Regulatory and Compliance Training & Consultancy

Improper use of client account as a banking facility

SRA Case Study: Unconnected payments from client account

Scenario

A law firm acted for a property development company. The original retainer related to a redevelopment of a block of flats, the creation of separate leasehold interests and sale of the individual leases.

When the flats were sold, the client asked the firm to retain the proceeds in the firm's client account. The company then asked the firm to make a series of payments from client account, using the proceeds of sale from the first development to pay a building contractor, architect and council tax in relation to another development site, and to pay £56,000 to a consultant for his services as a sales agent.

The consultant then asked the firm to split the payment to him - paying £9,000 to a car dealership as a deposit on a new car and the balance to another firm of solicitors as a deposit on a property he was purchasing. The firm was not instructed to provide legal advice about the second development site. Its role was limited to making the requested payments.

The firm later found out that the consultant was in the process of going through a divorce.

SRA's View

There is a clear risk here that in making the payments the firm would be in breach of rule 14.5.
Making prompt payments on behalf of a client to third parties connected with a conveyancing transaction on which a law firm acted, such as to sales agents, is unlikely to breach rule 14.5. However, the less connected the payments are to any such transaction, the higher the risks are that the firm may breach rule 14.5.

Here, the payments relate to other transactions on which the law firm was not acting. Developers also frequently use different companies as special purpose vehicles for each development and solicitors must be very wary of the risks in receiving funds that belong to Company A and paying them to Company B or to pay a liability of Company B.

Firms should also ask themselves why the money cannot simply be paid to the client which can then make payments itself. Even if the liabilities are all the clients, it remains very risky to pay these when there is no reason the client cannot do so itself. The client's convenience is not a legitimate reason. We would expect the firm to be able to explain fully why the payments are being made and to have fully considered the risks involved - for example, involvement in money laundering, avoiding money being caught in an insolvency, or the hiding of assets.

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