pyramid with a skilled research team that business relationships.
provides nuanced research to a centralized Third, in the wake of major corporate
decision maker – be it an individual lawyer and accounting scandals at the turn of the
11

2. Chapter 2
century, the relationship of lawyers and high demand, these complex clearances
their clients was changed by new laws and must happen quickly.
revised ABA and state ethics rules. Section In February 2009, the ABA House of
307 of the Sarbanes-Oxley Act of 2002, Delegates approved changes to Model Rule
modifications to the ABA Model Rules 1.6 1.10, ‘Imputation of Conflicts Of Interest:
and 1.13, and associated state ethics rules General Rule,’ that make it easier for law
set up a fundamental tension between firms to resolve conflicts of interest by
lawyers’ duties of loyalty and confidentiality screening5 a lateral from participation in a
to their clients and public expectation that conflicting matter. Now that the model rule
upstanding lawyers will ‘blow the whistle’ on has been revised, practice standards will
wayward ones. Law firm management has now evolve via state adoption of the change
recognized the safest way to avoid the issue and case law, especially in the areas of
is to avoid problem clients. Hence the need client notification and consent. Other likely
for a new business and conflicts decision- areas of interest include: documentation of
making body that stands apart from lawyer firm policy and ability to prove compliance;
and practice group interests and focuses on and application of technology to ensure
the greater good of the firm. enforcement of a screen.
Fourth, in the years just preceding
and following the 9/11 terrorist attacks, What’s needed?
the US, UK, and EU passed a number of The new model for conflicts clearance is
anti-money laundering laws4 to ensure based on the following irrefutable truths:
that professional service firms ‘know their
clients.’ The laws require due diligence to: Clearance must be based on all
the facts.
Verify the identity of a client or Clearance must be fast.
service beneficiary; Clearance must consider business as
Verify the purpose and intended well as ethical issues.
nature of the business relationship Clearance (or non-clearance) must
before it is established; and benefit the firm, not the individual.
Actively monitor the
business relationship. Following is a discussion on how these
truths translate into governance.
To prove compliance, these tasks also add
a record-keeping requirement to new client Clearance must be based on all
acceptance and conflict clearance. the facts
Finally, lawyers are opportunistic and, Regardless of the governance model,
consequently, mobile. Their success in conflicts and intake clearance must be
changing firms depends on the clearance based on all the facts, and those facts
of conflicts. It cuts two ways. Laterals must are increasingly complicated. There is a
be able to bring their most profitable spectrum of clearance and intake services
clients with them, and the recruiting law based on research, analysis, quality
firm must be sure that the lateral’s prior assurance, and documentation. The
experience will not jeopardize its existing following sections show how the governance
representations. As top legal talent is in models stack up.
12

3. Risk Management for Law Firms: From Policy to Practice
Throw it over the fence (hub-and- Research, screen, maintain, throw it
spoke model) over the fence (specialization model)
The most basic (and risky) governance The top end of the hub-and-spoke model
model is the hub-and-spoke model, where is to have more highly skilled staff conduct
clerical personnel simply search the party conflicts searches. Typical research includes:
names provided by originating lawyers. No
research is done to confirm whether the Confirmation of the proper spelling of
names are correct or if all pertinent names party names;
have been provided. The resulting reports Verification that all pertinent party
may not even be reviewed for false hits; names have been submitted (based
they are ‘thrown over the fence’ as is for the on area of law);
requesting lawyer to analyze. Identification of corporate families
Clerical staff report through intermediary for new clients; less consistently
managers to the executive director and researched for adverse parties and
there is minimal to no involvement of other related parties;
ethics lawyers. Staffing is negligible as Comparison of party names with the
there is no research, the searches take names found on the US Treasury’s
minutes to run, and lawyers bear the full Office of Foreign Assets Control (OFAC)
burden of analysis. With this level of staff Specially Designated National (SDN)
competency, maintenance of the conflicts list or in specialist databases (such as
data is rare. Staffing ratios can be as low World-Check); and
as one conflicts clerk (with part-time back Recent ‘newsworthy’ stories for new clients.
up) to 300 lawyers.
In this top-end model,
researchers are divided
into levels of expertise
and specialization. The
Ethics
Ethics job titles vary widely
committee
committee
Executive and include clerks,
director General
General Intake
counsel
counsel committee coordinators, searchers,
researchers, specialists,
analysts, leads, and
resolvers. For illustration,
Department
manager
Originating
lawyer
the job responsibilities
of three tiers have been
described and named
simply Level One, Level
Originating
lawyer
Originating Two and Level Three.
lawyer
Conflicts
clerks
Level One
Level One is the entry-
Originating
lawyer
Originating level position. Personnel
lawyer
perform all conflicts
Figure 1: The hub-and-spoke model searches (including the
13

