Currency Fluctuations in Trust Accounts: Who Bears the Risk When Holding Foreign Currency?

Summary

• Currency risk allocation must be explicitly addressed in engagement letters — without clear contractual terms, law firms may find themselves absorbing exchange rate losses that erode profitability or facing disputes with clients over depleted trust funds.
• ABA Model Rule 1.15 requires safekeeping of client property, but doesn’t specify how to handle currency depreciation — creating a compliance gray area that demands proactive risk management strategies.
• The U.S. dollar dropped 10.7% against major currencies in early 2025 — demonstrating how quickly foreign currency holdings can lose value and why mid-sized firms with international clients need robust currency risk protocols.

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Have you ever deposited euros, pounds, or yen into a client trust account, only to watch the exchange rate swing wildly before disbursement day arrived? If you’ve handled international transactions, you probably know that sinking feeling when currency markets turn against you — and the awkward conversation that follows about who exactly is responsible for the shortfall.

For mid-sized law firms handling cross-border matters, currency fluctuations represent one of the most misunderstood and underaddressed risks in trust account management. The ethical rules tell us to safeguard client funds, but they’re surprisingly silent on what happens when those funds shrink — not because of mismanagement or unauthorized withdrawals, but simply because the exchange rate moved in the wrong direction.

This isn’t a theoretical concern. In the first half of 2025, the U.S. dollar dropped 10.7% against a basket of major currencies including the euro, Japanese yen, and British pound. For a firm holding $100,000 in foreign currency for a client, that’s potentially $10,700 in value evaporated before a single disbursement was made. Who bears that loss? The answer depends entirely on how well your firm has planned for this scenario.

Understanding the Currency Risk Landscape

Before diving into risk allocation, it’s worth understanding why currency volatility matters more now than ever for law firms. The foreign exchange market is projected to grow by $582 billion from 2024 to 2029, reflecting the increasing globalization of business and legal transactions. With this growth comes increased exposure to currency risk for firms handling international matters.

Currency risk in trust accounts manifests in three primary ways. Transaction risk occurs when funds must be converted from one currency to another, and the exchange rate changes between when the funds are received and when they’re disbursed. Translation risk arises when reporting the value of foreign currency holdings in your firm’s functional currency — typically U.S. dollars — for accounting purposes. Economic risk involves longer-term changes in exchange rates that affect the purchasing power of funds held over extended periods.

For most law firms, transaction risk poses the most immediate concern. Consider a scenario where your firm receives €500,000 from a European client for a potential real estate acquisition. At the time of deposit, the exchange rate is $1.15 per euro, giving you $575,000 in equivalent value. Six months later, when the deal falls through and you need to return the funds, the rate has dropped to $1.05 per euro. The client’s euros are still there — all 500,000 of them — but their dollar-equivalent value is now only $525,000. That’s a $50,000 paper loss that never appeared on any invoice.

What the Ethics Rules Do (and Don’t) Tell Us

The cornerstone of trust accounting ethics is ABA Model Rule 1.15, which requires lawyers to hold client property separate from their own funds and to safeguard it with the care required of a professional fiduciary. The rule mandates complete records, prompt notification when funds are received, and delivery of funds to which clients are entitled.

What Rule 1.15 doesn’t address is how to handle the inherent risk of holding property that can change in value through no fault of the lawyer. The rule was designed primarily to prevent misappropriation and commingling — not to address market risk. This silence creates uncertainty for firms navigating international transactions.

Several key principles emerge from the ethics rules and their commentary. First, lawyers must maintain separate accounts for client funds, which for foreign currency often means establishing currency-specific trust accounts. Second, lawyers must keep accurate and complete records, which in a multi-currency context requires tracking both the foreign currency amount and its equivalent value at various points in time. Third, lawyers must promptly deliver funds to which clients are entitled — but the question of what exactly is “owed” when currency values fluctuate remains murky.

Some jurisdictions have begun addressing foreign currency in trust accounts more explicitly. In British Columbia, for example, the Canada Deposit Insurance Corporation now offers protection on eligible deposits in foreign currencies, removing previous requirements for lawyers to obtain written client confirmation before placing funds in non-CDIC-insured accounts like U.S. dollar pooled trust accounts.

The Risk Allocation Question: Three Approaches

When it comes to determining who bears currency risk, law firms generally have three options. Each comes with its own implications for client relationships, firm profitability, and ethical compliance.

Client Bears All Risk

Under this approach, the firm holds the foreign currency exactly as received, and any gains or losses from exchange rate movements belong to the client. If a client deposits pounds and the pound strengthens against the dollar, the client benefits from the appreciation when the funds are converted. If the pound weakens, the client absorbs the loss.

This approach aligns most closely with the fiduciary principle that trust funds belong to the client. After all, if the firm is simply holding the client’s property — in this case, a specific quantity of foreign currency — then changes in that property’s value naturally flow to the owner.

The practical advantage is that it eliminates currency exposure for the firm. The disadvantage is that clients may not fully understand the risk they’re assuming, leading to difficult conversations when exchange rates move unfavorably. Additionally, some clients may prefer that their lawyer take a more active role in managing financial risks associated with their matter.

