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Improper use of client account as a banking facility

SRA Case Study: Collation of investment funds

Scenario

A law firm acts for one of several debt or equity investors involved in acquiring a target investment. The firm is instructed to receive the aggregate collated investment funds into its client account. This is so that one firm is responsible, in accordance with an undertaking to be given, to complete the proposed investment out of hours. The completion of the investment is not subject to formalities which need specifically to be checked by a solicitor.

If the payments were to be made piecemeal (from the various represented and unrepresented investors) into a target investment, none of the investors (including the solicitors' client) would have comfort that the full amount of the investment would be invested, and the deal could be lost if there was no ability to complete and make payments out of hours.

SRA's View

The funds received from the client for which the law firm is acting (the lead investor) would not breach rule 14.5. The funds are that client's money and are received in connection with a transaction on which the law firm is advising.

However, receiving other money into client account, from or on behalf of, the other investors, that the firm is not acting for, does raise risks of a breach of a rule 14.5. The law firm will need to be satisfied that there is a proper reason for these funds to be received into client account. In this instance, there is a risk that the transaction would not be completed without one firm taking control and receiving into its client account the investment funds - and being able to complete out of hours and to give the necessary and appropriate undertakings.

The law firm needs to understand the nature and propriety of the underlying transaction on which it is acting, and the source of any funds received. There are clear risks of being involved in money laundering when non-client funds are received into a firm's client account and then paid out.

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