Warning about client account residual balances
Ed Austin
Solicitor & Director
Historic balances are in the news, with an imperative on law firms to clean up client ledgers.
At the Law Society Risk and Compliance Conference earlier this month Andrew Blatt, regulatory specialist and director of Murdochs Law, acknowledged that dealing with residual balances is a drain on time and resources, but urged delegates not to ignore them. Rather, ‘If you don’t have a policy, if you don’t review the balances post-file, this is a time-bomb ready to explode …because the SRA will see residual balances as an easy target’.
Solicitor advocate Jayne Willetts also noted that residual balances are firmly on the SRA’s radar and anticipated further SRA guidance notes or warning notices on the topic. Enderley clients are familiar with us beating this drum! Clearing residual balances should be an integral part of a firm’s regular compliance checks: we recommend monthly reviews of matter listings and client balances, as well as at file closure.
The ‘what-if’s’…
However, returning old money mightn’t be easy, depending on whether you can find the client. But what if the balances are so old that the client ID taken at the time does not comply with modern standards? Or if the balances were inherited from another firm and you have no ID, or you have scant details of the true owner, or worse still you suspect that the money is ‘criminal property’ within the Proceeds of Crime Act? – this is defined in s340 as follows:
(2) Criminal conduct is conduct which—
(a) constitutes an offence in any part of the United Kingdom, or
(b) would constitute an offence in any part of the United Kingdom if it occurred there.
(3) Property is criminal property if—
(a) it constitutes a person’s benefit from criminal conduct or it represents such a benefit (in whole or part and whether directly or indirectly), and
(b) the alleged offender knows or suspects that it constitutes or represents such a benefit.
The level of suspicion required is low.
What about making a donation to charity?
Can you clean up the ledger by sending the money to charity, maybe by transferring it to a charity ledger first? Well maybe… but beware s327(3):
(3) Concealing or disguising criminal property includes concealing or disguising its nature, source, location, disposition, movement or ownership or any rights with respect to it.
Transferring money of dubious provenance to a charity ledger might have this effect.
So, how can you return client money safely, without falling foul of the regulations?
Section 182 of the Economic Crime and Corporate Transparency Act 2023 (‘ECCTA’) introduced a new section 2D into s327, to remove from scope a situation where money (under s339A this must be less than £1,000) is returned to a client (not to charity) with a view to terminating a business relationship. However this depends on completing client due diligence duties, which might not be so simple. The overall effect is that you can return money without committing an offence under s327 but only where:
- the money is transferred to a customer or a client (note – not to charity); and
- the amount is less than the threshold amount in s339A (i.e. £1,000); and
- before returning it, you have complied with the customer due diligence duties; and
- it is for the purposes of termination of the business relationship
As noted, complying with modern client due diligence might not be so easy. And, query whether there is still a business relationship to terminate – that might have ended years ago, as the mere fact of holding a historic balance is not necessarily indicative of an ongoing relationship.
In my opinion in such cases you will need a Defence Against Money Laundering (DAML) from the National Crime Agency both in respect of transferring the money into a charity ledger (assuming you use a charity ledger as a collection account pending transfer) and in respect of then transferring it to the charity. If the amount of money in respect of one client exceeds £500, get the DAML first and then apply to the SRA.