4. Chapter 2
responsible for the maintenance
Ethics of anti-money laundering
committee
General Intake
documentation, terms of
engagement (firm letters and
counsel committee
outside counsel guidelines),
and waivers.
Department Originating
manager lawyer
Level Three
Level Three personnel are usually
former practicing lawyers or
Originating
lawyer
Originating
lawyer
highly experienced administrative
Level 1
personnel who have been
Level 2
promoted from Level Two. They
Level 3
Originating Originating
review the triaged work of Levels
lawyer lawyer
One and Two. They are subject
matter specialists (for example,
Figure 2: The specialization model
litigation, corporate transactions,
bankruptcy, intellectual property
OFAC SDN or specialist databases) and are prosecution, lateral hiring), have frequent
trained to remove duplicate and clearly false contact with originating lawyers, and drive
hits from conflicts reports. They also perform the conflicts resolution process. They have
straightforward confirmation (such as phone the authority to resolve straightforward
calls to verify ambiguous party names). issues. Issues they cannot resolve are laid
out for resolution by the originating lawyer.
Level Two Level Threes are sometimes authorized to
After four to six months, Level One personnel draft engagement, waiver, declination, and
begin to be promoted to Level Two positions disengagement letters. Their actions are
and Level Ones are replaced. Level Twos guided by frequent, formal contact with the
are responsible for the quality assurance general counsel, members of an ethics or
of Level One work. They are given more business intake committee, and members of
complicated tasks, such as analyzing and a hiring committee.
annotating new client-matter and lateral- With the increased level of service comes
hire reports to highlight potential issues, increased professionalism and staffing. The
researching corporate family membership, ratio goes from 1:300 to 1:50. Professional
and maintaining corporate family trees and certifications include paralegal certification,
ethical walls in the conflicts database. Masters of Business Administration, Masters
Level Twos are also responsible for the of Library Science, and Juris Doctor (JD).
unceasing maintenance of the conflicts As these professional degrees indicate,
database; a significant task when one conflicts analysis requires sound reasoning,
considers constant mergers and acquisitions, investigative and analytical skills, and strong
the transience of corporate families, the business judgment. To analyze potential
inevitable enjoining of new parties, and conflicts, the team must have a working
the need to update the description of a knowledge of legal ethics, international
matter as it progresses. Finally, they are business, and firm-defined positions on the
14

5. Risk Management for Law Firms: From Policy to Practice
resolution of conflicts issues. In addition, the identity and suitability of new clients and
they require significant on-the-job training; the nature of the proposed work. The model
a six-month ramp up is not unusual. changes to a pyramid because at the apex is
Consequently, in this top-end model, they are a team of specialized lawyers responsible for
employees with a high retention value. clearance. They are responsible for deciding
An added benefit of this hierarchical (in concert with practice group leaders,
structure is that it keeps personnel motivated members of the management committee,
through the long period of on-the-job and the general counsel) whether new work
training. As law firms move from the low to and new clients should be accepted. In this
top end of the hub-and-spoke model, the model the role of the originating lawyer is to
administrative manager of the department provide sufficient information for a clearance
also moves from a professional administrator determination to be made.
to a lawyer. The JD credential is critical for
credibility; as much as they loathe conflicts Clearance must be fast
clearance, lawyers are reluctant to turn it over In the hub-and-spoke model, clearance
to anyone who has not been similarly trained. decisions are distributed to the requesting
lawyers. Consequently, they control the time
Give them the answer (pyramid model) it takes to clear conflicts, secure waivers, and
Because of the riskiness of conflicts clearance establish the terms of engagement – unless
and new client acceptance, the largest and the situation requires escalation to a higher
most progressive law firms have centralized authority, such as a general counsel or
the entire process, usually under the auspices intake committee. Lawyers’ complaints with
of the general counsel. As with the top-end this model focus on the poor quality of the
hub-and-spoke model, in-depth research is information, the unintelligibility of conflict
tiered. Additionally, it is also focused on the reports, and the consequent amount of work
business aspects of the matter, for example, they have to do to clear conflicts, not the
duration of time.
Not so with the pyramid
model. Once the originating
lawyers have submitted the
General background information for
counsel
conflicts checks and new business
intake, elapsed time becomes
Practice and
firm leaders paramount. Clearance is
expected within at most two days,
Conflicts
Originating
lawyers
lawyer and preferably within hours.
Centralized staffs – especially in
Level 3
global firms – provide coverage
Level 2
24 hours a day, seven days
a week. To meet these time
Level 1 requirements (which are realistic
from a competitive perspective),
the staffing ratio in the pyramid
Figure 3: The pyramid model model goes from 1:50 to 1:20.
15

