Prohibition on provision of banking facilities by solicitors
The temptation to give in to a client’s wishes and take on the role of banker is one which many firms seem to find hard to resist. Despite continued warnings to the contrary, it would appear from looking at the legal press that solicitors’ firms continue to use client account as a banking facility for clients in circumstances where there is no underlying transaction.
The problem is, of course, that as solicitors many of us want to facilitate the needs of our clients and, if a client makes a request which is, on the face of it anyway, a reasonable one, and which appears to have no criminal purpose behind it, then it is a difficult call indeed to turn round to the client and tell them it cannot be done.
Already this year we have seen several instances of firms falling foul of the problem and illustrating the need for a greater understanding by firms of what they can and cannot do. This year’s cases include:
- SRA v Quartey and Esuruoso (Case No. 11350-2015) which resulted in the suspension of a solicitor who allowed her firm’s client account to be used as a banking facility by a property investment company,
- The circumstances surrounding collapsed Devon law firm Eastleys where two directors admitted in an agreement with the SRA to having allowed its client account to be used as a banking facility, and
- The referral to the SDT of three partners in London firm Fladgates LLP who are accused of having “used, or permitted the use of the client account of Fladgate LLP solicitors inappropriately by utilising it as a banking facility for clients”.
Possibly this points to a need for a clearer interpretation from the Solicitors Regulation Authority (SRA), although with the impending reduction in the size of the SRA rule book, this may be something of a vain hope.
The position should be straightforward – or at least that is the view that the SRA takes. Rule 14.5 of the SRA Accounts Rules 2011 states:
“You must not provide banking facilities through a client account. Payments into, and transfers or withdrawals from, a client account must be in respect of instructions relating to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities.”
The difficulty lies, however, in what precisely does that mean? What are “banking facilities”? What is an “underlying transaction”? Which services form part of “normal regulated activities”?
The SRA Accounts Rules contain no definitions of these terms and very little assistance in interpreting the meaning of the rule. Guidance Note (v) to that particular rule merely states:
“Rule 14.5 reflects decisions of the Solicitors Disciplinary Tribunal that it is not a proper part of a solicitor’s everyday business or practice to operate a banking facility for third parties, whether they are clients of the firm or not. It should be noted that any exemption under the Financial Services and Markets Act 2000 is likely to be lost if a deposit is taken in circumstances which do not form part of your practice. It should also be borne in mind that there are criminal sanctions against assisting money launderers.”
Not, it has to be admitted, particularly helpful. Even the SRA’s own warning notice “Improper use of a client account as a banking facility” shies away from actually defining any one of those three terms, although they do give some examples of when the rule might be contravened.
Perhaps the key to understanding the rule actually lies in those nine words in the middle of Guidance Note (v) – “whether they are clients of the firm or not”. But more of that shortly.
The SRA Warning Notice
So what does the SRA warning notice say? Not a great deal that is particularly concrete or categorical.
It states that a breach of Rule 14.5 will be regarded as a serious matter and may also involve a breach of the SRA Principles including:
- Principle 1: upholding the rule of law and the proper administration of justice;
- Principle 3: not allowing your independence to be compromised;
- Principle 6: behaving in a way that maintains the trust the public places in you and the provision of legal services; and
- Principle 8: running your business or carrying out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles.
Not really particularly helpful when a firm has to decide if it can or cannot undertake a transaction.
It also warns that Outcome 7.5 of the SRA Code of Conduct 2011 requires that solicitors must “comply with legislation applicable to your business, including anti-money laundering…”
Again, hardly a clear imperative.
It then goes on to advise that:
“Where clients ask you to process funds through your client account, you need to balance the client’s best interests against the other Principles and your legal obligations.”
It then concludes by looking at some cases which have been decided in this area and drawing on some of the comments from those cases – several of which actually seem to contradict the last piece of advice.
What Does the Rule Mean?
The only way that firms can really get at any form of guidance is to look at the decisions that have been made and to work backwards from there.
Essentially, what the rule appears to mean is, that unless there is an ongoing matter that specifically requires a firm to carry out particular transactions on a client account then those transactions should not, whatever the client wants, be made. Thus, notwithstanding the somewhat ambiguous advice from the SRA set out above that the firm should “balance the client’s best interests against the other Principles and your legal obligations” unless the activity on the bank account is necessary to give effect to the underlying transaction, then that activity should not take place.
So, for example, if a firm is carrying out the administration of an estate following a grant of probate then it is likely, and indeed perfectly proper, that payments will be made into and out of client account on behalf of that estate. However, if the firm represents a client generally, say for example in relation to various contracts, and without reference to these contracts, the client asks the firm to receive payments from, and make payments to, third parties then those will not be in respect of an underlying transaction and accordingly should not be made.
Of course, not all cases are that clear cut.
- What, for example, would be the position of the firm asked to manage the affairs of a beneficiary – perhaps one that did not for some reason have the ability to handle their own affairs?
- What of the firm asked to negotiate contracts on behalf of a foreign company and to deal with payments made in this country on that company’s behalf?
- Would the firm be able to process payments in and out of client account on the client’s behalf if the firm had just completed a property sale on the client’s behalf and the bulk of the money being used came from the proceeds of sale?
Which is where the words drawn from Guidance Note (v) earlier become relevant – “whether they are clients of the firm or not”. The point to be stressed here is that the mere fact that a person or entity is a client of the firm does not in itself provide sufficient justification for payments in and out of client account. Simply acting for a client is not in itself an underlying transaction. There has to be vital a correlation between the underlying transaction – which must be something which is a normal regulated activity – and the use of the client account.
What does Case Law Say?
