Misuse of client money

Examples below should be read in conjuction with the Risk Outlook 2017/18

More from the Risk Outlook 2017/18

Example 1

Solicitor uses client money to provide loans to third parties

The following case illustrates how access to information can help managers and compliance officers identify suspicious activity in the client account.

Mrs A was one of three partners, specialising in conveyancing. The firm employed an associate solicitor, Mr B.

Mr B had recently been appointed as the firm's Compliance Officer for Finance and Administration (COFA). This allowed him access to the firm's financial information, including bank statements.

It was not long before Mr B noticed the high volume of payments in and out of the client account. These were well in excess of the number of transactions one would expect to see, given the volume of cases the firm generally deals with. Mr B could find no evidence to suggest that client consent had been obtained, or that there were any underlying legal transactions associated with the transfers.

Mr B raised the matter with the managing partner, who then reported it to us. Our investigations revealed that Mrs A would often use excuses to delay conveyancing matters after receipt of the funds. During the delay, the funds would be transferred to third parties unconnected with the firm or its clients. After a few days, the third parties would pay the funds back into the client account, and the conveyancing matter would then proceed as normal.

It became apparent that Mrs A was using client money to finance short-term loans to third parties in return for interest. At the time of our investigation, there was a shortage of almost £1 million on the client account.

Although the firm's insurer replaced the funds, the firm was unable to afford the subsequent increase in premiums and had to close. Mrs A was referred to the SDT.

Example 2

Solicitor misuses client money after falling foul of loan sharks

The following case illustrates how personal financial difficulties and failing to resist pressure from third parties can lead to solicitors compromising their integrity.

Mr A was a sole practitioner. His firm was once very lucrative, but profits had declined significantly over the last two years. This made it difficult for him to maintain the standard of living he was accustomed to.

Mr A was already in debt with his bank and his overdraft was at its limit. He decided to take a short-term loan from a local moneylender to tide him over a particularly difficult month. However, his fee income for the next month was lower than expected.

This meant Mr A was unable to repay the loan, or the substantial interest owing. He decided to take out a larger loan to cover the payment and his expenses for the month.

Over the next few months, Mr A's debt continued to grow. The moneylender started applying considerable pressure to make him keep up with the payments. This included several visits to his home and office. The payments were demanded on irregular dates throughout the month, usually with very little notice.

Mr A began withdrawing money from the firm's client account to meet the payments. This went on for almost a year, until we were alerted via an anonymous report.

Our investigation revealed that Mr A had made over 30 unauthorised withdrawals from the client account. Although he had replaced most of the funds taken, a significant cash shortage remained.

We intervened into the firm and referred Mr A to the SDT.

Example 3

Firm unearths misuse of client money

The following case illustrates the importance of having effective controls on the client account.

Mr A was a senior partner in a medium-sized law firm.

He had taken out a number of personal loans to support his lifestyle. When Mr A could no longer afford his loan repayments, he decided to make unauthorised withdrawals from the firm's client account.

The firm's procedure required all fee-earners to ask the finance department to process transfers out of the client account. To get around this, Mr A obtained the log-in details for the accounting system from a junior finance administrator, under the pretext of wanting to monitor transactions on the client account.

Mr A then proceeded to steal funds belonging to a number of clients. He recorded these transactions on the respective client ledgers as payments for further work.

This went undetected until Mr A became unwell and his client files were given to other partners to progress in his absence.

The partners became suspicious when they noticed the payments, but could find no evidence to suggest that further work had been carried out, or that clients had been billed for the transfers out of the client account.

An investigation revealed that Mr A had taken almost £500,000 of client money over two years. The firm dismissed Mr A for gross misconduct and reported him to us. The partners replaced the client money and took steps to improve their systems and controls around management of the client account.

When Mr A appeared before the SDT, he was struck off and ordered to pay costs.

Example 4

Partner abuses client account to invest in brother's company

The following case illustrates the risks that may arise from allowing any one fee earner too much control over how they use the client account.

Mr A was one of five partners in a well-established law firm, specialising in conveyancing. He was a signatory on the firm's client account.

One day Mr A's brother, who owned a company that represented investors in buying and selling properties, asked him to make a short-term investment to help finance a large deal.

Mr A initially refused as he was short on cash. However, his brother was insistent. He suggested that Mr A could borrow the money from the client account and return it without anyone noticing. The scheme would allow Mr A to pocket substantial returns from the investment. Mr A allowed himself to be persuaded.

Although Mr A had intended to take part only once, it wasn't long before he was routinely transferring money out of the client account he operated, and into his brother's company account. In return, his brother paid him interest, a share of the profits, and referred clients to him.

Mr A's partners noticed his suddenly expensive lifestyle and became suspicious. After a preliminary investigation of his client files, they reported him to us.

We found Mr A had used client money to fund investments. At the time the investigation started, Mr A had replaced money owing to clients so there was no shortfall on the account. However, when Mr A appeared before the SDT, he was struck off and ordered to pay costs.

To prevent this happening again, the firm increased the monitoring of partners' activities. For example, file reviews became more frequent and all withdrawals from client accounts had to be approved by two partners.