Hong Kong

Background

Solicitors’ firms in Hong Kong are required to have professional indemnity insurance. That insurance is provided by the Solicitors Indemnity Fund (the Fund) pursuant to Scheme Rules6. The Fund provides professional indemnity cover for losses up to HK$10m in respect of any one claim (subject to certain deductibles and exclusions). The losses have to arise from a claim against the indemnified during the period of the indemnity “in respect of any description of civil liability whatsoever incurred in connection with the Practice”. Some firms have their own additional insurance cover.

Anti-money laundering risks

Like other major financial centres, a major concern for professional service providers in Hong Kong is money laundering. Hong Kong is a member of the Financial Action Task Force (FATF), the intergovernmental body that lays down recommendations for member states to follow  with respect to anti-money laundering and counter-terrorist financing. As a result, it has a comprehensive regime of anti-money laundering legislation. One of the most important offences is that of dealing with property knowing or having reasonable grounds to believe that it represents the proceeds of crime7. It is a defence to have made a timely report to the relevant authority or have intended to but have reasonable excuse for not having done so.

There has been a spate of prosecutions for this offence in Hong Kong. These have involved all sorts of individuals; businessmen, professionals and so-called cross-border “cash runners”.

Two high-profile prosecutions have involved convictions of partners at Hong Kong law firms.  In one case in 2013, a corporate partner pleaded guilty to fraud and money laundering and was sentenced to 12 years imprisonment. The background to his conviction is alleged to have been a Hong Kong billion dollar fraud to hide gambling “debts” arising out of (among other things) a taste for the high-life in Macau. This case has given rise to a number of ongoing high value civil claims against the firm concerned by claimants said to have lost out as a result of the partner’s misappropriation of funds allegedly held on their behalf in the firm’s client account.

In the other case in 2014, a senior partner of a law firm was sentenced to six years for one count of money laundering with respect to what the court described as an “unusual” payment of approximately HK$68m; the payment is said to have passed through the firm’s account over  the period of about a day without proper due diligence, for no legitimate purpose and as a “favour” to a client and for onward transmission to his wife. This case (conviction and sentence) is being appealed and (among other things) the appeal is likely to turn on the meaning of “having reasonable grounds to believe” that the property concerned represented the proceeds of crime.

Both cases demonstrate that (for now) the “dealing” offence is the anti-money laundering prosecution of choice for prosecutors in Hong Kong; professionals (such as lawyers and accountants) are not immune. Going forward, and as Hong Kong prepares for its next FATF mutual evaluation (thought to be in 2017/18), there are likely to be more prosecutions.

The need for effective anti-money laundering due diligence and know your client checks has become a must for service providers in Hong Kong. For solicitors, this means compliance with Practice Direction P (Anti-Money Laundering and Terrorist Financing) issued by the Law Society of Hong Kong.

Limited Liability Partnerships

Law firms in Hong Kong have traditionally operated as partnerships or sole proprietors with unlimited liability (save insofar as they are able to limit liability as a matter of contractual terms  in the engagement). This contrasts starkly with the move to the limited liability practices seen in other jurisdictions, such as the United Kingdom and some states in the US.

That said, change is coming in Hong Kong. After some 10 or so years of consultation and legislative scrutiny, the Legal Practitioners (Amendment) Ordinance (the LPAO) was passed in 2012 and (based on current estimates) is due to become operative in the latter part of 2015 or the early part of 2016.

Law firms practising in Hong Kong will be allowed to adopt a Limited Liability Partnership (LLP) model. It is important to stress this is a “Hong Kong LLP model” and is different to LLP status as understood in the United Kingdom. The Hong Kong model balances the interests of consumers and the professions.

Under this Hong Kong model, a partner can avoid personal liability for any “partnership obligation”8 arising from the provision of professional services by the LLP in circumstances where he or she is not personally at fault. The entity will continue to practise as a partnership with unlimited liability and the partners will continue to be jointly and severally liable for other debts of the partnership such as trading debts.

Pursuant to the LPAO it will be mandatory for all LLPs in Hong Kong to procure additional (“top-up”) insurance cover in the open market of not less than HK$10m in respect of any one claim (over and above the limit of indemnity available under the current Professional Indemnity Scheme). The Law Society of Hong Kong is in the process of preparing rules for the top-up insurance requirement.

Another feature of the Hong Kong LLP model is the “clawback” provision in the LPAO which  (in effect) requires a partner to pay back to the LLP some or all of their distribution of profit   (or partnership property) if that distribution results in the partnership being unable to meet its liabilities. The clawback period is limited to two years after the date of the distribution to which the liability (to repay) relates.

Although the Hong Kong LLP model is not a full corporate model or limited liability status, the introduction of LLPs will be a significant development. Of related interest are legislative amendments that are already in place to permit solicitor practices to incorporate. These changes are waiting on finalisation and approval of Solicitor Corporation Rules and myriad consequential amendments to other subsidiary legislation.

Once operative, a solicitor corporation will be able to limit its liability (in contract or negligence) in an engagement with a client, up to the amount of the paid-up capital of the corporation. As yet, there is no timeframe for when solicitor corporations will become operative in Hong Kong but, given the restricted nature of the protection provided by the proposed Hong Kong LLP model, it is quite possible that solicitor corporations will prove more attractive to practitioners.

Both Hong Kong LLPs and solicitor corporations are attempts to limit solicitors’ professional liability in an increasingly litigious and risk averse environment.