The client intake process is an unbillable yet time consuming task for law firms. Despite the resources that are invested in client due diligence, 53% of lawyers do not have confidence that their client due diligence process always provides enough information in deciding to represent a client or not, according to Thomson Reuters.
In the past, law firms could keep due diligence much simpler than what is required today. They needed to to check a client’s contact information, their background for criminal convictions or past litigation, the state of their finances, and for any so-called ‘smoking guns’ – evidence in the public domain that shows the prospect is not being truthful.
Today, due diligence needs to go much further to ensure a potential client is a good fit. As a result, more time and resources are being invested into a process that can sometimes lead to a client being rejected, and law firms across practice areas wasting time and resources. Law firms can minimise the impact of this by using the best, most intelligent Legal Software Platform available.
Why is better due diligence needed now?
Russia’s invasion of Ukraine at the beginning of 2022 prompted regulators to focus on how Russian oligarchs, and other criminals and corrupt actors hide, launder and spend their ill-gotten assets. Although the sanctions imposed by Western governments did not apply to law firms, many law firms decided to stop working with Russian-linked individuals and organisations due to the reputational costs.
Before that, the global investigative journalism that led to the 2021 Pandora Papers and the 2016 Panama Papers sparked massive global outrage over money laundering and tax avoidance, which was often facilitated by law firms.
Loopholes are now being closed on both sides of the Atlantic that apply directly to law firms.
In the UK, suspected criminals or corrupt officials now must explain how they came to own assets that are disproportionate to their income following the creation of the beneficial ownership registry and unexplained wealth orders.
The European Union is considering a directive to provide procedural safeguards against strategic lawsuits against public participation. These are also known as SLAPP suits or intimidation lawsuits.
Many countries are cracking down on golden visa programmes that allow oligarchs and others to gain European citizenship.
In the US, the Enablers Act was recently passed by the House of Representatives. When it passes in the Senate, which looks likely, lawyers engaged in a financial activity or who set up a business for a client must conduct due diligence and file Suspicious Activity Reports with the government.
In September, the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) made it compulsory for many corporations, limited liability companies, and other entities created or registered to do business in the US to file information about people who own or control companies.
Canada has promised to fast-track its beneficial owner registry.
Both regulators – which are being endowed with greater funding and investigatory powers – and public opinion are more focused than ever before on global corruption and its facilities.
It is more important than ever that law firms avoid acting as enablers of real estate and fine art transactions, strategic libel suits, and tax evasion as a result of poor due diligence. It is, in other words, vital for law firms to know exactly who they are in business with.
The problems with client intake software
The traditional background checking process:
Step 1: PEPs and sanctions look-up tools provide yes/no answers about known risky clients. However, these tools are not updated in real time. They do not highlight people who are about to be sanctioned, or close associates of those who have been sanctioned. Analysts need to run additional, manual PEP and sanction checks.
Step 2: Analysts must go through and analyse the results to screen out false positives by applying other contextual information known about the subject. This costs time and money, but is work that cannot be rushed.
Due diligence is more important than ever, and it needs to be done more thoroughly than ever before – ideally on an ongoing basis. The vast amounts of information available on individuals and organisations in the public domain, thanks to the internet, is undeniably useful, but sifting through it all is a time consuming, or even overwhelming task.
Not only does leaving it to human analysts take up lots of time, but it can lead to delays in responding to clients who would be suitable and who may have turned to another law firm who can perform more efficient due diligence. Superficial due diligence can lead to high conversion rates, that then run into serious ethical, legal, reputational and financial issues.
The risks of not using the most advanced due diligence software
Red flags associated with a client are overlooked during the client intake process. This can lead to poor ethical conduct, media and public scrutiny and potentially crippling financial consequences.
Inefficient compliance processes create long delays in client intake and missed opportunities.
Xapien’s thorough and efficient due diligence solution
AI is fast becoming essential for any law firms looking to maintain effective compliance and new business intake processes.
When Xapien’s automated background research software is used for client intake, speed increases, manual inaccuracies are removed, and lawyers gain a deep understanding of potential clients’ reputations, backgrounds and objectives. Not only does this give them a greater understanding of potential clients, but it helps them build better relationships with those clients.
How Xapien gives a competitive advantage
A potential client approaches law firm A to work on a merger. Law firm A’s risk and compliance team runs their standard search process and finds none of the companies’ benefactors on a PEP or sanctions lists. The team also runs some further checks on Google, inputting keywords such as ‘fraud’, ‘corrupt’ etc. The process takes a couple of hours. No problems are found.
Law firm B (firm A’s major competitor) is also approached. Law firm B uses Xapien to conduct automated research on the client. Xapien’s analysis of open-source data takes seven minutes and finds news reports showing the benefactor has ties to Putin. The owner is believed to hold assets on the Russian president’s behalf.
Law firm A is in the dark. If they onboard the client, then they might wake up to global headlines saying they are facilitating Putin’s lifestyle by supporting this merger. This could lead to an exodus of clients and employees with major consequences.
Law firm B can make an informed decision about taking on the client.
While many law firms aim for consolidated detail and clarity when making client intake decisions, it is not scalable without the right technology.
Introducing AI to the client intake process solves the challenges of the deep research process. It equips lawyers with the full picture of their potential client, so they can make fully-informed decisions.
Xapien generates readable, shareable reports in five to 10 minutes on any individual or company.
Manual research teams, even when equipped with database and search tools, simply cannot match the power and speed of AI. Lawyers and analysts can focus on legal strategy, decision-making, and lawyer-client relationships, rather than research.
Know everything there is to know about potential clients
Xapien’s technology 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.
Compliance teams and decision makers can make quick decisions about the clients they take on, fully informed of any risks involved – even those they didn’t think to look for.
Stay ahead of risks
Xapien’s Natural Language Processing identifies key networks and affiliations that enable lawyers to to stay ahead of potential risks, and be aware of people who are likely to be added to the sanctions lists in the future. 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.
As well as gathering valuable data, Xapien also:
Extracts knowledge and insights from that data that can be used to signpost potential future enforcement actions and previously unknown red flags.
Uses that data to conduct deeper and broader onward research.
Verifies and disambiguates results to ensure that analysts can focus only on genuinely risky entities and individuals.
Compliance is a high-stakes matter for law firms because breaching legal and privacy boundaries can jeopardise a case. This has to be counterbalanced with the need to maximise research on potential clients. Law practices can only go so far when gathering client information before infringing privacy.
Xapien’s software helps with this balancing act. When set up to process open-source data, it uses only data which is available in the public domain. It has in-built regulation capabilities that stop it from infringing privacy laws.
For some law firms the concern around automation is that it will create more work, while others worry that it will lead to job cuts. That is not the case.
Vedika Mehera, Orrick’s innovation adviser recently said to law.com:
“Data and the ‘Great Resignation’ shows that employees are experiencing significant burnout. Our attorneys and resources across the firm are looking towards technology and automation now more than ever to eliminate manual tasks that are time-consuming and burdensome. Our automation efforts save our team’s attorneys hundreds of hours and improve the quality of their work life.”
David Cunningham, Chief Innovation Officer at Reed Smith, added:
“I suspect the answer is supposed to be that we have reduced headcount, but it’s the exact opposite. We’ve grown. Historically, the work has been stuck on lawyers’ plates. Like ‘I’m in a big transaction and don’t bother me till I’m done.’ Now we are saying, ‘No, where there is staff involved in the process, we can speed things up. We are investing in automation and staff to scale up.”
“Automation saves our team’s attorneys hundreds of hours.”
Orrick’s innovation adviser