Why U.S. law firms should voluntarily implement anti-money laundering processes
When the U.S. Senate blocked the Enablers Act in December 2022, law firms avoided new regulatory requirements to conduct anti-money laundering (AML) checks on clients. But law firms already have compelling reasons to institute AML and Know Your Client (KYC) processes.
Whether your law firm is based in the U.S. exclusively or has offices around the world, implementing AML and KYC processes presents several upsides, helps you avoid significant risks, and is easy to carry out with the right technology.
Taking a global approach to AML saves time and increases revenue opportunities
When you accept a new client, you want to make the full resources of your firm available to them. Thus, if you’re a global law firm, it’s beneficial to onboard U.S.-based clients in a way that enables you to transfer work to overseas offices or to take advantage of advice and services provided by your offices outside of the United States. Even if the client doesn’t anticipate needing the counsel of your lawyers in other countries, best practice recommends keeping the door open to that possibility.
As organizations become increasingly global, centralized, and complex in nature, service needs and delivery requirements develop exponentially. An example of modern service needs would be when a U.S.-based client requires legal services in the U.S. as well as across several other practice office locations.
The optimal way to onboard a U.S. client to other offices across the globe is to implement a consistent AML and KYC standard that all firm offices adhere to regardless of whether operating in a regulated or unregulated jurisdiction. Once a firm settles on a standard for all offices, having a consistent process can significantly increase the efficiency of the client onboarding lifecycle and improve the experience of the internal team and client.
Onboarding the client without implementing any kind of AML process would limit the jurisdiction of the work you could undertake for that client. Should the client later have a matter requiring the counsel of your attorneys in other countries, the work would have to await completion of AML checks, causing delays and risking dissatisfaction.
Knowing who your clients are makes for sound business
Even if your firm only has offices in the U.S., instituting KYC and AML risk-based processes during onboarding and beyond makes good business sense. Failing to take action to investigate your clients increases the risk that your firm will be the victim of a money-laundering scheme or other criminal activity, which has happened to several law firms in the past.
It’s not hard to imagine how falling prey to money launderers — whether terrorist organizations, drug traffickers, or other transnational criminal organizations — could damage your firm’s reputation. At the very least, your firm’s inadvertent involvement in money laundering would suggest a lack of care that might undermine your firm’s reputation for careful, thorough work and due diligence.
Implementing AML and KYC standards
So, how can your firm implement AML and KYC processes? If you’re a strictly U.S.-based law firm, following a voluntary risk-based approach to preventing money laundering, as the American Bar Association recommends, is a sound strategy.
Regardless of your jurisdiction, instituting processes to combat money laundering generally involves two key steps:
- Initial risk assessment of a new client during onboarding
- Ongoing monitoring for potential new risks from changed circumstances relating to the client or matter
Initial risk assessment involves verifying the client’s identity and uncovering its beneficial owners (the person or entity that actually owns or controls the client). Then, your firm would run checks to establish whether the client or beneficial owner has been involved in previous criminal activity, has sanctions against them, or is a politically exposed person (PEP). Your firm might also want to consider assigning a scalable risk score to the client. This initial risk score can inform the level of ongoing monitoring you pursue for each client.
Identifying the true controllers of a matter (that is, the beneficial owners) is important because money launderers often use anonymous shell companies (companies without any employees or operational assets) or third-party agents to execute transactions as part of their money laundering schemes.
If a client were to contact your firm for a high-end real estate purchase, for example, you would want to verify that that the client isn’t controlled by another company or acting at the behest of another individual. In addition, running AML/KYC checks on any entity involved in transferring funds through escrow accounts administered by your firm is highly recommended.
Setting up these checks and verifications involves creating defined workflows and forms as well as enabling cross-checking of data against third-party databases. Because of these complexities, software purpose-built for these processes makes them easier to implement and track.
One such software solution is Intapp’s AML compliance solution, which integrates with Intapp Intake. The Intapp AML compliance solution provides a templated AML and risk assessment form to collate and review relevant AML information and facilitate risk assessment at the client and matter levels. It also integrates with a firm’s key systems, third-party data, and a reputable ID verification partner.
Preventing money laundering
As the United States works to strengthen its approach to preventing money laundering through the Corporate Transparency Act and its beneficial ownership reporting requirements , law firms have an important self-directed role to play in preventing criminal behavior and its devastating social, economic, and security consequences.
You can learn more about potential scenarios in which lawyers can become the unwitting victims of money laundering schemes in A Lawyer’s Guide to Detecting and Preventing Money Laundering.
If you’d like to see how software can make it easier for your firm to implement a risk-based approach to prevent money laundering at your firm, please schedule a demo here.
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