6. Chapter 2
Clearance must consider business although they do frequently complain about
as well as ethical issues the big cases that got away because of small
Adapting the old adage, “You can win the matter conflicts.
battle, but lose the war,” a firm can clear Firms that look at their client base
the conflicts battle and lose a client. Both critically and strategically inevitably implement
general practice firms and practice boutiques a centralized new business clearance
must be attentive to client sensitivities, be process in manual, semi-automated, or fully
they corporate family relationships, patent automated form. The benefits of formal, firm
or trademark prosecutions, or subtle cross- management review include:
practice challenges to loyalty. These business
perspectives can only be provided by the Objective consideration of whether a
firm’s most experienced business leaders new client is a good client for the firm.
and are particularly difficult to harness Insertion of a neutral third party
in the hub-and-spoke model, where the into head-on-head disagreements
involvement of senior firm members is by between partners.
invitation from the originating lawyer. Formal oversight of proposed business
In the centralized pyramid model, on arrangements; no more ‘giving away
the other hand, the conflicts lawyer has the the store’.
judgment and authority to involve the senior Formal review of billing and payment
members of the firm when needed. Moreover, history for new matters of existing clients:
the conflicts lawyer has the stature to get why take on more bad business?
senior members’ attention on a timely basis. Oversight by practice areas for ‘fit’ of
An alternative technique to surface work and staffing.
client sensitivities is to circulate a new
business report. These reports come in two The consistency with which decisions are
flavors: the first publishes the description made can diffuse personal tensions and
and associated parties of matters before prune and reshape a firm’s client base
approval; the second publishes the over time.
description, parties, and client-matter A centralized conflicts clearance and
identification (ID) of clients and matters after new business intake process also leads
approval. From a clearance perspective, the eventually to a structured matter close and
report of business under consideration is client disengagement processes, which
much more useful than the one that reports mark the end of an active representation
the fait accompli. The technique is not really or relationship. Increasingly recognized
effective, however, as the communication for their importance, client and matter
of the information depends on busy lawyers closing change the ethical considerations
actually opening and reading the report. for conflicts of interest. It is possible to be
adverse to a former client (Client A) as
Clearance (or non-clearance) must long as the new work for Client B is not
benefit the firm, not the individual substantially related to the work done for
Many, many law firms characterize themselves Client A. Matter closing also starts the
as assemblies of solo practitioners. In firms retention period of the representation’s
with this culture, partners do not judge the files. From a data perspective, matter
clients and proposed business of others – closing is a milestone that is used to
16

7. Risk Management for Law Firms: From Policy to Practice
update matter descriptions and associated consider client relationships, and weigh the
party names. The marketing department associated business risks. Their responsibility
uses the milestone to secure case studies is to the firm, not individual practitioners.
and promote additional services. In short, Automation, although expensive, helps with
additional rigor in closing matters and accuracy, speed, and documentation.
disengaging, as a result of the centralized
process, leads to better client information Meg Block is managing director at Baker
and more efficient conflict analysis. Robbins & Company. She can be contacted
at mblock@brco.com.
Can automation help?
Although expensive (it takes ‘a village’ References
to program all the tendrils of the 1. See www.RiskRoundtable.com.
conflicts clearance and new business 2. The high water mark for mergers was in
intake process), automation does bring 2001, with 82 mergers completed in the US.
additional benefits including: See Hildebrandt International, ’Mergerwatch:
2004 US law firm merger activity’, 6 January
Intelligent routing of information; 2005. Available at http://www.hildebrandt.
straightforward decisions are expedited com/Publications/Pages/PublicationDetail.
and tough decisions are sent on to those aspx?PublicationGuid=674733dc-8b93-
who can make them. 4b1e-98a7-d3218dfe83cd.
Improved data quality through validated 3. For example, in 1986, AmLaw 100 firms had
data entry. 25,994 lawyers; in 2008, AmLaw 100 lawyers
Increased efficiency via pre-population totaled 81,992 – a threefold increase.
of known data and synchronized 4. For example, the UK Terrorism Act 2000, USA
updates of firmwide systems; type Patriot Act 2001, UK Anti-terrorism, Crime
once, use many. and Security Act 2001, UK Money Laundering
Time-based triggers to move Regulations 2003 and 2007, and the EU
decisions through bottlenecks or Hague programme.
solicit updated information. 5. The Model Rules’ definition of screened
Consistent gathering of intake applies to ”situations where screening of a
documentation for long-term reference. personally disqualified lawyer is permitted to
Application of ethical wall and remove imputation of a conflict of interest
confidential security at matter inception. under Rules 1.10, 1.11, 1.12 or 1.18.”
In conclusion
The risks associated with conflicts clearance
and new business intake can no longer
be managed as a hub-and-spoke process
with clerical staff and lawyers. A skilled,
centralized team – likely to be led by a
lawyer – is needed to provide nuanced
research to a centralized decision-making
body. This team must also assess business
ethical conflicts, evaluate the quality of work,
17