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Compliance challenges facing law firms in 2024, and how to solve them

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An effective KYC process requires law firms to truly know their clients’ backgrounds. Though demanding in terms of time and resources, conducting due diligence is a crucial part of this to remain compliant.

As we enter 2024, law firms are facing more complex compliance challenges. The penalties for AML breaches are severe; six-figure fines are being applied in the UK and worldwide. Legal leaders are undoubtedly feeling the heat. In a recent study, chief legal officers were asked about their leading risk area and three in ten said regulatory compliance.

This article will delve into the compliance challenges law firms face in 2024 and how Xapien’s AI-powered research tool helps compliance teams identify and understand the risks associated with a client, supplier or opponent upfront.

Increasing regulatory anxieties

Lack of visibility on the regulatory landscape is raising expectations for more complex risks, according to the 2024 General Counsel Report. For compliance leaders, it makes risk management more challenging since compliance teams don’t know how regulations will evolve or what new rules may be introduced — particularly amid a turbulent geopolitical environment. 

Recent regulatory developments

At the end of 2023, the Solicitors Regulation Authority (SRA) revealed that nearly 30% of audited law firms were non-compliant with AML laws. Given that the 2017 money laundering regulations have been in effect for six years, there’s little excuse for firms to neglect getting the fundamentals right when it comes to having compliant risk assessments.

In the EU, a new Anti-Money Laundering Authority (AMLA) is expected to be operational in 2024 which could significantly change the KYC and AML landscape. The AMLA was established to address weaknesses in the EU’s AML-CFT framework.

The UK is also clamping down on financial crime with its Economic Crime Plan 2 — an iteration of the first Economic Crime plan — which aims to do three things: reduce money laundering, combat kleptocracy, and cut fraud.

To tackle money laundering through the misuse of UK corporate structures, the Economic Crime and Corporate Transparency Bill gives Companies House enhanced powers to reject and remove information if flagged as inaccurate or suspicious.

Here are just a few more challenges compliance teams face in 2024…

Multiple jurisdictions

An increasing number of firms are operating in multiple jurisdictions, as are their clients. Each jurisdiction brings its own sets of regulations law firms must keep pace with, leading to greater compliance management challenges.

Stricter ESG requirements

Environmental, Social and Governance (ESG) issues are becoming an increasingly important compliance consideration for law firms. The FCA is introducing an anti-greenwashing rule on May 31 2024 for all authorised firms to make sure sustainability-related claims are fair, clear and not misleading.

Tighter budgets

The global economic downturn is still causing uncertainty in the mergers and acquisitions market. In 2023, investment firms felt the impact of inflation and rising interest rates, leading them to be more careful about how they deploy funds. The market saw a substantial 29% decrease in deals as a result, which has led to a decline in demand for transactional legal practices.

Law firms keep their finger on the pulse with Xapien

Xapien is instrumental in giving a quick, strong understanding of individuals and their sanctions exposure.

Director, Dechert LLP

Whether it’s used by experts, lawyers or researchers, Xapien enables law firms to spend more time strategising, and less time wading through search results.​

Results

  • Lower risk: Law firms can see the full picture on any client, employee or partner in under 20 minutes
  • Increased productivity: Compliance teams no longer have to spend hours trawling through search results
  • Reduced costs: More work can be done with fewer workers
  • Better client experience: Law firms operate more quickly and efficiently
  • Higher accuracy: The possibility of human error and bias is reduced

Law firms need a thorough understanding of potential clients to guarantee compliance if they decide to take them on. The compliance team must not only verify if the prospective client has been sanctioned or is politically exposed, but also assess the likelihood of sanctions or political exposure in the future, and check for close ties with entities that may pose risks. Existing clients seeking new representation should undergo renewed checks.

When multiple parties are involved in a case, such as in a merger and acquisition in which over 30 entities are listed on the cap table, manually conducting comprehensive background research is infeasible.

Keeping ahead of the 24/7 news cycle

When you enter a person or business’s name into Xapien’s search engine, it searches through compliance datasets, corporate records and the entire indexed web to derive insights from open-source information in real time.

