The lawyers using AI to keep tabs on new global sanctions

When US president Donald Trump revealed he would be withdrawing his country’s support from the Iran nuclear deal, one law firm in Sydney took particular note.

Last month, when US trade sanctions were lifted against Chinese technology company ZTE, a lawyer in Hong Kong began combing through the fine print to explore opportunities for his clients.

After North Korea cancelled planned talks with South Korea over joint military drills, a group of lawyers in Seoul was quick to review its data and advise clients to react accordingly.

This is where international sanctions meet the commercial world and where a few innovative law firms, including in the Asia-Pacific region, are making a name for themselves.

Mitigating risk and complying with international regulations of various jurisdictions is nothing new for organisations operating across borders, says Andrew Dale, a partner in the Hong Kong office of law firm Ropes & Gray. However, the risks associated with non-compliance in terms of legal consequences and lost opportunities have never been higher, he says.

When sanctions are imposed against a country, it is up to individual businesses to ensure they comply. Failure to do so can have a tremendous cost, says Emilios Avgouleas, professor of international banking law and finance at the University of Edinburgh. He cites HSBC’s $1.9bn deferred prosecution agreement in the US in 2012 after the laundering of more than $880m of Mexican drug cartel money by the international banking group.

“If you are caught doing business in prohibited countries or with prohibited people or organisations, [companies may face a ban on] doing business in the US,” Prof Avgouleas adds. There is also the potential reputational risk.

Trade sanctions and data privacy and security are the most recent compliance concerns for firms’ clients, coming on top of the perennial anti-money laundering prohibitions, anti-bribery and corruption, and antitrust challenges. Current pitfalls include the fluid situation surrounding US sanctions in both Iran and North Korea, as well as Europe’s General Data Protection Regulation (GDPR), which restricts how companies use the personal data of EU residents.

Until recently, says Prof Avgouleas, most law firms’ services covering compliance with sanctions were essentially limited to creating legal entities in appropriate jurisdictions and monitoring payments and supply chains to ensure firms stayed on the right side of the law — or at least near enough to keep out of legal or reputational trouble. Now times have changed, client expectations are ever higher, and the more innovative law firms are aiming for deeper understanding of knotty multi-jurisdictional laws and faster provision of intelligence they can act on.

For Seoul-based law firm Yulchon, trade sanctions against North Korea have become an area of expertise, innovation and opportunity. Carl Im, a former theoretical physicist and now Yulchon’s chief technology officer, has developed a “client-focused digital compliance system”, called AlgoCompliance.

Mr Im’s multilingual algorithm monitors government websites daily to unearth changes in regulations. Using artificial intelligence, the system identifies those that are relevant to Yulchon clients, assessing whether a change in regulation would trigger a compliance violation. The data gathered also allow Mr Im’s team to produce plans for scenarios that enable clients to focus on potential risks.

“Rather than starting from the law, we started from the data,” says Mr Im. Compliance initiatives are more reliable for planning and for auditing when driven by data, he adds.

Other law firms are trying to provide deep analysis and intelligence.

At Ropes & Gray in Hong Kong, Mr Dale says the firm set out to collect and collate information to create intelligence that will help clients to mitigate risk.

“Whenever possible it is better to spend the time, money and effort to avoid risks rather than deal with them after they become a crisis,” he says. Since it began building out its Ropes Risk Mitigation & Management (R2M2) analysis tool last year, the firm has further developed what it can offer.

The result is essentially an in-house research unit, combined with a sophisticated communications service and risk analysis tool. This enables Ropes clients to understand big picture trends, parse daily developments and assess risks to their business operations around the globe. So, when US trading sanctions were lifted against Chinese technology manufacturer ZTE, R2M2 would have been able to analyse potential opportunities that may have arisen for private equity clients.

“Many private equity firms have significant overseas investments,” says Mr Dale. “In fast-moving areas, such as sanctions, investment firms sometimes need to be light on their toes and move quickly.” The due diligence work and advice made possible by the R2M2 tool “can help them decide whether to allow a deal, to restructure it or require remediation steps,” he says.

In the Sydney offices of Ashurst, the law firm has developed what it calls an “integrity due diligence” service to help clients comply with regulatory frameworks throughout the region and to mitigate exposure to myriad integrity-linked risks that lead to reputational damage for otherwise good corporate citizens.

Trent Baldacchino, one of the architects of the service, spent a decade in west Africa consulting on anti-bribery and anti-corruption questions for global organisations wishing to do business in the region.

For clients of Ashurst’s Integrity Due Diligence service, the firm’s risk assessment team scours public records across jurisdictions to develop a picture of a target entity or individual, identifying and assessing warning signs on legal, regulatory and reputational questions, says Mr Baldacchino. The multi-disciplinary team works with colleagues in local offices to produce analysis, conclusions and recommendations.

Clients increasingly want “a level of granularity” on integrity questions, he says. “They need to address the regulatory and legal points but they are also demanding actionable information to mitigate their risk exposure and affirm their standing as a good corporate citizen.”

Yulchon, Ropes & Gray and Ashurst have all set out to innovate to enable international clients to stay compliant with regulations around the world. For Prof Avgouleas at the University of Edinburgh, such law firms face a big task. “Sanctions compliance isn’t going away,” he says. “The environment is sure to become ever more complex.”