AML in law firms and providing a banking facility

A recent Regulatory Settlement Agreement clarifies the overlap of these two separate issues.

Using client money held for that client, a solicitor implemented a client’s instructions to purchase jewellery, to pay the client’s credit card bills, to defray unrelated business expenses, and to make various investments. This happened on 23 separate occasions.

The critical point was that the spend was not related to the transaction for which the client money was held. The solicitor was therefore accused of allowing the client to use the firm’s client account as a banking facility. There were additional complaints about inadequate source of funds checks.

The mere facts that the spend in this case was on client instructions and that there was no proven harm were no defence: the matter is effectively one of strict liability. They did however mitigate the penalty imposed. It’s relevant that the SRA states ‘although there was potential for harm to be caused, this was not realised.’ In other words, the SRA’s acceptance that there was no harm – which appears to be relatively unusual – made no difference. Further, the SRA considered that the number of payments over several months made this ‘a pattern of misconduct.’

The effect here was that there was no underlying legal transaction on which the firm was instructed. The case underscores that law firms must only use client funds strictly for the purpose for which they are held and must not accept instructions for unrelated spend even if the client instructs and there is adequate money to do so. So, for example, whilst it is perfectly acceptable to redeem mortgages or other charges (and undertakings will have been given for this), the payment of credit card bills or other unsecured obligations from the proceeds of a property sale is not acceptable. What about estate agents’ fees? It is of course standard practice to pay estate agents’ fees from net sale proceeds, and we consider that that too is acceptable as the payment is part of the purpose for which the client funds are held.

The only safe option is to return excess funds to the client for them to pay any unsecured debt, and also – if the client wants to make unrelated payments from sums being held – to return the money for the client to effect the purchase or investment themselves.

And… to carry out proper source of funds checks at the outset.