Regulation, Use cases:
5 use cases for RegTech in the legal industry
In today’s fast-evolving regulatory landscape, legal firms need to work at speed, processing large volumes of data to maintain compliance. It’s no simple task.
That’s where RegTech enters the picture. Although this technology is often associated with the financial sector, there is an increasing range of regulatory tools and technologies being created for the legal industry. In fact, it’s better to view RegTech as a subset of GovTech rather than Fintech. This is because it can help legal firms fulfil their regulatory duties in practical and actionable ways.
In this article, we’ll explore how RegTech can be used by law firms. We’ll focus on how AI can run in-depth compliance checks that lead to better risk management, faster due diligence, and simpler reporting. These capabilities aren’t designed to replace human expertise. Instead, they handle time-consuming tasks, so lawyers can focus on billable work.
First, why should law firms use RegTech?
Customer Due Diligence (CDD) takes up considerable resources. Lawyers have to choose between investing their working hours into truly knowing their clients, or checking off boxes to indicate regulatory requirements have been met. Even when in-depth research is a priority, it’s easy to get overwhelmed leading to important information being missed. Firms with fewer resources will always be at a disadvantage, but RegTech can fill that gap.
RegTech solutions not only deliver significant cost savings but make high-quality due diligence research accessible to a firm regardless of its size. RegTech can deliver everything law firms need to make informed decisions, in clear and auditable ways. Potential clients turn into billable ones within hours, not weeks. More importantly, it becomes evident when a client isn’t a good fit, preventing any time from being wasted. On that note, here are six parts of the process where RegTech should be implemented…
6 RegTech use cases for legal firms
Know Your Customer (KYC)
Know Your Customer (KYC) represents a range of measures that organisations adopt to effectively manage risks and authenticate the identities of their customers, clients, and suppliers. In regulated sectors, this ensures adherence to both national and international regulations. Traditionally, compliance teams have relied on corporate registries and databases to fulfil the basic regulatory requirements of a KYC check. But, while database checks and corporate registry searches might fulfil basic regulatory compliance, they only scratch the surface of truly understanding the client.
The surge in online information about individuals presents an opportunity and a challenge. That’s where RegTech comes into play. RegTech has the capability to comb through the entire indexed internet, transcending databases to surface information from website pages, media releases, news articles, corporate records, and even platforms like LinkedIn and Wikileaks. With this data at their disposal, lawyers will truly know their clients based on a strong understanding of their backgrounds.
The more a law firm knows about its clients, the better it can understand risks and identify suspicious activities. After doing a thorough KYC check, law firms must review the gathered information to assess their level of risk. This involves diving deep into specifics, like checking if clients are politically exposed persons (PEPs), operate in high-risk industries, or are based in risky countries. But there’s more to review from open-source data, which RegTech can help with.
Imagine an old news article mentioning that a client is a friend of someone recently sanctioned. When there are multiple articles to go through, it’s easy to miss such a detail. RegTech, powered by AI, can read every piece of information online, spot mentions of a person’s name, and connect all these mentions to understand how that person is discussed in different contexts. This reveals risks and connections that might take weeks to find… or might not be noticed until it’s too late.
Adverse media screening
Adverse media screening plays a crucial role in both Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) processes. It helps law firms examine potential clients—both individuals and corporations—by checking online articles and media content. This process uncovers any connections to fraud, money laundering, tax evasion, terrorism, or other financial crimes, affecting the client’s overall risk assessment.
In the past, law firms did this manually using search engines, but it was time-consuming and often led to false positives, where a client is matched incorrectly. False positives pose a significant challenge by consuming time and affecting the customer experience. But with RegTech, adverse media screening can be swift and accurate. RegTech can scrutinise every data source linked to a subject and compare that information with all other data to flag only relevant information.
Documentation and record keeping
As regulators take on a more proactive role as AML supervisors, they’re keen to learn about how law firms maintain client due diligence records, how often CDD is updated, how risk assessments are conducted, and whether there’s a documented framework in place.
In scenarios involving audits or inquiries, law firms are required to show documentation showcasing their diligent efforts in assessing and managing client risks. Gathering these documents can be time-consuming. However, with the assistance of RegTech, evidence of due diligence becomes accessible with a simple click.
Automated tools like Xapien simplify the demonstration of compliance and due diligence within seconds. For example, Xapien records every search of open source information conducted on any individual or organisation by the compliance team. Its reports are time-stamped and saved. Furthermore, every report is saved with complete sourcing of all the relevant information so lawyers can demonstrate to auditors and regulators that the decisions they took were based on the information they knew to be true and available at the time. Moreover, Xapien is working hard to make all of its underlying technology explainable, enabling law firms to present the full chain of decision-making to regulatory bodies.
Periodic client review
It can be frustrating for firms to repeat CDD on clients who have had long-standing relationships with them. This becomes particularly challenging when those clients are perceived as low-risk. However, the reality is that in AML-related risk assessments, not taking action increases risk. Whereas performing periodic research on existing client profiles reevaluates the risk associated with each one over time.
For instance, if a firm’s client introduces a new business partner, and this individual falls under high-risk categories or operates from a high-risk or sanctioned country, the client’s risk profile changes. Not performing these checks means missing out on updates. And if the client doesn’t provide this information, and the firm continues with a low-risk assessment, it exposes the firm’s reputation to risks.
However, the vast volumes of online information make this research a time-consuming task. And when it’s done, can firms ever be certain that they’ve unearthed every crucial detail? Manual screening doesn’t guarantee this… but RegTech can.
RegTech reads through sources like shareholder data, media, and news articles, connects the dots, and then constructs an intricate knowledge web in the background that links the data together. It doesn’t just spot obvious warning signs – it unveils subtle connections that might escape the human eye. The best part? Risk analysis can be done in minutes, not days.
As we’ve explored in this article, AI-powered RegTech can be used by the legal industry in a range of ways. From expediting data collection and adverse media checks to facilitating risk analysis and informed decision-making, RegTech is an increasingly indispensable tool. It’s boosting compliance, reducing risk, and freeing compliance teams from repetitive tasks so they can focus on high-value work. Discover how Xapien can do this for your firm by speaking with the team today.
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