By Liz Bond
In our recent piece ‘Don’t Treat Clients Like Commodities’, we looked at bulk client file transfers and how to make things easier for clients. Now, we’re turning the lens on the firm itself and the risks that come with bringing in a new, established fee-earner. It makes sense to boost fee income by hiring laterally, but it’s crucial to look closely at all the risks involved before jumping in.
So what are the CDD danger spots?
There’s a real risk when you take on the clients and matters of a lateral hire if you don’t do proper CDD. It might seem easier just to rely on the AML checks the last firm did, as it saves a bit of time and means you’re not pestering the client for the same information again. But that can backfire if those earlier checks weren’t up to scratch.
Whilst we are all aware of the requirement under the MLRs to complete CDD, each firm has its own way of doing things and the CDD conducted by a prior firm may not align with your firm`s standards. Just because a box has been ticked on the Client Matter Risk Assessment (CMRA) doesn’t always mean all the right ID, sanctions, PEPs, source of funds or wealth, and adverse media checks have actually been done.
And if you just take the new hire’s word that the client is sound, without doing your own digging, you could be setting yourself up for trouble.
A full risk assessment needs to be completed for every client introduced by the lateral. A new risk assessment should also be carried out for every new matter.
Skipping proper source of funds checks could mean you end up accepting dodgy funds, and new joiners might bring clients with hidden money laundering risks. That’s why it’s crucial for your firm to be hands-on and carry out your own checks as soon as possible, no matter what’s gone on before. By putting strong AML checks at the heart of your onboarding process, you’ll be better placed to spot and deal with any risks, keeping your reputation and compliance in good shape.
In terms of reliance, the MLRs spell things out pretty plainly – you really do need to do your own CDD checks, inter-firm reliance is rare. While there are times when you might be able to lean on CDD carried out by another ‘relevant person’, this comes with real risks and, of course, if you rely on someone else’s CDD, you’re still on the hook if things don’t add up or the checks fall short of what’s required.
Don`t forget your FWRA too which might need to be reviewed in light of any meaningful change to risk exposure.
However, doing pre-hire checks on potential clients isn’t always straightforward. The SRA Codes of Conduct don’t mention lateral hires specifically, but data protection and rules on confidentiality still apply. If you do need access to any information, the solicitor should get the client’s permission first and only share what’s really needed. Keep a clear record of what information you have received and when. All of this means it’s even more important to carry out your own thorough checks as soon as you take them on.
Practical workflow
From a practical perspective, a workflow to assist with the lateral process would include:
Pre-hire client screening – but only after the lateral has obtained client consent to the disclosure advising what will be disclosed, for what and to whom.
- Conflict scoping using anonymised lists to protect client data
- Conduct high level checks to identify early red flags.
Post-hire client screening:
- Fast track CMRAs followed by CDD refresher checks on all incoming clients including: source of wealth and funds, sanctions/PEPs. Do not act until all thresholds are met!
- Repeat checks at all key event stages
- Evidence to assess the risk of the client and the transaction, for example, adverse media checks; for corporate, business ownership and persons of significant control checks
- CMRA with explanations of risk ratings
- Ownership – matter partner and MLRO/MLCO sign off; robust file review system including early sampling of transferred matters.
Other risks
Bringing in a lateral hire can be very expensive, depending on your firm’s size, location, and the kind of work you do, so it’s wise to manage things carefully. Even if a candidate’s client list looks promising, don’t just focus on the potential profits. Make sure the person actually fits the way your firm works. Think about whether their skills add to what you already do and if you’re ready to take on new types of work if the hire leads you down that path. This is especially important if you’re hiring just one person, not a whole team, as you might need to get outside help for specialist advice.
If there is a regulatory conflict of interest, or even a significant risk of one, you shouldn’t take on the work so like CDD checks, make sure that thorough checks are carried out pre and post-hire.
It’s worth double-checking there aren’t any commercial conflicts too. Before you take on a new client, think about whether they’re in competition with any of your existing clients or if working with them could create issues with the sectors you’re looking to grow. Think about the costs involved in bringing clients on board and check if your firm has enough people and resources to handle moving over several matters at once.
You’ll also need to make sure you are able to do more thorough checks if any clients or cases seem riskier than your usual work. Make sure the new hire’s clients are a good fit with the ones your firm already works with. If their clients have a bad reputation, are known for causing trouble, or get mixed up in awkward deals, it could end up causing reputational problems for your firm too.
Think about ongoing matters: the timing of transferring client cases; calculating costs; handling complaints; and where the responsibility would lie for any PII claims.
Once hired, consider the level of support the lateral might need and the risks of them struggling to integrate or generate new business.
