The key driver of the Rules is that all financial transactions in and out of a client account should directly be related to the legal service that your firm is providing. We also noted that convenience for you or your client was not an excuse to get around Rule 3.3.
Are there money laundering issues to be considered?
Your firm could very well be assisting with money laundering where you are allowing a client account to be used as a banking facility.
We mentioned long-standing private clients, in Part 1 of our blog, where they have cash sat in your client account but no true underlying legal transaction in progress. This could be hiding assets.
Where you are transferring funds in and out of client accounts, this may be part of placement schemes. I am sure you will regularly train all of your staff on how to spot suspicious financial activity.
You will have built into your client onboarding procedures, a review of their source of funds, especially if these are critical to the piece of work you are instructed to complete. So why would you then agree to transfer money into your client account or make a payment out of this which does not fit with the work that you are completing for that client?
Be extra vigilant when you have a client with a large number of ongoing matters and they are requesting transfers between these matters and then on to other clients that you may also be dealing with. You cannot use the excuse of convenience in this high-risk area.
Are there other (high-risk) reasons why your client wants you to hold onto that cash?
Is this possibly an attempt by your client to ring-fence some personal cash in a divorce case? Is your client involved in some form of investment scheme and the use of your client account may lend credibility to that scheme? Is your client trying to avoid paying money into their bank account where they may have insolvency pressures, and they don’t want the bank to credit those funds against an overdraft position?
These three examples bring with them a high risk to you and your law firm.
What should you do now?
Consider what your office procedures say about accepting client monies, and for approving the withdrawals from your client accounts. Are you certain that you are completing sensible and pragmatic source of funds checks on your clients?
Do you check on a monthly basis for clients who are holding funds in your client account where those amounts have not moved during the month? If the transaction that you are completing is moving along, then you may expect the amounts held in client account to fluctuate, but this monthly review does at least prompt your COFA to highlight where there may be a higher risk of banking facility taking place, and then to conduct more in-depth file reviews. Most accounting software systems can generate a report that highlights inactive client ledgers, that can be used during the review.
Does your COFA conduct a monthly review of the client monies held to assess whether there are residual balances that should be sent back to your clients? Don’t forget that you should be returning client monies as soon as there is no longer a proper reason for you to hold these funds. This may be following the completion of a transaction or where it may have failed partway through. Are you likely to have clients who say hold onto these funds while I look for another investment opportunity? This is not allowed, and those funds should be repaid without delay. Your acceptance of this residual balance could be deemed to be a banking facility.
Have you trained all of your fee earners?
These individuals are your first line of defence. They should help you to comply with the SRA Accounts Rules and to reduce the risk of your firm falling foul of money laundering regulations and other regulatory breaches that carry disciplinary enforcement.
Do all of your fee earners follow your office procedures strictly and how do you know this? Are you completing file reviews to check?
Do they stop and think before simply following a client request or instruction, as to whether this receipt or payment is a normal expected part of the legal service?
Where a client asks your fee earner to make payment on their behalf, do your fee earners actually ask your client why they cannot simply make the payment themselves?
An appropriate conclusion to this blog can be taken from Paul Philip, SRA Chief Executive
“Solicitors naturally will want to help their clients, but they of course must also do the right thing. If a client wants you to act in this way, you should seek to understand why they are asking you to do this and reassure yourself that you take an approach that is compliant.”