ComplianceApril 02, 2021

CT expert insights: How U.S. law firms can streamline and scale their global work

For more and more law firms, growth and expansion often mean doing work in other countries. In this edition of Expert Insights, CT’s Global Sales Support Manager, Rob McHugh, discusses the opportunities and challenges of doing work internationally, and how law firms can structure their internal operations to best address growing global legal work.

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Greg Corombos: Hi, I'm Greg Corombos. Our guest this week on Expert Insights is Rob McHugh, global support sales manager at CT Corporation. For more and more law firms, growth and expansion often mean working in other nations. For the next several minutes, Rob will offer his expertise on how to streamline and scale that global legal work. And Rob, thanks so much for being with us.

Rob McHugh: Great to be here.

GC: Well, let's talk about the opportunity and the challenges here. So, when law firms do expand to attract business overseas, what problems are they encountering when they try to take on that work?

RM: Well, let's set the groundwork first. Anytime you do global work, you're exposed to different laws, regulations, different business cultures, and different penalties for compliance violations. All these combined make it much harder than you expect.

Firms involved in merger and acquisition work almost unavoidably will have global work. In many deals, there's a very good chance that there's a foreign entity involved, and you will need to perform due diligence to reveal potential legal liabilities of this foreign entity. A problem for law firms is that little due diligence is, by its nature, a very complex undertaking. You need to consider the intricacies of local jurisdictional requirements; you need to consider local timelines for document retrievals. Are you able to account for document naming conventions? Because not all documents match one-to-one as to what we're used to here in the United States. So additional searches may be required.

Many times, translation is required, which extends turnaround times. There's also a management problem when it comes to global due diligence. Let's say a deal includes entities in 50 different countries. How do you efficiently perform lean litigation judgment and bankruptcy searches? Or obtain Certificates of Good Standing in 50 different countries when you consider that this process differs from country to country? The question is, is it worth trying this on your own? Is it worth dedicating a team of paralegals to manage the orders? It'd be very difficult for any firm to effectively manage it, especially considering the language barriers and multiple vendors in different legal systems.

Another problem is staying on budget and staying on a timeline. With multiple vendors, it is very hard to come up with a budget at the start of the process. There will be a lot of time loss in just obtaining fees from two vendors, let alone the time required to manage the back and forth communication with multiple vendors throughout the world. Remember that relying on foreign vendors means communication will suffer. Some vendors aren't very responsive, and most vendors will be in different time zones. So you lose the day between emails. It's much easier to have a global service provider who can give you a fixed budget with timelines at the start. And you save time by being based in the United States.

Another problem we see is on the global entity management side. A client wishes to, say, expand a business to other countries. Say they want to expand to Europe to sell products there. What happens is U.S. attorneys tend to get stuck because the process differs and the laws aren't necessarily clear. There are questions regarding the entity type. What entity type is most common in this jurisdiction? Does a certain entity type cost more, for example? Is a local director required? We see that it's easy for U.S. attorneys to underestimate the amount of ongoing work that is required to keep an entity in compliance—and this can be a problem.

Globally, the trend is that there are more and more requirements to keep an entity in compliance. Most countries now require an ultimate beneficial owner filing or a registry maintained with his corporate records. And that wasn't the case five years ago.

So, Greg, it's an uphill battle full of potential problems we see as firms take on global work.

GC: There's a lot to follow. A lot to keep on track of especially with all the jurisdictions, like you said, So Rob when it comes to global work, does the size of the firm really matter? Or can a smaller firm handle work on a global scale just as well as the bigger ones?

RM: There's a perception that small firms can only handle local matters, you know, things that are don’t go beyond the borders of their own state. And while many small firms may not advertise that they provide Global Services for their clients, or really want to take on this work, they may find themselves stumbling into global work just based on how the world operates.

Now, it's common for small U.S.-based clients to suddenly try to expand and start selling products in Europe or in Asia. Or for a small firm to be involved in a merger and acquisition deal where there's due diligence required and a few foreign countries. Before trying to take this on your own, ask a few questions: Do I have an expertise in the legal systems that these countries or to know what local searches or document retrievals need to be done for due diligence in these countries? Can I provide the client with a definitive timeline and budget at the beginning of the project? Do I have the time to deal with multiple foreign vendors?

