Challenges in anti-money laundering compliance in Vietnam of law firms

The challenges and difficulties of law firms in complying with the Law on Anti-money Laundering (AML) No. 14/2022/QH15 dated November 15, 2022 of the National Assembly are not merely a matter of lack of awareness or resources, but also systemic and specialized obstacles of the industry. In this article, from practical compliance activities, we would like to contribute and propose regulatory agencies to issue detailed guiding documents so that law firms have a full basis and the best compliance direction in this new field for law practice organizations in Vietnam.

1. Examples of law firms in Vietnam's AML system

1.1. Legal framework for AML in Vietnam

The AML in Vietnam is placed in a relatively high-risk context, with the level of money laundering risk assessed by the Basel Committee as 7.08/10, ranking third in the region[1]. This confirms the importance of building a solid legal corridor and improving compliance efficiency in all professions, including the legal sector. The current legal framework is built based on the Law on AML in 2022, effective from March 1, 2023. This law inherits many provisions from the 2012 AML Law but also adds many important contents to overcome previous limitations and harmonize with international standards of the Financial Action Task Force (FATF).  

Specifically, the Law on AML 2022 stipulates measures to prevent, detect, prevent and handle money laundering. A notable new point is the legalization of regulations from Decree 87/2019/ND-CP, the addition of new reporting subjects and the amendment of the names of some business activities to match the definition of the FATF. The law also adds the principle of "reciprocity" in international cooperation, allowing the exchange of information even if there is no international treaty or bilateral agreement.

To guide the implementation of the Law, the Government has issued Decree 19/2023/ND-CP, detailing the principles and criteria for national risk assessment, customer identification, and especially the criteria for determining beneficial owners. Next, the State Bank of Vietnam has issued Circular 09/2023/TT-NHNN, providing more detailed guidance on the risk management process, the regime for reporting suspicious transactions, and internal regulatory requirements for reporting subjects.

1.2. Compliance obligations of law firms as "Reporting subjects"

According to the Law on AML 2022, law-practicing organizations are identified as one of the "organizations and individuals doing business in relevant non-financial industries and trades" in the group of subjects subject to reporting. This position poses many important compliance obligations, requiring law firms to actively implement them seriously.

The main obligations include:

• Customer due diligence (CDD/KYC): The law firm is responsible for collecting, verifying, and updating customer identification information throughout the relationship establishment period to ensure that transactions are consistent with existing records and the level of risk of money laundering.  
• Risk assessment: Reporting institutions must conduct a risk assessment of money laundering and update this result annually. The assessment results must be approved in accordance with the organization's internal regulations.  
• Transaction reporting: This is one of the core obligations. Law firms must report transactions of unusually large or complex value in accordance with government regulations, and especially suspicious transactions report (STR). Suspicious transaction reports do not depend on the value of the transaction, but on suspicious signs.  
• Developing internal regulations: As an organization, law firms must issue internal regulations on AML, including the main contents of organizational structure, risk management processes and reporting regimes.  

2. Specific challenges and compliance burdens from practice

2.1. Challenges of professional ethics compliance and risks from legal conflicts

One of the most core and complex challenges for lawyers and law firms is the contradiction between the reporting obligation under the AML Law and the obligation to keep client information confidential under the Law on Lawyers. According to Article 25 of the 2006 Law on Lawyers, lawyers are obliged to keep confidential information about cases, affairs and about clients that they know in the course of practicing practice, unless otherwise agreed in writing by clients or otherwise provided for by law.

Although the AML Law 2022 is the legal provision that creates this exception, the problem is not simply theoretical. In practice, complying with reporting obligations can put lawyers in an awkward position. The relationship between lawyers and clients is built on a foundation of absolute trust. Reporting a suspicious transaction can be perceived by the customer as a betrayal, breaking this relationship. Even if the subsequent reporting is proven to be unnecessary or harmful to the client, the lawyer may face the risk of loss of credit, loss of clients, and civil lawsuits for damages. This risk is not fully protected by the law, leaving lawyers and law firms always in an awkward position: if they do not report, the law firm may be dealt with under the Law on AML; But if reported, the law firm could face serious occupational and commercial risks. This is a systemic weakness, creating a psychological burden and great occupational risk for lawyers. In the process of practicing, it can be said that this is the biggest challenge that lawyers and law firms in Vietnam face in complying with anti-money activities. It must also be noted that the legal profession is very specific not only in Vietnam but also on a worldwide scale. The professional activities of a lawyer or a practicing organization almost depend greatly on the prestige, in which the client's trust is the biggest and most important "brick".

2.2. Challenges in customer identification (CDD/KYC) activities

Identifying customers has been a common difficulty when many customers refuse to provide or provide inaccurate, incomplete, and inconsistent information. However, one of the biggest difficulties is identifying a Benefit Owner (BO). The Law on AML 2022 and its guiding documents define a BO as an individual who has the de facto ownership or control of a legal entity or a transaction. The determination of BO is based on specific criteria such as the percentage of charter capital ownership of 25% or more or the right to govern the appointment and dismissal of the board of directors.

The problem arises when law firms do not have enough tools and authority to do this independently and adequately, especially in complex transactions involving offshore company structures. There is also currently no official document of the competent authority to guide law firms to identify BOs in complex transactions. Law firms are forced to rely on information provided by clients, which can be completely fake or incomplete. This puts law firms in a high-risk legal position that can be sanctioned for failing to comply with client verification regulations, while law firms themselves do not have enough tools to do this effectively.

