Risk Update

Cost, Conflicts & Risk — Arbitration Teams Navigating Costly Conflicts, SRA Publishes New AML Advice and Business Intake Templates

Why Arbitration Spinoffs Are ‘Part Push, Part Pull’ for Big Law” —

  • “For Yas Banifatemi, practicing international arbitration at a large law firm had stopped making sense.”
  • “She and her colleagues had for years operated ‘a firm within a firm’ that had become Shearman & Sterling’s ‘crown jewel,’ she said, but as the firm expanded its U.S. presence the global arbitration practice was feeling some unfortunate side effects. As Shearman grew its focus on the energy sector by adding dozens of partners in Texas, Banifatemi and the arbitration team found themselves increasingly conflicted out of matters for longstanding clients.”
  • “‘Shearman had a very expanded view of what a conflict is,’ Banifatemi said.””When the firm’s finance team represented a bank as an underwriter, for example, its arbitration practice had to bow out of disputes in which the bank had been involved as a lender but was no longer a party.”
  • “‘We lost extremely interesting, prestigious matters to that view of conflict of interest,’ Banifatemi said. ‘That ended up being very annoying. You cannot expand your work and the work you have is losing ground because you have so many conflicts.'”
  • “Conflict concerns coupled with the desire to be free of the bureaucracy of Big Law—all those meetings and red tape—led Banifatemi and Emmanuel Gaillard, co-heads of Shearman’s practice, to leave with a 38-lawyer team to start GBS Disputes in 2021.”
  • “Their exit was perhaps the loudest and most notable in recent years, but the past decade has seen a growing trend of international arbitration practitioners ditching large firms to branch out on their own. As the arbitration market has matured, small-scale specialist and boutique firms have found clients receptive to the streamlined service they can offer, and many attorneys are finding that the grass truly is greener outside of Big Law.”
  • “But in fact, the recent spate of arbitration exits from large firms is ‘part push, part pull,’ according to the head of an international arbitration practice at a global firm. The race toward maximum profitability has become particularly pronounced, and as that’s happened arbitration has lost some of its luster, given its nature as a long-term play with limited margins compared with more lucrative and reliable practices. At certain large firms, the practice leader said, ‘arbitration is no longer the shining star in the firm.’ Those circumstances can open the door to a firm accepting an arbitrator’s exit or even offering a gentle push.”
  • “More significant, though, is the pull that arbitrators are feeling, the practice leader said. As the arbitration market has matured and the club of prestigious practitioners has grown, many have seen the proof of concept offered by firms like GBS and Three Crowns and determined that they have better options.”
  • “The pressure to maintain profitability in large firms presents itself in other ways, too, according to Weijia Rao, assistant professor at the Antonin Scalia Law School at George Mason University, who previously practiced international law at Sidley Austin and worked at the International Centre for Settlement of Investment Disputes (ICSID). Representing a country in investor-state arbitration often involves a capped fee, she said, which means it isn’t usually as profitable as representing investors or companies. For some arbitration practitioners, that creates an unwelcome tension.”
  • “For international arbitrators who have left big firms in recent years, freedom and flexibility were among the most important factors. From avoiding conflicts to selecting clients and even choosing how to hire and train, exiting Big Law allows practitioners a sense of clarity that can be hard to find as part of a full-scale enterprise.”

Colette Best, Director of Anti-Money Laundering at Solicitors Regulation Authority, introduced several new resource:

  • “We have recently published a suite of information to help firms put in place good client/matter risk assessments. These are an essential block of your AML controls to decide what level of customer due diligence is needed to mitigate the risk.”
  • We have published a report setting out the findings of our thematic review: “Client and matter risk assessments
  • We have also published a template for client/matter risk assessments for those firms which wish to use it: “Completing the client and matter risk template
  • And a warning notice setting out what firms are getting wrong and what good practice looks like: “Warning notice: Client and matter risk assessments