The challenges facing law firms in 2023, and how to solve them
Law firms have long needed to carefully look into the background of their clients in order to avoid potential legal or ethical non-compliance. This process, though demanding in terms of time and resources, is crucial to avoid conflicts, comply with regulations, and avoid inadvertently facilitating money laundering or supporting organised crime.
As we enter 2023, the compliance challenges facing law firms are more complex than ever. The penalties for breaches are severe and being readily applied across the globe. Legal leaders are feeling the heat. When asked to list their top five risks, 23% of legal leaders placed regulatory compliance at the top of their list, according to a recent survey by FTI Technology and Relativity.
Compliance issues law firms need to monitor include:
- Conflicts of interest
- Anti-money laundering
- General regulatory risk and compliance
To remain on top of these challenges, and maintain a positive relationship with partners, risk and compliance teams at law firms need:
- A thorough and accurate understanding of potential clients, current clients, and their networks
- The ability to discover and present this information at speed
- To stay abreast of evolving laws, sanctions and risks
- To be able to present regulators with proof of due diligence
Compliance teams at law firms must balance multiple demands. They must act as the eyes and ears of regulators to ensure their firm and its clients are compliant. They also face tight deadlines and pressure from partners to provide swift, accurate answers, frequently about intricately structured businesses, companies, and other entities.
Augmenting those pressures are swiftly evolving regulations, anti-money laundering laws and sanctions, as well as regulators equipped with greater powers than ever before, and an increasing prevalence for firms to operate globally, exposing them to multiple sets of compliance rules.
Therefore, compliance teams today are under significant pressure. This paper will explore the compliance challenges law firms are confronted with in 2023 in greater detail, and explain how Xapien’s automated background checking software helps manage them.
Why compliance efficiency matters
Six in ten legal leaders say that new regulations require them to constantly update policies and hire more staff, according to the FTI Technology and Relativity report. Compliance teams bear the brunt of this. They need to ensure their law firm remains compliant and maintain positive relationships with partners.
Recent regulatory developments
US antitrust regulators are expanding the scope of merger reviews. The Federal Trade Commission (FTC) has started to examine mergers and acquisitions for their impact on data concentration, corporate board conflicts, and employee pay in addition to their effect on consumers. In 2022, the FTC was granted the authority to review smaller deals in the same manner as larger deals, subjecting all mergers under the $101 million Hart-Scott-Rodino threshold to automatic antitrust review.
The US Federal Government is also enforcing stricter Anti-Money Laundering laws by requiring financial institutions to improve their AML compliance processes to identify, mitigate, and monitor money laundering and terrorist financing risks.
From April 2023, UK firms will need to report differences between information they hold about existing customers’ owners and data recorded on the Persons with Significant Control (PSC) register at Companies House. The Solicitors Regulation Authority (SRA) is ramping up enforcement and issued 37 fines in 2021/22, up from 16 in 2020/21 and 7 in 2019/20, with 23 fines related to money laundering.
In 2023, a new Anti-Money Laundering Authority will become operational in the EU. This will lead to a renewed focus on AML efforts, with improved coordination and cooperation between countries and Financial Intelligence Units (FIUs). Companies can expect increased scrutiny and enforcement of AML regulations.
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 UK’s Financial Conduct Authority, for example, is set to take a tough stance in 2023 with the implementation of new rules aimed at combating ‘greenwashing’, as part of its consumer protection strategy. A growing number of general counsels are reporting responsibility for ensuring compliance in this area.
The global economic downturn of 2022 is continuing to cause uncertainty in the mergers and acquisitions market, leading to a decline in demand for transactional legal practices like M&A and high-end corporate finance. According to Thomson Reuters, this has contributed to a decrease in productivity across the legal sector, a situation complicated by external factors such as the ongoing war in Ukraine, the impact of COVID-19, and global inflation. This is increasing the pressure on compliance teams to deliver fast and accurate information about potential clients.
Constantly changing regulatory expectations
Xapien is instrumental in giving a quick, strong understanding of individuals and their sanctions exposure.Director, Dechert LLP
Whether it is used by experts, lawyers or researchers, Xapien enables law firms to spend more time strategising, and less time wading through search 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
In depth: Xapien makes compliance faster, simpler and more reliable
Law firms need to maintain a thorough and accurate understanding of current and potential clients, and their networks.
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.
Constantly changing regulatory expectations
When you enter a person or business’s name into Xapien’s search engine, it searches through existing datasets, from PEPs and sanctions lists to corporate records, as well as scouring the entire web and deriving insights from open-source information. It can process over 133 languages.
Once it has scanned millions of data points, it flags anything that might be considered a potential risk. These risks can easily be overlooked due to language barriers or time constraints.
Beyond regulatory and reputational risks, the insights generated can help the firm decide if the client is a mutual fit with the firm.
Case study 1: 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 known fraudster and currently in jail, but search engines failed to reveal this without the extra ‘broadstairs’ and ‘guernsey’ inputs.
How Xapien solved the problem
Uncovering the risks about Michael Doyle could take a compliance team 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 that they might not have thought to look for.
Case study 2: Xapien facilitates enhanced due diligence at rapidly scaling fintech startup, Griffin
As a banking as a service (BaaS) provider where compliance is a key offering, it is vital that Griffin’s clients and suppliers are good actors.
However, using search engines to carry out enhanced due diligence tasks like adverse media screening on prospects and combing sanctions lists is a resource-heavy task.
This takes a minimum of one day per prospect (often longer) and is a major time drain for a rapidly scaling business, where every minute counts.
How Xapien solved the problem
With Xapien, Griffin can download, store and periodically update results on the businesses it is reviewing. This functionality ensures that there is a clear trail of evidence available that shows due diligence has been carried out.
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.
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
Case study 3: 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” in accordance with this guidance.
How Xapien solved the problem
Xapien makes it easy to stay abreast of changing regulatory landscapes. It runs searches on PEPs and sanctions databases, news and media articles, corporate records and wider internet data from sites such as LinkedIn, Wikileaks, offshore leaks, and more. 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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Search engines are great but they are only the starting point. Finding, reading and condensing the full picture is slow, hard, and painstaking work. Xapien can help.