Small and midsize law firms’ due diligence procedures

When your law firm evaluates a potential client, do your review procedures vary depending on the practice area or partner? Or does your due diligence involve little more than a Google search? These kinds of cursory and inconsistent approaches can be found among law firms of all sizes. But according to a 2023 article, the smaller your firm, the more likely its due diligence processes are inadequate.

If you’re part of a small or midsize firm, have you put in place a consistent, reliable, streamlined process for reviewing potential clients for conflicts and other red flags?

Software makes this much easier to accomplish. You may believe you cannot afford software purpose-built for conducting due diligence on potential clients. But the cost of doing so is only a small fraction of the costs your firm may suffer if a missed conflict or other client issue results in lawsuits and reputational harm.

Below we look at typical approaches to reviewing potential clients and why they create avoidable risks. We also compare the costs of inadequate due diligence procedures to the costs of a robust system for vetting new clients.

Using informal, homegrown processes creates risks

As the article reports, some firms’ due diligence consists of simply searching clients’ names on Google. The problem with this approach is that such a search may not reveal everything your firm needs to know.

Consider an estate attorney who is thinking of taking on a client, John Smith, to draft his will. A Google search might not reveal that Mr. Smith is the son-in-law of one of the attorney’s existing clients, Mrs. Jones. If Mr. Smith’s will negatively impacts the estate plan the lawyer already drafted for Mrs. Jones, the estate attorney could be looking at a significant lawsuit.

If you think this kind of thing can’t happen, this scenario is actually very similar to the facts of a case that resulted in a $3 million judgment against an attorney for a conflict of interest.

Let’s say, though, that your process is more thorough than a mere Google search. You instead have a consistent set of questions that you ask of all clients, such as “What other companies or businesses are you or your organization affiliated with?” Thanks to your detailed questions, you have greater peace of mind.

But should you feel so at ease? What if the client forgets or doesn’t know that her company is affiliated with a party that is adverse to one of your existing clients? The problem with a questionnaire approach to client review is that your clients (or their representatives) may omit or be unaware of critical information.

Another approach some firms rely on is to simply share a potential client’s name with their partners and rely on their partners’ experience or knowledge. If the partners haven’t heard anything bad about the client, then you’re free to take them on.

You can see, of course, why this approach is inadequate. Your partners, whatever their strengths and experiences may be, simply cannot be expected to know everything about any and all potential clients who may approach your firm.

Instead of accepting the shortcomings of these homegrown processes, you can use purpose-built software for reviewing potential clients. Software like Intapp Conflicts incorporates data sources that reveal your potential clients’ affiliations. This software can help you identify potential conflicts, surface potential money laundering concerns, and uncover other concerns in a streamlined, reliable manner.

Missing client conflicts and other client issues can cost your firm millions

In addition to lawyers’ ethical duty to avoid conflicts of interest, your firm has compelling financial reasons to check for conflicts. A judgment against your law firm for a conflict of interest might require your firm to pay hundreds of thousands or millions of dollars in damages.

The reputational damage from the lawsuit would also likely cost your firm additional substantial sums in lost revenue from clients who drop or avoid your firm. Even if your firm successfully defends itself against a conflict-of-interest claim, the expenses of the defense and the reputational harm could be significant.

Likewise, falling prey to money launderers as a result of inadequate and nonsystemic review processes could damage your firm’s reputation and ability to attract clients.

Implementing a reliable system for reviewing potential clients costs relatively little

Compared to the potential millions of dollars in damages and lost revenue from a missed conflict of interest, the cost of implementing software designed to facilitate conflict checks and anti-money-laundering review is small. With a solution such as Intapp Conflicts, which is priced by the number of lawyers in your firm, the cost could be very reasonable for small and midsize firms.

In addition, such a system costs you little in time. With a properly implemented client review and intake system leveraging Intapp’s wealth of best practice information and contracted data sources, your firm can complete due diligence review of potential new clients quickly and consistently.

Intapp offers several related software solutions for reviewing new clients, including Intapp Intake and Intapp Conflicts. If you’d like to discover how these solutions complement each other and can support your firm, please contact us to discuss your needs.