If any of the answers are “no,” you are probably going to need help. For example, due diligence in Mexico is not very straightforward. Mexico secured financing laws are actually very complex. Searching at the national level for liens on Google property may not be considered comprehensive and searching at the state level is not simple either. Not all Mexican states record property assets, commercial transactions in the same office. So, it can be very confusing. And it's not easy doing due diligence in Mexico at all. So, it's an uphill battle. And overall, you know, I want to say that the size of the firm matters. It’s U.S. firms that face the same problems whenever they take on global work.

GC: So Rob, whether it's a big firm, a small, firm, or somewhere in the middle, you mentioned all the different jurisdictions that a legal matter could be part of. So how can firms stay on top of all these different changing regulations and global requirements?

RM: It's really difficult to stay informed, especially for a U.S. attorney who doesn't necessarily have the time. Even if you have access to the information, the sheer volume of legal and regulatory changes is too much to digest.

It's better to know the major global trends. So, if the EU passes a directive, spend time understanding that directive because all EU member states will have to pass their own laws in accordance with it. When it comes to global entity management, it is very hard to stay informed because the relevant updates don't necessarily make the news. That's why it's important to have boots on the ground. Many times the relevant changes are two forms the entities must file on an annual basis or there are changes regarding filing deadlines.

One issue to consider if a country overhauls its company's law, do you have the capacity to understand the implications of the changes for your client? It's going to be a lot of work. Even if there aren't changes to laws or regulation development government authorities publish guidance on certain laws. And this guidance goes essentially unnoticed unless you're looking in the right place. In 2020, due to COVID-19, we saw a lot more guidance out there, the national changes in laws, and mostly dealt with how to hold virtual board and shareholder meetings.

But overall, Greg, in answering your question, the volume of the changes out there, there's a value in teaming with a global service provider.

GC: There do have to be some downsides here though when you're trying to expand and do work overseas. And we've talked about some of the challenges just now with the things you need to stay on top of but what are the risks of taking on global work on your own?

RM: Global deals and the work can be scuttled by a single missing document. And that's why it's important to have a level of due diligence plan and get it right the first try. I think it goes without saying, but there's an added challenge for U.S. attorneys when they take on global due diligence investigations. It's simply unfamiliar territory for them. The attorney must understand what is available in each country, then the attorney must identify the documents or searches that are relevant to their investigation. But without knowing the entire menu of searches or documents available in each jurisdiction, the investigation may not be comprehensive.

It is essential from the onset that the law firm have a global due diligence plan in place. And this plan is not adequate if the attorney is working with half the menu. And this can be a huge risk. When we look at global entity management. One of the primary risks involves foreign vendors. When you rely on a foreign vendor, it is crucial to realize that they have the upper hand if there's an invoicing dispute.

Invoicing disputes are actually very common with global work. Why? Well, foreign vendors can tack on extra fees. Or they simply charge ridiculous fees for something that seems kind of simple. For example, say a Director's leaving the board of your client’s company. You may find that the fee is twice or three times higher than what you expected. They know it's urgent, and you don't have the time to change service providers. So you're stuck with that high price. Once there's an invoicing dispute, your options are to negotiate or to alternatively litigate or arbitrate in a foreign country. And I don't think any law firm wants to be doing that. You'll find that they're engaged in agreements are drafted very much in their favor.

And if you refuse to pay an invoice, don't be surprised if the vendor stops making compliance-related filings for your entities which will then fall out of Good Standing. You have to ask, to what degree do I trust this vendor with my client’s business? Does the vendor have professional liability and cybersecurity insurance? Is the vendor GDPR compliant? Are their finances sound? I think it should be clear that vetting one single vendor can take a very long time. Now imagine trying to do that vetting over and over again in different countries.

And finally, the level of service is a risk because you don't know what you're getting. Many times, U.S. companies realize that the level of service is unacceptably poor, and a compliance obligation is missed. Some countries treat missed compliance obligations much differently than we have here in the United States. They treat them very seriously. For example, in India, an entity can fall into non-compliance for something as simple as holding a late board meeting or early AGM and go into what's known as compounding status. And that requires months of legal work and an actual hearing in India before they can get back into compliance. There are also some countries that take a more punitive approach to noncompliance and actually arrest directors when they enter the country at the border.

So, there are many things to consider when taking on global work on your own.

GC: Absolutely. I mean, the due diligence required to work in all these different jurisdictions is quite amazing. And then there's also of course, the trade-offs that you have to make. What are the cost and time implications of doing this global work?

