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New tech & regulations changing the face of legal due diligence, new paper shows

Tad Simons  Technology Journalist/Thomson Reuters Institute

· 5 minute read

Tad Simons  Technology Journalist/Thomson Reuters Institute

· 5 minute read

A new Thomson Reuters report explores how legal due diligence is changing as a result of regulatory reforms and information needs that require more advanced investigative tools and technologies

Law firms conduct due diligence for many reasons: to vet new clients and vendors; to support litigation; and for market research, competitive intelligence, real-estate valuations, conflict-of-interest assessments, and more — but how law firms conduct due diligence is changing as technology evolves.

Indeed, a new generation of software tools and resources is giving law firms access to a much more expansive pool of information, from court records and business ownership data to financial records and real-time feeds for denied persons, sanctioned parties, and adverse media.

A new Thomson Reuters report, Law firm due diligence: The only constant is regulatory change, explores how law firms around the world are incorporating these tools and resources into their practices, and why law firms may soon be required to utilize even more thorough methods of due diligence, either out of business necessity or by legal obligation.

Methodology and findings

For the report, Thomson Reuters surveyed more than 50 legal professionals and top law-firm decision-makers from around the world. Respondents were asked a broad range of questions about how their firms conduct due diligence, what investigative tools they use and why, and how cloud-based technology platforms have — or have not — changed their approach to communications and investigations of all kinds.

Some of the key findings in the report include:

      • 90% of survey respondents said they are personally involved in conducting or managing due diligence when investigating parties for litigation.
      • Vetting new clients and vendors is largely an administrative matter that does not involve attorneys directly.
      • More than one-third (36%) of law firms screen more than 50 parties per month.
      • Fewer than 10% of law firms re-screen vendors and clients on an annual basis.
      • Most firms do not use the sort of advanced information resources that provide real-time feeds and updates on government watch lists and adverse media — but more than half (56%) said they are interested in it.
      • Even at firms where client information is stored on a centralized, cloud-based platform, communication tends to remain siloed in practice areas, often resulting in redundant searches for the same information.
      • Most law firms use a combination of information resources for due diligence, but very few use all the resources available to them.

The future of due diligence

The report also discusses the future of legal due diligence and why law firms may soon be required to develop more rigorous procedures for client and vendor in-take. In particular, the report looks at efforts in the United States and elsewhere to enact legislation requiring law firms to implement methods similar to the know-your-customer (KYC) protocols that financial institutions currently use in order to prevent money laundering and other financial crimes.

These initiatives are part of an ongoing effort by governments and law enforcement agencies to require lawyers and other financial intermediaries to take greater responsibility for gathering information on clients and, if warranted, disclosing to federal authorities any suspicious financial activity in which their clients may be involved.

Even if law firms ultimately are not required by law to provide authorities with sensitive information about their clients — information that has historically been protected by attorney/client privilege rules — law firms in the U.S., the European Union, and elsewhere are certainly being encouraged (and in some cases required) to help authorities combat financial crimes. Further, the economic and reputational risk of associating with criminal actors has never been higher, so it is in a law firm’s own best interests to know who their clients are and what risks they pose.

For these and many other reasons, law firms — especially large ones — are upgrading their technology infrastructures to enhance their due-diligence capabilities and protect themselves. However, this report also highlights the growing risks to firms that have not yet embraced more advanced technologies for data-sharing and due diligence.

A blueprint for change

As the report makes clear, technology impacts the legal profession in many different ways, but scant attention has been given to how law firms can improve their due-diligence capabilities or why they may need to.

The new report discusses these issues in depth and provides both a rationale and a blueprint for those law firms that want to take maximum advantage of the technological resources available to them. And for those firms that feel they are falling too far behind the technological curve, the report discusses immediate steps they can take to assess their current due-diligence practices and identify information gaps and communications inefficiencies that, if addressed, could improve their investigative capabilities.

You can see a full copy of the report, Law firm due diligence: The only constant is regulatory change here.

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