Digital compliance is critical to help legal firms rise above regulation

Regulated firms across the UK are facing significant pressures as the demands on the business and its team only increase, while budgets to help combat this continue to get smaller. Firms in the legal sector, including solicitors and conveyancers are no exception to this. It is helping to fuel what many are calling the ‘cost-of-doing business’ crisis, as businesses continue to battle persistent inflation, elevated energy bills and other higher associated costs. In addition to this long list of challenges, there’s also the ever-growing burden of compliance.

As we speak with businesses up and down the country, the demands of compliance are becoming a real pain point for the majority. In our conversations, they share their increasing regulatory burden, but with tighter budgets, the expectation is they have to do far more with much less. The worry is that as teams are stretched further – especially in many of the small-to-medium practices that make up the legal sector, the greater the opportunity for error.

Speaking last year, the head of the Solicitors Regulation Authority (SRA) warned firms that there would be an “onslaught of regulatory requirements” coming from central government to prevent money laundering, sanction breaches and serious financial crime. In his speech to the Law Society’s Risk and Compliance Conference, Paul Philip said there was nothing the regulator could do to stop this onslaught and warned of increasing powers to levy larger fines to those facilitating economic crime.

So, what is the answer for these regulated firms that are facing this massive weight of compliance? As is often the case, it boils down to our ability to understand, adopt and integrate new technology into our work and processes. Across all business functions, technology continues to bring greater efficiencies and economies of scale – yet when it comes to a digital compliance strategy which is alive to the challenges and responsibilities we face today, many firms are still slow to adopt.

Resource-heavy manual processes

When it comes to compliance with strict anti-money laundering (AML) rules, many regulated firms, including those in the legal sector, choose to maintain time-consuming and resource-heavy manual checks. Not only do these checks drive up the cost of doing business due to the time and resources required, they expose the business to a greater risk of financial crime.

In spite of this, our most recent survey at SmartSearch found that 48 percent of regulated firms across legal, finance, property and accountancy still use manual documents in some way to verify a customer’s identity. In the legal sector, almost half (47 percent) of the respondents made the same admission, with conveyancers most likely to only use manual verification (29 percent).

This is worrying, especially as fake ID documents continue to become more sophisticated and readily available. In fact, a Freedom of Information request revealed that Border Force staff are presented with nearly 2,000 fraudulent documents, such as passports and ID cards, every year. As a result, there’s every chance these same documents could be in circulation and photocopied for proof by regulated firms across the country.

Perhaps more alarming is that majority of regulated firms – 87 percent - are confident in their ability to spot a fake document. In the legal sector, this figure was 68 percent of the firms surveyed. The property sector – which often works hand-in-hand with legal professionals – was the most confident at more than 94 percent. However, the Home Office’s own guidance on checking for forgeries of official documents lists 24 potential failure points, many of which require expert knowledge and years of training to identify. One of the key reasons given for relying on manual checks was because it is the only way to “truly guarantee” a person’s identity.

Lack of trust in technology

Even with the use of EV recommended within the 2020 Money Laundering and Terrorist Financing Act, a clear barrier to adoption is a lack of trust in technology. According to our data, 23 percent of legal firms said they mistrust electronic verification – an increase from 20 percent in the previous year’s survey. Across all sectors surveyed, it’s a worrying 36 percent – just over third of firms.

The conclusion to draw is many regulated firms are unaware of the recommendations from the act. Meanwhile, businesses continue to struggle under the pressure, allocate resources or staff inefficiently and crucially, create opportunities for criminals to wash their illicit funds.

In reality, innovations such as electronic verification (EV) have transformed the process of verifying identities, not just in its speed, but in its accuracy too. EV is one of the key pillars of a digital compliance strategy, enabling firms to relinquish these outdated manual checks and accurately verify identities in seconds. In fact, an ‘individual check’ on the SmartSearch platform utilises EV and can generate as much as six-times the intelligence as one manual check of a passport or ID – in a fraction of the time too.

