Why law firms use Xapien to strengthen KYC checks

_{Nick Morgan, Head of Legal Professionals • April 25 2024}

The Solicitors Regulation Authority (SRA) has recently tightened its enforcement actions on AML compliance. This follows findings of non-compliance among many firms due to systemic failures. As a result, firms are turning to AI-powered solutions to enhance their risk management processes, especially concerning Know Your Customer (KYC).

In this blog, we’ll explore how law firms, from boutique to global, are using our AI-powered due diligence tool to strengthen their KYC checks. But first, let’s take a look at how the SRA’s approach is evolving.

Suggested read: Xapien recognised as leading enterprise KYC solution by Chartis

The SRA crackdown on AML breaches

The SRA is paying closer attention to firms’ compliance with AML regulations after criticism from international bodies like the FATF, which highlighted weaknesses in the UK’s fight against money laundering and terrorist financing. Consequently, the SRA is enforcing stricter compliance rules to match global standards. From 2024, law firms must confirm their client identities and fully understand their businesses, source of funds, and complete risk profiles.

Compliance audits and penalties

To enforce this, the SRA has stepped up its compliance audits, conducting more frequent and detailed inspections of law firms’ AML and KYC practices. Firms found non-compliant may face severe penalties, including fines and restrictions on their practice, underscoring the importance of adhering to these enhanced regulatory standards.

Focus on technology

The SRA recognises the role of technology in enhancing compliance processes. It encourages law firms to adopt advanced technological solutions to streamline and improve the accuracy of their KYC and AML procedures. This includes using AI-powered tools to perform deeper and more efficient client background checks and ongoing monitoring.

The risk of not improving your KYC process

If law firms don’t improve their compliance processes now, they expose themselves to several risks in the future, from financial penalties to failed client relationships.

Regulatory penalties

Non-compliance can lead to severe penalties from regulatory bodies. These penalties can include hefty fines, sanctions, and even restrictions on practice, which can impact a firm’s operations and financial stability.

Reputational damage

Falling short of compliance standards can tarnish a law firm’s reputation. Negative publicity erodes client trust and potentially deters future clients, affecting the firm’s market position and long-term viability.

Client loss

Inefficient processes lead to longer onboarding times, which can frustrate clients and may cause them to seek legal services elsewhere. This not only impacts the firm’s immediate revenue but also its client base and referral network.

Increased legal risk

Insufficient KYC and AML processes can put a law firm at risk of legal issues, such as unintentionally aiding illegal activities like money laundering. This could lead to potential legal actions against the firm.

AI-powered KYC checks

AI enables law firms to conduct deep and thorough due diligence on their clients in minutes, providing a detailed and nuanced understanding of client backgrounds. By automating the time-consuming aspects of due diligence, AI frees up legal professionals to engage more meaningfully with their clients. 

Xapien is an AI-powered research tool that generates a summarised research report on any individual or organisation, worldwide. No other tool integrates data from half a billion corporate records, datasets from leading PEP, sanctions, and watchlist screening providers, plus 35 trillion web pages in real-time spanning the entire indexed internet.

No more false positives

Analysts often struggle to ensure they’ve got the right person or company when doing initial research. By entering a second piece of context into Xapien, such as Nick Morgan and Xapien, it will automatically search for everything referencing Nick from Xapien. It’ll find other Nick Morgans, but it’ll discount them because it knows that individual isn’t connected to Nick’s online presence. Xapien draws all this information from structured and unstructured sources and categorises it by risk profiling or simple review flags, so analysts can easily work through the report. 

Automated due diligence reports

The final step in the due diligence process is report writing — another time-consuming task. Xapien takes care of this by compiling information and generating summaries around key details, like a subject’s source of wealth. These comprehensive summaries tell you everything you need to know about the client’s background, enabling firms to truly ‘know’ their customer beyond basic KYC requirements.

KaurMaxwell: KYC checks through a broader risk lens

KaurMaxwell relies on Xapien to perform due diligence through a broader risk lens. The firm’s CEO was initially drawn to Xapien for its capability to uncover information not easily accessible via standard web searches, enabling the firm to gain deeper insights into potential clients for KYC. Its lawyers even use Xapien for counterparty research, too.

What once required five analysts for this level of depth now only needs one. In less than 10 minutes, Xapien discovers information that previously would have taken days or weeks to uncover. The outcome is a fully-sourced summarised report providing an initial view of a potential client’s risk profile.

Firms use Xapien for Initial Due Diligence (IDD)

Firms are starting to perform Initial Due Diligence (IDD) as part of their KYC process. That means having an upfront view of a client’s risk profile and presenting that to the decision-making board and other stakeholders to ensure they comply with the SRA’s and other regulatory obligations.  

In cases where a company has a limited online profile — which is often the case with smaller, unregulated businesses — Xapien will help analysts find a starting point for a more thorough investigation. It also eliminates the need for deep research where it’s clear that the client poses little risk.

Integrating Xapien into due diligence allows law firms to effectively differentiate between the two workflows. By quickly identifying the risk level of a client, firms can make informed decisions about whether or not to proceed with onboarding them. This not only enhances the speed of the onboarding process but also ensures a higher standard of compliance.

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