Firm Bears All Risk

At the other extreme, some firms assume currency risk by guaranteeing the dollar-equivalent value of funds at the time of deposit. If a client deposits €100,000 when the rate is $1.15, the firm commits to returning $115,000 worth of value regardless of where exchange rates move.

This approach can be attractive to clients and may serve as a competitive differentiator. However, it creates significant financial exposure for the firm. A major currency swing could result in substantial losses that the firm must absorb from its operating funds. For mid-sized firms without sophisticated treasury operations, this risk may be inappropriate.

There’s also an ethical dimension to consider. If the firm is guaranteeing currency values, it’s arguably taking on a financial risk that goes beyond the traditional scope of legal representation. Some might argue this approaches the territory of providing investment or financial advice, which carries its own regulatory implications.

Shared Risk with Clear Terms

The most nuanced approach involves explicitly allocating currency risk through the engagement letter or a separate agreement. This might include provisions that specify how and when foreign currency will be converted to dollars, establish thresholds for acceptable exchange rate variance, define procedures for converting currency if rates move beyond specified parameters, and allocate gains or losses according to a predetermined formula.

For example, an agreement might state that funds will be held in the original currency but converted if the exchange rate moves more than 5% from the rate at deposit. Alternatively, it might specify that any currency gain or loss will be split equally between the firm and client.

The advantage of this approach is transparency. Both parties understand their exposure from the outset. The disadvantage is complexity — both in drafting the provisions and in administering them throughout the representation.

Practical Strategies for Managing Currency Risk

Regardless of which risk allocation approach your firm adopts, several practical strategies can help manage currency exposure in trust accounting.

Establish Clear Engagement Letter Language

Your engagement letter should explicitly address currency risk whenever a matter involves foreign funds. Consider including provisions that identify the currency or currencies in which funds will be held, state whether and when currency conversion will occur, allocate responsibility for exchange rate gains or losses, specify any thresholds that will trigger conversion or require client notification, and address how exchange rates will be determined for conversion and accounting purposes.

Here’s sample language to consider: “Client acknowledges that funds deposited in foreign currency will be subject to exchange rate fluctuations. [Firm] will maintain such funds in the original currency unless otherwise instructed by Client or unless required for disbursements in a different currency. Any gains or losses resulting from exchange rate movements during the period funds are held in trust shall be [allocated as agreed]. [Firm] will use commercially reasonable exchange rates from [source] for any conversions.”

Minimize Holding Periods

The longer you hold foreign currency, the greater your exposure to adverse exchange rate movements. Whenever possible, structure transactions to minimize the time between receipt and disbursement of foreign funds. For matters where extended holding periods are unavoidable, consider more frequent communication with clients about currency values and potential conversion strategies.

Use Separate Currency Accounts

Rather than converting all incoming foreign currency to dollars immediately, consider maintaining separate trust accounts for major currencies you frequently handle. This avoids conversion costs and spreads, preserves the client’s position in their original currency, and simplifies accounting when funds will ultimately be disbursed in the same currency received.

However, be aware that maintaining multiple currency accounts increases administrative complexity. You’ll need to perform three-way reconciliation for each account and track exchange rates for reporting purposes.

Document Exchange Rates Contemporaneously

Whenever funds are received, converted, or disbursed, document the applicable exchange rate from a reliable source. This creates an audit trail that supports your accounting and can help resolve any disputes about currency values at specific points in time.

Consider Currency Hedging for Large Amounts

For substantial foreign currency holdings that will be maintained for extended periods, currency hedging instruments such as forward contracts can lock in exchange rates and eliminate uncertainty. However, hedging adds cost and complexity, and may not be practical for smaller amounts or shorter holding periods. Firms considering hedging should consult with financial professionals and ensure any hedging arrangements comply with ethics rules regarding the handling of client funds.

Communicate Proactively

Don’t wait until disbursement to discuss currency values with clients. For matters involving significant foreign currency exposure, consider providing periodic updates on exchange rates and their impact on the dollar-equivalent value of trust funds. This prepares clients for potential variances and reinforces your role as a proactive advisor.

Recording Foreign Currency in Your Accounting System

Proper accounting for foreign currency trust funds requires careful attention to both the trust accounting rules and generally accepted accounting principles. Your legal accounting software should be capable of tracking both the foreign currency amount and its dollar equivalent.

At minimum, your records should reflect the amount of foreign currency received and the date of receipt, the exchange rate at receipt and the corresponding dollar value, any subsequent conversions with applicable exchange rates, the current dollar-equivalent value for reconciliation purposes, and all disbursements with applicable exchange rates and dollar values.

Many firms find it helpful to maintain a separate ledger column or sub-account for unrealized currency gains and losses. This allows you to track the impact of exchange rate movements without affecting the client’s actual foreign currency balance.

When preparing client reports or invoices, consider how you’ll present currency information. Will you show only the foreign currency amount? The dollar equivalent? Both? Consistency is key — whatever approach you choose, apply it uniformly across all matters involving foreign currency.

