Law Firm Reputation in the KYC Age
My wife hates shopping. But with three active kids, a dog and an absent-minded husband, it’s necessary. To make her life a bit more convenient, she spends time finding ways to shop online. It’s hard to deny the convenience. But more important, it enables her to research and read reviews. I will often see her reading peer reviews or explore a company’s reputation as she decides where to make a purchase. And with the proliferation of online reviews and social media, reputation – even on an anecdotal level – is becoming more valuable for organizations.
As Gloria Origgi, an Italian philosopher and tenured senior researcher at the French National Center for Scientific Research, stated in her latest book, Reputation: What It Is and Why It Matters (2017), “[f]rom the ‘information age’, we are moving towards the ‘reputation age’, in which information will have value only if it is already filtered, evaluated and commented upon by others.”
In the context of law firms and due diligence/know-your-customer (KYC), this has interesting implications. Due to increased competition and greater expectations coming from clients, firms are now more closely associated to a business or business practice. That’s significant because consumers may view business with a more skeptical eye. In the context of law firms, potential clients may now consider not just the subject-matter expertise of the firm, but what sort of reputation the firm has which may be significantly impacted by the clients the firm represents.
In fact, firms and attorneys have traditionally been built on reputation. Representation of a client went well so that client refers another and so on. Eventually, the firm or attorney builds a positive reputation. But as time goes on, and businesses react to the heightened KYC environment, firms and attorneys should not become apathetic when it comes to how clients can impact their reputation. Every business should prepare for a moment when something goes sideways – with the current speed of information, bad news can spread quickly. As Benjamin Franklin said, “It takes many good deeds to build a good reputation, and only one bad one to lose it.”
However, attorneys advocate for others, at least in theory. They are experts in a field that is predicated on the concept of innocence until proven otherwise – that necessarily brings clients of all sorts of backgrounds. Many people understand that representing the person or issue does not equate with accepting or endorsing what a particular client does. In practice, however, even the most sophisticated client may have difficulty accepting a firm’s representation when it is known to represent a known pedophile, terrorist, or racist hate group.
This reputational risk is inherent when operating a law firm. It comes from the risk posed by advising or representing what may be perceived to be an unsavory client. This type of risk is becoming even more topical given the dynamic state of how firms must handle KYC, anti-money laundering (AML), beneficial ownership, and terrorist financing.
Traditionally, financial institutions were the focus of KYC and AML legislation. But the focus is now broadening and more organizations are executing due diligence investigations based on their level of risk. There is a growing fear of doing business with an illicit group or individual that more organizations are employing a risk-based approach to relationships with anyone. In fact, the attorney profession, and similarly situated “gate-keeper” professions, are being dragged, sometimes kicking and screaming, into the heavily regulated AML world. There are several bills being considered by Congress that would essentially put attorneys under the same AML and suspicious activity reporting requirements as financial institutions.
These recent developments should cause firms and attorneys to hesitate and reflect on their own client on-boarding process. They should consider, “Am I sufficiently looking inward at the reputational risk I face from my own or potential clients?” For example, any law firm or attorney handling transactions for clients, or dealing with money on behalf of their clients, should protect themselves from potential reputational catastrophe as a firm’s success or failure can be impacted by its reputation.
As I learned many times in law school, it’s difficult to “un-ring the bell.” Meaning, once a firm or attorney becomes associated with a negative reputation, it may be difficult to change the perception of consumers or, in this case, clients. The last thing a firm wants is for an internet search for the name of one of its attorneys to yield news hits or possible sanctions due to AML violations – a surefire way to scare away potential clients.
Consider the report by FindLaw which states that millennials place a lot of trust in online reviews. The report goes on to state that the millennial generation “trust strangers with the experience of using a product instead of trying it out for themselves before purchase. This behavior extends to service-based industries as well, where millennials want to see reviews before they make a decision.”
If, as Origgi stated, “reputation has become a central pillar of collective intelligence today,” then firms and attorneys need to pay attention. Vetting clients and casting an internal due diligence gaze by looking at the reputational risk they face from their own clients should be an integral process for on-boarding and monitoring clients for any firm or attorney.
Indeed, the American Bar Association (ABA) has suggested that attorneys perform reasonable due diligence on prospective clients and certain new legal matters brought by existing clients. The Basic Client Intake Form, published by the ABA, states:
Upon the intake of a new client, an [a]ttorney may wish to take some or all of the measures discussed below to help the [a]ttorney assess the risk of money laundering and terrorist financing the potential representation of the client may entail.
Included in the measures are:
- Background checks which may provide current address, bankruptcies, liens, judgments, criminal records, sexual offenses, and business associations
- OFAC Screening
- Google Searching and
- Periodic updates where the attorney would complete the whole process again at specific intervals throughout representation.
A process that encompasses these steps, in combination with a sufficiently inward, risk-based, client-intake approach will help protect firms and attorneys from reputational risk. As I said in my last article, attorneys should be mindful of the KYC/AML evolution and implement appropriate internal practices to prevent potential reputational harm.
This post was written by Eric Molitor, a specialist with Court Express.
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