Sanction screening

Having the right technology in place can enable firms to utilise staff and allocate resources much more effectively and minimise the risk of human error. Just as important is the ability to not only automate but strengthen what was once onerous compliance tasks such as robust screening for sanctions and politically-exposed-persons (PEPs). This has long been a requirement for regulated firms to complete and according to the Joint Money Laundering Steering Group (JLMSG), ongoing monitoring is crucial to stay updated on changes in global PEPs and sanction lists, something even more evident given the ongoing war in Ukraine.

While the news agenda may have moved on, the war still continues, as does the thousands of ever-changing sanctions facing Russian nationals and entities. In truth, it’s not just Russia with the UK’s growing sanction regime now including nearly 30 countries. Recent reports suggest that some firms are already preparing for any potential action on China, having been caught out by the Russian invasion and subsequent sanctions.

There’s no question that a renewed focus on sanctions has piled additional pressure onto teams and compliance processes. The consequences for enabling sanction evasion are significant too, whether it’s eye-watering fines, resource-draining investigations, reputational damage or even criminal prosecution. In a recent red alert, the Joint Money Laundering and Intelligence Taskforce named legal professionals as one of many key professions that is most susceptible to enabling sanction evasion.

Rather than relying on static spreadsheets or manual checks of sanction lists, a digital compliance platform combines robust screening with real-time international sanction intelligence to alert users to potential red flags immediately. As existing customers potentially fall into the spotlight too, the right software will run these critical checks and automatically trigger enhanced due diligence on any potential matches.

SmartSearch, for example, also offers a Batch Upload feature, to perform retrospective checks via a bulk upload to verify historic customers and resolve any intermittent compliance gaps. With this approach, users can upload multiple clients in one go and run a full verification check, including sanctions and PEP screening. This is most suitable for those firms looking to clean up historical records, run fresh checks on an entire database or stay up to date with ever-changing sanction demands.

Rather than a burden or a hardship, these once complex checks just become standard practice, and just another part of a frictionless compliance process for the business and onboarding experience for the client – generating a real competitive advantage.

Source of funds checks

It’s a similar story for source of funds checks, which continue to be a significant burden on legal firms. In spite of this, many legal professionals are yet to fully explore innovations to streamline this process, such as Open Banking – a system that provides secure third-party access to financial data through an API.

Our recent survey found that 28 percent of legal firms are still manually reviewing bank statements to confirm the source of funds, while 21 percent use a combination of manual checks and Open Banking. Perhaps the biggest concern though is the more than a quarter of firms that don’t complete these essential checks at all. Given the climate we find ourselves in, this is a huge red flag and could speak to either a lack of awareness of their responsibilities or that the burden of compliance is becoming just too much.

Adoption of open banking continues at great pace with many of the UK’s largest banks and building societies making data available. Consumers are responsive to the change too with more than one-in-nine consumers in the UK active users. SmartSearch, for example, integrates source of funds technology to enable firms to identify the origin of funds in just 60 seconds, with minimal input from the client.

Rising financial crime

The reality is that as firms see their regulatory responsibilities increase, they need to ensure that they have all these tools in their arsenal to meet the demands of the regulator. Above all, they must ensure that their processes are robust enough as reports of financial crime attempts only increase.

In our survey, a shocking 42 percent of regulated firms reported a rise in financial crime attempts. At 48 percent, the legal sector was the hardest hit – an increase from 34% the previous year. Worse still, 17 percent of legal professionals, solicitors and conveyancers have actually been a victim in just the six months prior to the survey.

If firms needed any further incentive to modernise their approach to compliance, this is certainly it. Rather than mistrust, technology should be embraced as part of a digital compliance strategy. After all, it enables firms to not only meet their regulatory requirements, but drive greater efficiencies and cost savings, improve service, unburden stretched staff and ­­­­above all, protect the business from the serious threat of financial crime.

Using SmartSearch as an example, our digital compliance platform is trusted by 7,000 client firms, including one in three of the top 200 legal firms.