The success of any professional practice partly depends on the success and activity of its clients. Indeed, a client can turn out to be a credit risk, or worse. To safeguard your practice, you must be aware how your clients are faring in the current climate and what activities they are undertaking.

It is worth remembering that the moment you start working for a client you are effectively providing an immediate interest-free loan, which you will subsequently wish to collect. So ask yourself if you have any clients for whom you would not be happy to write out a cheque for repayment some time in the future?

The most important matters to be considered when taking on a new client are money laundering and conflict management issues. Shortly after 11 September, there was considerable speculation that London might have been used by Al Qaeda for some of their financial dealings.

We should therefore expect to see considerable scrutiny and it is important for firms to have clear procedures in place which are adhered to at all times. Firms will also need to be aware of the impact of the Proceeds of Crime Bill
currently going through Parliament and the second EU Directive on Money Laundering which will be more far reaching than the current rules.

Partners who fail to adhere to money
laundering requirements risk damaging the firm's reputation. There will also be the risk of considerable financial penalty of having to deal with any difficulties, both as a result of acting for inappropriate clients and, perhaps more importantly, failing to apply the professional standards required of a qualified lawyer.

The main reasons why firms fail to satisfy their money laundering requirements are due to a lack of: internal policy/guidance; monitoring;training for staff/partners; clear 'whistle blowing' policy;
l scepticism regarding potential clients' explanations; an understanding of the risks; and
a belief that 'it would not happen to a firm like us'.
Bear in mind that a significant number of monetary transactions undertaken by money launderers need to involve a lawyer or accountant, albeit innocently. The level of notifications by lawyers and accountants is less that one tenth of the cited 'over 20%' of the expected notifications from professional sources.

As professional people, we should expect greater scrutiny in this area for years to come.
Conflict issues abound in the legal sector and it is important that firms have procedures in place to identify when such conflicts arise. While large law firms may have the resource to have detailed monitoring in place, smaller firms should ensure that their internal communication systems can identify when such issues arise.

When taking on a new client or a new project for an existing client, it is wise to consider the client's current financial status. This does not mean that you should not undertake speculative work, but merely that you should be aware of any potential for payment difficulties. If payment could be a problem, it may be helpful to discuss this with colleagues before involving the firm in what may prove to be an onerous commitment.

During the past year we have seen headlines in the legal press regarding firms that have run up large legal fees for a particular client only to find that by the time the fee is sought the client has admitted financial hardship with the result that a substantial element of the fee goes unpaid. There is a degree of financial due diligence that can be undertaken when commencing work for a client or potential client, but invariably, this relies on historic data making it essential to understand the current economic climate in which the client operates.

The corporate accounting shocks that are currently rocking the US corporate world clearly indicate the potential pitfalls that await the informed, let alone the uninformed. In certain circumstances, it may be worth obtaining a Companies' House search on a new corporate client as well as seeking third-party references before commencing work.

One of the best ways of combating these potential difficulties is to ensure that clients are billed regularly and that payment is received promptly. This is an area where many firms and partners pay insufficient attention.

On a number of occasions, I have gone to law firms to discuss partner remuneration and a topic of hot discussion is that partner X is seen as highly successful, but is failing to invoice and collect his debts from clients. This can lead to some nasty surprises and more firms are now linking billing policies and debt collection to their remuneration strategy for partners. As for the partner concerned, they may find it very difficult to explain to colleagues why billing has been deferred, resulting in bad debts.

It is true that clients billed regularly and promptly are more likely to produce a better recovery rate, as the work is fresh in the client's mind when billed. For large cases consider billing on a monthly or more regular basis. If properly explained to the client at the outset it is difficult to argue against such a policy. However, in such circumstances, it is important to ensure that the billing process is kept simple and does not increase internal costs.
One law firm that I know well has a deliberate policy of requesting fees in advance from any new client. There are many arguments for and against such a bold approach. However, using my earlier analogy about the interest-free loan this policy does not appear unreasonable.

After all, why should a firm incur the staff costs to undertake a piece of work for a client without any certainty of being paid? Interestingly, many firms who adopt this kind of policy will, in most cases, still be appointed for the project as long as the policy is properly explained at the outset.
Many argue that this kind of policy is not appropriate for their firm or their clients and that this is not the way to conduct business. However, in these uncertain times, it is reasonably clear which firms have the higher risk profile and which firms are likely to be used by a client in financial difficulty gambling on its future.

Advance fee policies have their own complexities. A clear policy and statement to the client is necessary to deal with a client's potential dissatisfaction with the level of service and/or any overpayment of fees made in advance.
Needless to say, advance payment of fees should not be accepted without completing the appropriate money laundering review, which takes us full circle.

Colin Ives is a professional practices partner at Smith & Williamson.