Mega deals and AML, how to stay compliant

In light of the SRA's AML 'crackdown', Andrew Hawkins writes in Law.com about the challenge posed by compliance for law firms and the risk breaches can bring in terms of financial sanctions and reputational damage. 

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Interest rates have peaked and many are hoping​ ​​they ​may start to decline when the MPC next convenes. While geopolitical risk still abounds, the green shoots of economic growth can be found, if you look hard enough. 

One place to look is M&A activity. PwC speculates that M&A might see  a significant rebound in 2024, as firms put an estimated US$4tn of ‘dry powder’ to work. All of which is good news for the economy, for business and for service providers like the law firms that facilitate these mega-deals.  

Managing higher volumes of M&A deals after a few years of slow down however, brings new challenges for law firms. Not least the managing of complex payments and ensuring that parties to those payments are trustworthy. KYC can be an onerous task and, when dealing with potentially thousands of payees, subject to human error. Faced with a pugilistic SRA that recently announced an ‘AML crackdown’, such errors could be​ ​costly​ and law firms have to be more vigil​​ant than ever​​​​.​​​     ​​​​     ​​.  

The AML crackdown 

Following the SRA’s high-profile intervention in the firm Axiom Ince, after the disappearance of some £60 million of client money, the regulator recently announced a ‘crackdown’ on AML in the legal sector.  

And so far, the regulator is walking the walk as well as talking the talk.  

From small firms like Bristol’s three solicitor Batchelor Sharp to giants like Clyde & Co, the SRA is demonstrating that it isn’t afraid to levy hefty sanctions where breaches are found. The outcome of the SRA’s consumer protection review is also likely to increase regulatory scrutiny, as well as the complexity involved in staying compliant.  

So, for corporate law firms, the pressure is on.  

Law firms are contending with higher levels of complexity in their deals, whether more international parties or increasingly diverse funds flows, while having to provide outstanding service levels to their clients and remain competitive. Arguably more consequentially, they have to mitigate the risk of human error that comes with that complexity, and avoid the financial, reputational and even career-ending consequences that an AML breach will bring.  

Simplifying complexity 

When it comes to striking this balance, a lot comes down to payments. Making sure the right parties receive the right funds at the right time, is key.  

Lawyers are not payment experts and aren’t always best equipped to anticipate and manage issues that might come up through the payment process. It’s not uncommon for example with cross-border payments, for a payment to be sent but not received. This can cause considerable anxiety and confusion and working out what’s happened and how to rectify it is a complex process that requires an understanding of the intricate web of payment rails. 

When combined with the need to run due diligence on parties around the world, ensuring payees are trustworthy and not involved in any form of financial malpractice, this complexity also comes with significant legal risk.  

Beyond these considerations, there is also the question of the cost of managing payments and KYC in terms of billable hours. We recently surveyed lawyers from the top one hundred UK firms to see how much time firms were spending on KYC in payment processes. The largest number of respondents (40%) stated that KYC takes 2-3 working days, while 32% said it takes 4-9 working days.  

This work can quickly amount to thousands, if not tens of thousands, of pounds in write-offs as well as late nights coordinating between transactional parties, collecting documentation and conducting verification to get the deal closed on time.  

So, how can firms go about simplifying this complexity?  

Payment Planning 

When it comes to managing payments while staying on the right side of the law, planning early is essential. Having lawyers and payment providers in the process upstream helps ensure legal documents are drafted correctly at the outset.  

Even small mistakes can cause significant costs in terms of time and resources. This is because, in a process as complex as a significant acquisition, making ‘one little change’ to a document can actually mean amending tens of documents. In terms of the numbers too, where large sums of money are in play, even a seemingly insignificant rounding error can cause delays or, in a worst case scenario, void the deal. Legal practitioners are detail oriented and involving them early means problems can be identified and rectified before they become significant.  

Outsourcing to third-party payment services can also help mitigate these transactional risks. It is also a way to get ahead of potential forthcoming regulation from the SRA around the handling of client funds. If the SRA goes further and consults with the FCA too, as has been hinted at, working with a financially regulated partner will be much quicker than trying to build in-house capability.  

Conclusion 

It remains to be seen whether or not 2024 sees an M&A frenzy as some suggest. Any uptick in M&A activity however brings opportunities for corporate law firms and is welcome news. But, with the SRA proving ever more willing to flex its regulatory muscles, this activity will also bring challenges.  

Striking the balance between offering great client service and avoiding AML breaches will be key to success in 2024. A focus on payments will help firms unlock this success.  

This article was first published in Law.com - read online here. 

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