Table 1: Criteria and data to be collected to identify beneficial owners

2.3. Challenges in identifying and suspicious transactions report (STR)

The Law on AML 2022 and current guiding documents provide many detailed suspicious signs for sectors such as banking, securities, real estate, and payment intermediaries. However, there is a lack of a similar and specific category for the legal profession. Legal services are different in nature from those in the financial industry: they are mainly advisory and document preparation, do not directly handle large money flows or transactions of a frequent "money transfer" nature.

The lack of specific indications for the legal field makes it seriously difficult for law firms to identify when a client's transaction is suspicious. This leads to negative consequences such as: First, law firms may ignore sophisticated money laundering practices because there are no criteria for identification. Secondly, due to the fear of being dealt with, law firms may report too many transactions that are not really suspicious, wasting resources of both businesses and regulators. To address this legal gap, it is extremely necessary to issue in-depth guidelines.

Table 2: Suggesting suspicious transaction signs for the legal sector

2.4. Difficulties in implementation resources

Compliance with AML regulations requires law firms to invest significantly in financial and human resources. These costs include the development and enactment of internal regulations, investments in customer management and transaction monitoring technology, as well as personnel training costs. However, there is a large disparity in capacity between large law firms and small law firms or single law firms. Large companies have the financial ability to invest in a comprehensive compliance system, while smaller units face a lot of difficulties.

Although the law requires that all "reporting subjects" comply with the same obligations, this difference in resources creates an inequality. Small law firms, even with a sense of compliance, are still more vulnerable to violations due to lack of resources, leading to legal risks and administrative sanctions. This disparity not only causes a cost burden but also reduces the overall efficiency of anti-money work in the whole industry, because money launderers can take advantage of loopholes from units with weak compliance capacity to carry out money laundering acts in Vietnam.

3. The current situation and impact of this activity on law firms

3.1. Legal and English risks

Failure to comply with AML regulations can lead to many serious consequences. Legally, law firms and individual lawyers may face administrative penalties or even criminal prosecution if they commit acts related to money laundering. This consequence not only affects individuals but also directly affects the entire law practice organization.

Moreover, reputational risk is an invaluable asset of any law firm. Being found to be involved in money laundering activities, even if unintentional, can seriously damage the reputation of the company and the lawyer individually. In an industry based on trust and integrity, a stain on reputation can ruin an entire career and cause a permanent loss of clients.

3.2. Compliance status

The current situation of applying anti-money compliance measures in Vietnam's legal industry is still limited. Many law firms have begun to build internal processes and organize training, but due to the lack of specific guidelines and specialized criteria, these activities may only be cope-oriented, "make-have" in nature, rather than creating a truly effective compliance system. This leads to a lack of synchronization and consistency in the application of anti-money measures across the industry.

4. Solutions and recommendations

4.1. For State management agencies

To solve the above difficulties, management agencies need to take more specific and in-depth actions.

Promulgation of specialized guiding documents: The Department of AML under the State Bank should closely coordinate with the Ministry of Justice and the Vietnam Bar Federation to issue a detailed and specialized guidance circular or manual for the legal sector. This document needs to directly solve problems such as:

• Harmonizing reporting obligations and information confidentiality obligations in specific cases.
• Provides a portfolio of suspicious transaction signs specialized to the legal sector.
• Put in place an effective coordination mechanism so that law firms can verify BO information.

Enhanced training and technical assistance: Provide in-depth training programs and guidance materials on risk assessment for non-financial reporting subjects.  

4.2. For law firms

Law firms cannot wait for complete guiding documents but need to proactively implement internal solutions:

Develop risk-based internal processes: Classify customers according to risk level (low, medium, high) and apply enhanced identification and verification measures for high-risk customers. This process needs to be concretized and widely disseminated within the organization.  

Invest in training: Regularly organize internal training sessions and send personnel to participate in intensive training courses on anti-money organized by competent agencies.  

4.3. Role of the Vietnam Bar Federation

The Vietnam Bar Federation and local Bar Associations play a key role in bridging and supporting members.

Firstly, organize concentrated training

The Vietnam Bar Federation should coordinate with the State Bank, the Ministry of Justice along with the support of local Bar Associations to organize in-depth training sessions on anti-money for all members, helping to improve the awareness and compliance capacity of the whole industry. This is an important factor to raise awareness as well as compliance capacity of law practice organizations in the coming time.

Secondly, the Vietnam Bar Federation should issue a practical guidance document

The development of manuals and manuals on anti-money practice for lawyers and law practice organizations will help these individuals and units easily apply legal regulations to their daily work, especially to have the best compliance direction in the field of anti-money according to the State's regulations.

Compliance with AML regulations in Vietnam poses significant challenges for law firms, not only in terms of legality but also in terms of ethics and resources. These challenges require a multi-dimensional approach, with close cooperation between state management agencies, socio-professional organizations and law firms themselves. Addressing current problems, especially the lack of specialized guidelines and difficulties in verifying beneficial owners, will not only help improve the effectiveness of anti-money work, but also protect the reputation and promote transparency and integrity of the legal profession in Vietnam.

Lawyer Nguyen Van Phuc

HM&P Law Firm