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Simon Luke

UK Country Manager, First AML

The true costs of non-compliance for legal professionals

The true costs of non-compliance for legal professionals


Simon Luke explores what's truly at stake for firms that flout compliance rules: from financial penalties to reputational decay

It is true that compliance comes at a cost. And as inflation, hiked interest rates, and the cost-of-living crisis maintain their grip on the economy, cutbacks and streamlining budgets might be a priority for many businesses. But despite the temptation, compliance can’t fall to the same cost-cutting fate. 

The costs of non-compliance, as well as playing with ethics, good practice and ESG values, can far outweigh a compliant approach. Globally, there was a 50 per cent surge in AML fines last year, with the financial hits on firms totalling almost $5bn. The severe penalties that come with non-compliance can have a damning outcome. But money isn’t the only cost on the line. 

For the law profession, even greater importance is placed on reputation – you can be made or broken on people’s perception. Falling out of line with regulations could lead to a data breach, for example, which could haunt your firm long-term. With finances and reputation hit, maintaining operations becomes burdensome, impacting subsequent revenue flow and potentially leading to employee departures.  

Monetary damage

Monetary damage, a direct fallout of non-compliance, is an issue that the legal professiol can’t afford to ignore. This peril poses both internal and external threats that can severely impact a firm's financial health.

Externally, non-compliance can lead to substantial fines. Regulatory bodies like the Financial Conduct Authority (FCA) adopt an uncompromising stance and the legal expenses linked to non-compliance cannot be overlooked. The costs associated with engaging senior legal professionals, such as Senior Counsel or senior barristers, to defend against allegations can be financially demanding and drain a firm's resources.

Internally, non-compliance can silently undermine a firm's financial stability. A complex and protracted onboarding process resulting from poor processes can lead to the loss of clients and, subsequently, business opportunities. A study by PricewaterhouseCoopers disclosed that 50 per cent of respondents would leave a company after just two negative experiences, indicating a potential drop in revenue. Furthermore, a delay in onboarding due to non-compliance equates to deferred revenue. In a profession where time is money, this delay can result in significant losses.

Reputational damage

Reputational damage is an often underestimated, yet significant consequence of non-compliance. The impact of a tarnished reputation can strike at the very core of a legal firm's standing and client relationships.

Externally, potential data breaches pose a constant threat, turning the spotlight on a firm's inadequacies in maintaining compliance. A single cyberattack or ransomware incident can lead to significant financial implications, not to mention the loss of trust from clients. Moreover, the unforgiving realm of media scrutiny can amplify the damage, creating a ripple effect. In an age where public perception is crucial, a single misstep can haunt a firm indefinitely, damaging its image and undermining its ability to attract new clients.

Internally, reputational damage can have equally damaging effects. Regulatory bodies like the FCA and NCA employ naming and shaming tactics to deter non-compliance, leading to a tarnished reputation within the industry. This can result in the loss of potential new business, affecting the firm's growth prospects. Additionally, existing clients may become dissatisfied, being associated with a disreputable firm. Even if they continue to do business with you, their likelihood to recommend your firm to others might be significantly reduced.

A robust compliance regimen is therefore not only a means to prevent financial penalties but also an essential tool to safeguard the firm's reputation, which once tarnished, can take years to restore.

Operational disruption

Non-compliance doesn't just have financial and reputational implications; it can also result in serious operational disruption, affecting both external business interactions and internal team dynamics.

Non-compliance can lead to enforcement actions from supervisory authorities, such as mandated compliance remediation. These measures not only bring an unwanted spotlight on your firm but also cause interruptions in business operations. The continuity of your service is vital for maintaining client trust and ensuring a steady revenue flow. Therefore, any halt or disturbance in operations can have a significant impact on revenue and customer relations.

Internally, the fallout can be equally disruptive, leading to disillusionment among team members. Inefficiencies brought about by non-compliance place a heavy burden on frontline teams. They end up spending around 20 per cent of their time on AML administrative tasks, a considerable diversion from core competencies that can lead to both lower morale and productivity. When considering average salaries, this unnecessary diversion of resources translates to a hefty loss of $7,800 per person annually.

Operational disruption resulting from non-compliance is not just a matter of internal concern. It influences your service delivery, team satisfaction, and bottom line. Maintaining a stringent compliance regime thus becomes crucial not only for avoiding monetary and reputational damage but also for ensuring the smooth functioning of your legal practice. Understanding this can be the difference between a thriving legal firm and one struggling with the fallout of non-compliance.

How tech can transform AML processes

In an era dominated by digital innovation, technology serves as a powerful ally in navigating the demanding landscape of AML compliance. Utilising technology can revolutionise AML processes and operations, bolstering the efficiency and effectiveness of a firm's workflow.

Automation stands as a game-changer, capable of streamlining time-consuming tasks. This frees up valuable staff time, allowing legal professionals to focus their attention on high-value activities that drive the growth and success of your firm. Similarly, advanced data analytics and AI-powered tools can elevate the accuracy of PEP, sanctions, and adverse media checks. By reducing false positives, these tools minimise the time and effort spent on manual reviews, thereby promoting operational efficiency.

Furthermore, technology facilitates seamless integration with various data sources, enhancing the speed and accuracy of identity verification and screening processes. The result? A more robust, effective, and streamlined compliance regime that not only safeguards your firm from the penalties of non-compliance but also enhances overall operational effectiveness.

While implementing technology and establishing a comprehensive AML program does come at a cost, it's critical to see this as an investment rather than an expense. By strategically allocating resources and leveraging technology, firms can mitigate compliance costs while simultaneously protecting their reputation and financial stability. In the face of an ever-evolving regulatory landscape, embracing technological solutions is more than just a strategic move; it's a necessary step towards ensuring longevity and success in the legal profession.

Simon Luke is UK Country Manager at First AML