RM: Costs generally depend on the country; higher-cost jurisdictions are the ones you would expect. You know, Switzerland, UAE, China, even in developing countries actually have a very high cost. Some of the developing countries really only have a handful of legitimate vendors. And you have very little negotiating power, especially for you know, smaller one-off projects. Many law firms in other countries will push an hourly pricing model.

So you are really at their mercy as an out-of-country customer, and this can be high risk. Even if a law from another country agrees to a fixed fee, it's going to be much higher than the market rate. They know that you don't know what the market rate for that service is in their country. And regarding time modifications, generally speaking, most global work takes more time than expected. And many law firm clients don't like hearing this, but it's very common for it to take longer. And expectations with the clients should be set early on. For example, if you're setting up an LLC in UAE, it could easily take anywhere from two to three, possibly four months due to the amount of work and time it takes to have signed documents legalized and ready for use in the UAE.

For many countries by law KYC checks, which are Know Your Customer checks, must be completed before any work can be done. These KYC checks generally take a few days. But most of it depends on how quickly the client gets the information. And if you look at the transactional side that is ordering lien searches and document retrievals, the timeline is also dependent on the country. And they can range from one day to several weeks. COVID delays aren't helping right now. So, we recommend not waiting until the last minute. Certain requests just take time.

But overall, it's important to know the cost and timeline for the global work at the onset of the project. I really want to stress knowing that at the onset is important to clients.

GC: And you just mentioned in passing, setting those expectations is important. So how should law firms properly set client expectations when it comes to global work?

RM: I just want to start out by saying that there's a very common fallacy out there. And that fallacy is that doing work in another country will be comparable to the work United States. And that's simply not the case.

We take it for granted that our system provides efficiencies at nearly every level, whether it's starting a company, obtaining documents from departments of state, or being able to make electronic filings when doing global work. Expect a lack of technology in many countries. Their corporate registry websites are not user-friendly or may require credentials before you can get basic information. Many systems rely on physical filings and don't have that electronic filing option. Government offices can be painfully slow. And this is no surprise, but documents don't always come back in English. So translation is required and that extends your timeline and increases your costs and puts stress on managing a global project.

You have to inform your clients that KYC checks will be required. And this means that they're going to have to provide certified copies of their passports and copies of recent utility bills to prove residency. And these KYC checks, it doesn't matter who you are, they're required by local law in many countries have them.

If a client's setting up a foreign business, let the client know that UBO reporting is likely. UBO stands for ultimate beneficial owner. And that's defined as the natural or legal person who actually has an impact on a company's activities or receives a material benefit from it. But in most countries, the threshold for being considered a UBO is 25% ownership. So, your client should be aware that the UBO will be reported to the appropriate governing authority or kept in a register with the company records. Over 80 countries now have laws with some UBO requirement. And a few countries have this information made public such as UK, Germany, Denmark, and Ireland. And some clients are not aware that this information is can be made public.
Other countries are more private and do not have this transparency. And you know, for example, British Virgin Islands, Cyprus, Hong Kong, and in Singapore, you know, those countries that appreciate more of a private approach.

So you're going to definitely hear more about UBOs in the upcoming years, and especially with the United States passing the Corporate Transparency Act this year on January 1. But overall, as I said, clients should not expect the rest of the world to be like the United States, and they really should be ready for KYC and UBO work.

GC: We're talking with Rob McHugh. He's Global Support Sales Manager at CT Corporation. And, Rob, you mentioned the common fallacy that it's going to be the same amount of work, whether it's international or domestic. But when it comes to taking on that global work, how can law firms quickly scale their ability to do that work with minimal investment?

RM: Greg, you know, scaling your work is not an easy task. And the only true way to do it is to have a trusted global service partner. If you don't, there's a lot more risks. And I talked about that risk today.

Whether your firm has a small or large global due diligence project or has a client looking to expand globally, CT offers custom solutions for projects of any size, with the ability to scale up to meet your needs, instead of having the burden to deal with multiple venders. We offer an easy, single point of contact for global work. We have offices and partners in over 150 countries and have the expertise service and technology to help streamline your global work.

GC: Rob, fantastic discussion. Lots of great information. Thank you very much for being with us today.

RM: Thank you, Greg.

GC: Rob McHugh is global sales support manager at CT Corporation. I'm Greg Corombos and for more information on this topic, please call CT at 844-787-7782

 

Robert McHugh
Global Sales Support Manager
Robert is a Global Sales Support Manager at CT Corporation, with extensive experience in international corporate compliance and governance.