Once it has scanned millions of data points, it flags any potential regulatory, reputational, and ESG risks. If a researcher did this manually, they could easily overlook information due to language barriers and time constraints. Whereas, Xapien processes over 133 languages and holds millions of fragmented information in a knowledge graph to quickly draw connections.

Example: Investigating Michael Doyle

A man called Michael James Doyle asks a law firm to represent him as he sets up a new company. Running his name through a search engine generates results about a footballer. 

When his company is added, his profile on Companies House comes up. A search on ComplyAdvantage brings up 143 results.

A Xapien search takes 12 minutes and shows he has resigned from 167 companies, 31 of which have risks associated with them. One is a confirmed watchlist. He also appears on a list of disqualified directors in Guernsey. Michael Doyle is a convicted money launderer who served time in jail, but search engines failed to reveal this without the extra ‘Broadstairs’ and ‘Guernsey’ inputs.

Uncovering the risks about Michael Doyle could take days. Xapien found it in minutes.

With Xapien, anyone can quickly generate comprehensive, easily readable reports on an individual or company within minutes. This allows compliance teams and partners to quickly obtain the information they need, without overwhelming potential clients with excessive questions. The information is available before any other work is done. They can make informed decisions about accepting clients, aware of any potential risks, even those they might not have thought to look for.

Enhanced due diligence goes from one day to 12 minutes at Griffin

As a banking as a service (BaaS) provider where compliance is a key offering, Griffin’s clients and suppliers must be good actors.

However, using search engines to do enhanced due diligence tasks like adverse media screening on prospects and combing sanctions lists is resource-intensive.

It takes at least a day per prospect (but often longer) and is a major time drain for a rapidly scaling business where every minute counts.

As soon as a prospect or supplier is mentioned, their name is run through Xapien. Inputting the search terms takes 30 seconds. Compliance can leave the software to run while they get on with other tasks. The results are available in 12 minutes or less. Compliance takes half an hour to read the results. Direct risks are highlighted, so compliance can skip the irrelevant information.

Griffin is left with a summarised, shareable, and time-stamped report on every third party. This ensures a clear trail of evidence that shows due diligence has been carried out.

I cannot overstate how much easier due diligence is with Xapien. Enhanced due diligence on a prospect used to take the better part of a day. You can sometimes go down a rabbit hole of searches and reviewing news stories to try to determine whether they are proven, hearsay or media speculation. 

Xapien enables us to get all of that data in 12 minutes or less. Now, I can leave Xapien running in the background while attending to other compliance needs.

Alex Nash, Money Laundering Reporting Officer, Griffin

How Xapien enables a law firm to make an informed decision

A potential client asks law firm A to represent them in a merger. Law firm A’s compliance team looks up the client using PEP or sanctions lists and finds nothing problematic. Further checks on search engines, using keywords such as ‘fraud’ and corrupt’ reveal no problems. The process takes a day.

The client also approaches Law firm B (firm A’s major competitor). Law firm B uses Xapien to learn about the client. Xapien’s analysis of open-source data uncovers news reports showing the client is believed to hold assets on the Russian president’s behalf. The search took seven minutes.

Law firm A has no awareness of this potentially harmful information. If it onboards the client and the merger takes place, its reputation could be gravely damaged. Law firm B can make an informed decision about taking on the client, and prepare rebuttals for negative reactions.

Proving that due diligence has been conducted using search engine history is time-intensive and error-prone.

However, law firms governed – for example – by the UK’s Money Laundering Regulations are required to establish a written firm-wide risk assessment outlining their approach to addressing money-laundering risks. The Solicitors Regulation Authority (SRA) reviewed 400 firms’ risk assessments in 2019 and reported “high levels of non-compliance” under this guidance.

With Xapien, firms can stay compliant

Xapien makes it easy for law firms to stay compliant in a fast-changing regulatory landscape. It identifies key networks and affiliations that enable lawyer firms to be aware of clients who are likely to be added to sanctions lists in the future, helping them stay ahead of potential risks. For example, someone might not be directly sanctioned but could be mentioned in media articles as a ‘close friend’ of a sanctioned figure. Traditional sanctions checks would not flag these risks.

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