Creating compliance

Compliance and German Bar Associations: Modern governance required

By Dr. Sven-Joachim Otto

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This paper looks at the need for compliance in self-managed organizations using the example of a German Bar Association. It outlines the legal obligations of the executive committee and the executive board and compares these with those in public and private companies. It explains anti-corruption and purchasing guidelines in detail using a concrete example and highlights the need for greater transparency in the board’s work. Ultimately, it recommends the remuneration of the executive committee and executive board members be made public.

Introduction

The issue of compliance in the private sector has long been on the agenda and is constantly evolving, but historically it has been less of an issue in the public sector and in self-managed organizations. As the PwC study “Public Crime 2010” shows, this is not justified. It concluded that nearly one in three public authorities has been affected by at least one criminal offense. In almost four-fifths of cases, an official or employee of an agency was involved, a very significant figure in this context since employees are exposed to bribery in one in five agencies. There is an obvious need for a long-term, comprehensive and strategic approach to compliance.

In its discussion paper on the professional ethics of German attorneys, the executive committee of the German Federal Bar Association (Bundesrechtsanwaltskammer, BRAK) stated, among other things, that there was no independent ethical obligation for large legal offices; but due to their size, special structures and operational maxims, they did have to comply with professional ethics by means of additional organizational and administrative arrangements (compliance and governance requirements).

Legal obligations of the executive committee and the executive board

As with a company, the executive committee and board of directors of a Bar Association take responsibility for administration and organization. They must ensure the association complies with its obligations in accordance with the German Federal Lawyers’ Act (Bundesrechts-anwaltsordnung, BRAO), the German Professional Code of Conduct for Lawyers (Berufsordnung fuer Rechtsanwaelte, BORA) and its own business, procedural and compensation directives.

Management is also responsible for setting up and adhering to a risk management policy and communicating it to the board of managing directors and the shareholders at the annual general meeting. The association also needs to implement effective measures to prevent corruption (the four-eye-principle) and ensure robust internal auditing. In the case of transactions subject to approval, the firm should ensure and document that the executive committee has the consent of the respective competent body in order to avert conflicts of interest. Case law lays down the principle of efficiency and economy on the basis of budgetary law.

Because of their official status according to paragraph 11, No. 2, letter C of the Penal Code, members of the executive committee and the board of directors are punishable under paragraph 331 (Benefit) and paragraph 332 (Corruption) of the Penal Code. With a view to protecting the financial resources of the Bar Association, paragraph 266 (Infidelity) of the Criminal Code also applies.

Possible compliance measures and anticorruption policy

In general, it is advisable for Bar Associations to discuss the draft anti-corruption directive and adopt it to the situation on the ground. These directives often already exist at the federal and state levels and can be used as templates. In February 2017, the Board of the Düsseldorf Bar Association issued a directive on the prevention of corruption and infidelity.

There are also areas in Bar Associations that are vulnerable to unlawful or unfair influences, in particular when contracts are awarded, decisions are made (with and without discretion) by the issuing or no issuing of notices (authorizations, revocations, etc.), control activities are carried out, and assets are sold or acquired.

The directive of the Düsseldorf Bar Association provides clear instructions to deal with conflicts of interest and with protecting the financial resources of the Association. It lays down thresholds for accepting and giving gifts, for hospitality and for other benefits. The directive excludes secondary activities of members at member firms’ offices and provides rules and regulations on participation in professional events as well as on business travel at the expense of the Association.

Purchasing and procurement guidelines

At this point, attention should also be drawn to the possible implementation of purchasing and procurement guidelines. Studies show that in municipal procurement, enormous sums can be saved by strategic purchasing. The purchasing guidelines are used to establish binding rules for the procurement of all goods and services for the Association. These rules reduce inefficient purchasing and contribute to the efficient, sustainable use of membership fees. They are intended to define clear roles and responsibilities, unify supplier selection, document and improve procedures, and ensure process transparency. Purchasing guidelines are generally addressed to the executive committee, the executive board and all employees of the respective Association. They specify limits for signing authority for regulations on framework contracts and invitations to tender for contracts, for appraisals, and for the selection of suppliers and service providers. In February 2017, the Düsseldorf Bar Association also issued a purchasing guideline specifying certain procurement procedures and a strict four-eye-principle. Orders to law firms are to be issued in the form of temporary framework agreements.

Other measures

Consulting practices advise municipal companies to regularly introduce transparently and systematically documented information requirements using internal control systems. If necessary, a compliance officer or external ombudsperson should be appointed as a comprehensive contact for all employees. Special attention must also be given to the permanent training of company staff.

Transparency of a Bar Association’s activities

The right of members of the Association to obtain information is important. As compulsory members, they have a right to know what their contributions are used for. This also applies, in particular, to questions relating to the remuneration of the president, the treasurer and other vice presidents; office expenses; the fees of other members of the management board and all other members of the executive board and the amount of compensation for fee adjudicators and rapporteurs of the conciliation department.

In the German state of North Rhine-Westphalia, for example, similar obligations also apply  to institutions subject to public law that are directly answerable to the state as well as companies in the private sector in cases where the state or municipalities have a direct or indirect majority interest. They stipulate that the remuneration of the individual members of management, the supervisory board, the advisory board and similar bodies made on the basis of performance and performance-related components as well as components with a long-term incentive effect are disclosed separately in the notes to the annual financial statements. Bar Associations could publish this information in their annual report.

Conclusion

Recent professional policy discussions have revealed functional shortcomings in self-management that seem to stem from overarching governance structures, too little transparency in executive and presidential activities, and the absence of a return to the annual general meeting as the democratic ruling entity. A modern governance structure, on the other hand, can improve the transparency and efficiency of the governing body, thereby strengthening self-administration and preventing direct state supervision. Lean management structures at all levels also reduce costs that must be borne by members’ compulsory contributions.

sven-joachim.otto@de.pwc.com