Common Mistakes to Avoid

Even well-intentioned firms can stumble when handling foreign currency in trust. Here are the pitfalls we see most frequently.

Failing to Address Currency Risk in Engagement Letters

This is by far the most common mistake. Many engagement letters are silent on currency matters, leaving both parties uncertain about their rights and obligations when exchange rates move. Even a brief acknowledgment of currency risk is better than nothing — but a detailed allocation clause is better still.

Converting Immediately Without Client Consent

Some firms routinely convert all incoming foreign currency to dollars upon receipt, assuming this simplifies administration. While there may be valid reasons for immediate conversion, doing so without client consent can trigger disputes if the exchange rate subsequently moves in the client’s favor.

Ignoring Exchange Rate Documentation

Failure to document exchange rates contemporaneously creates problems for both accounting and dispute resolution. If a client later questions the value at which funds were converted, you’ll want reliable documentation of the applicable rate.

Using Inconsistent Rate Sources

Exchange rates vary among providers. Using one source for receipts and another for disbursements, or switching sources mid-matter, can create unexplained variances and undermine confidence in your accounting.

Treating Foreign Currency Gains as Firm Income

If your engagement letter assigns currency risk to the client, any gains from favorable exchange rate movements belong to the client, not the firm. Taking currency gains as firm income without explicit authorization could constitute misappropriation.

Neglecting Regular Reconciliation

Foreign currency accounts need the same rigorous three-way reconciliation as dollar accounts — arguably more, given the additional complexity. Don’t let foreign currency accounts become orphaned in your reconciliation process.

Technology Solutions for Multi-Currency Trust Accounting

Managing foreign currency trust accounts manually is challenging at best. Modern legal billing and accounting platforms offer features specifically designed to handle multi-currency scenarios.

Look for software that provides native multi-currency support with automatic exchange rate updates, the ability to maintain separate ledgers for each currency, flexible reporting that can show amounts in original currency, dollar equivalents, or both, integration with your banking relationships for streamlined reconciliation, and audit trails that capture exchange rates at each transaction point.

The right technology doesn’t eliminate currency risk, but it does ensure accurate tracking and reporting — essential foundations for whatever risk allocation approach your firm adopts.

Building Currency Risk Into Your Client Communication Strategy

Effective management of currency risk isn’t just about accounting and legal agreements — it’s also about client relationships. Consider incorporating currency matters into your standard client communication protocols.

At Engagement

Discuss currency exposure during the initial client meeting whenever international funds are involved. Explain the options for risk allocation and document the agreed approach in your engagement letter. Many clients will appreciate your proactive attention to this issue.

During the Matter

For matters with significant currency exposure, provide periodic updates on exchange rates and their impact on trust balances. Consider setting thresholds that trigger automatic client notification — for example, whenever the dollar-equivalent value changes by more than 5%.

At Conclusion

When closing a matter, provide a clear accounting of all currency movements, including any gains or losses and how they’ve been allocated per your agreement. This transparency reinforces trust and can head off post-matter disputes.

FAQ

Who typically bears the risk when a law firm holds foreign currency in trust?

The allocation of currency risk depends entirely on the agreement between the law firm and client. Without explicit contractual terms, the default position is that the client bears the risk since the funds belong to the client. However, best practice is to address risk allocation explicitly in the engagement letter to avoid disputes.

Can a law firm be disciplined for currency losses in a trust account?

ABA Model Rule 1.15 requires safekeeping of client property but doesn’t address market-driven value changes. A firm generally won’t face discipline for currency losses that result from normal market fluctuations, provided the firm maintained proper records, didn’t convert funds without authorization, and followed any agreed-upon protocols for currency management.

Should we convert foreign currency to U.S. dollars immediately upon receipt?

Not necessarily. Immediate conversion triggers exchange costs and locks in the current rate, which may or may not benefit the client. The decision should be made in consultation with the client based on factors including anticipated holding period, expected currency movements, the currency needed for ultimate disbursement, and any specific client preferences.

How do we record foreign currency trust deposits in QuickBooks?

Most accounting systems, including QuickBooks, allow you to set up accounts denominated in foreign currencies. Record the deposit in the original currency amount, and the system will track both the foreign currency balance and its dollar equivalent based on current exchange rates. LeanLaw’s integration with QuickBooks Online provides additional tools for law firm trust accounting with multi-currency support.

What should our engagement letter say about currency risk?

At minimum, your engagement letter should acknowledge that funds may be held in foreign currency, state how and when conversion will occur, allocate responsibility for exchange rate gains and losses, specify the source for exchange rate determinations, and describe any procedures for client notification about significant currency movements.

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Sources

• U.S. Department of the Treasury, “Foreign Exchange Report,” June 2025
• American Bar Association, Model Rule 1.15: Safekeeping Property
• International Monetary Fund, “Global Current Account Balances,” July 2025
• CME Group, “FX Markets: Major Factors to Watch in 2025”
• Technavio, “Foreign Exchange Market Size and Forecast 2024-2029”
• Law Society of British Columbia, “Trust Accounting Handbook”