For any sort of guidance on this area one must really turn to the decisions made and effectively work backwards as to what would be regarded as unacceptable behaviour. Regrettably few of the decisions allow you to work back to what is acceptable, so one has to look at the negative.
There are a number of cases which highlight particular areas. These include:
- The Attorney General for Zambia v Meer Care & Desai and others  EWCA Civ 1007. In this case the Attorney General of Zambia had made an application against the ex-president of Zambia, some Zambian officials and two law firms in the UK. The application was for the return of public monies, allegedly used to fund lavish lifestyles for the government officials and their families rather than the secret service expenditure which was claimed. In reaching its decision the court found that two solicitors – Iqbal Meer of Meer Care & Desai and Bimal Thaker of Cave Malik – had effectively enabled this to happen by permitting funds to be paid through their client accounts for many years – usually without any underlying legal transaction and by failing to be alert to the very substantial sums of money passing through client account and circumstances which should have put him on inquiry as to their authenticity or legitimacy. Indeed, the Court of Appeal noted in this case that “…it is plain that he was providing the service of a bank account, albeit only in credit… with almost none of the payments through the client account being related to any legal work done by the firm. It is equally plain that this was not a proper thing for a firm of solicitors to do.”
- In the case of Wood & Burdett (SDT 8669/2002), the Office for the Supervision of Solicitors applied to the Solicitors Disciplinary Tribunal (SDT) for an order against Michael Wood and Alan Burdett in relation to a number of accounts breaches including dealings where “the entries on the relevant client’s ledger account did not appear to be associated with an underlying transaction in respect of which the firm was acting other than the transmission of the money itself” and for operating a facility where “to enable clients and third parties to ‘cash’ cheques against which payments would be made to the party concerned, or at the direction of the party concerned, by way of cash or bank transfer.”The SDT found that Mr Wood was operating a banking facility, which was not a proper part of a solicitors’ business, and as a consequence struck Mr Wood off the Roll. In reaching its decision the SDT stated that “It is not a proper part of a solicitor’s everyday business or practice to operate a banking facility for third parties whether they are clients of the firm or not. To operate client account in such a way would be likely sooner or later to be subject to the attentions of the unscrupulous and the solicitor concerned might well find himself laundering money without being aware that he and his banking arrangements were being utilised for such nefarious purpose.”
- In the case of Premji Naram Patel v SRA  EWHC 3373 (Admin) the SDT imposed a fine of £7,500 on Mr Patel because he had “permitted his bank account to be utilised by a client and/or third parties to receive and pay monies where there were no underlying legal transactions.” Mr Patel appealed to the High Court on the basis that the second sentence of Rule 14.5 had to be read disjunctively. That is to say that payments into and out of a client account have to relate to either (a) an underlying transaction or (b) a service forming part of the solicitor’s normal regulated activities. He submitted that solicitors must not permit their client account to be used as a banking facility but will not be in breach of the rule if its use occurs as a consequence of a client’s instructions in relation to an underlying transaction, albeit not a legal transaction.The Court, however, rejected that argument and upheld the fine imposed by the SDT commenting that “movements on client account must be in respect of instructions relating to an underlying transaction which is part of the accepted professional services of solicitors”.
- The 2006 case of Michael Wilson-Smith (No. 8772-2003 ) involved a solicitor who was assisting a client by acting as “escrow agent” in about 50 dishonest transactions in which people were sold worthless documents for a large fee. He allowed money to pass through his client account in circumstances where he suspected or should have suspected there was a real danger that he was facilitating money laundering.
The tribunal stated “Whilst it is probably widely and well known the Tribunal feels it important to reiterate conclusions which it has made on earlier occasions, namely that a solicitor should not permit his client account to be used where there is no underlying transaction save in circumstances where he is absolutely satisfied that he is holding money on behalf of a client for a proper purpose and is disbursing it for a proper purpose. A solicitor should have no role to play in the collection and disbursement of monies in a situation where he is not receiving fees for the benefit of his advice.”
Referring to this case, David Middleton and Michael Levi in their article “Let Sleeping Lawyers Lie: Organized Crime, Lawyers and the Regulation of Legal Services”[i] take the view that preventing solicitors from using their client accounts as bank accounts reduces the opportunities for wrongdoing generally as the solicitor is able to avoid being involved in “risky behaviour without having to prove what the client may be up to.”
- Finally we look at the case of Fuglers & Ors v SRA  EWHC 179 (Admin) (QB). Here, Fuglers LLP acted for Portsmouth FC whose bank account was withdrawn after a winding-up petition was brought on the grounds of the club’s insolvency. The senior partner of Fuglers had authorised the use of the firm’s client account for the benefit of the club at a time when the club was facing winding-up by the Inland Revenue and when the club’s bank had frozen its accounts and payments out were made which favoured certain creditors over others.It was decided that although the Code of Conduct gives solicitors special privileges for holding client money for various reasons, acting as a bank is not one of those reasons. Over £10 million of Portsmouth FC’s money passed through the firm’s client account in four months, misconduct which the tribunal described as very serious and which resulted in substantial fines for the firm and two of the partners . The firm and partners appealed on the basis that the fines were manifestly excessive. However the High Court held that “a very substantial fine was called for to mark the seriousness of the misconduct” and to send a message that client accounts are central to regulation of solicitors’ conduct.
Three statements by the Court in this case are singled out by the SRA in their Warning Notice and these are worth repeating here. They are:
“The first strand is that it is objectionable in itself for a solicitor to be carrying out or facilitating banking activities because he is to that extent not acting as a solicitor. If a solicitor is providing banking activities which are not linked to an underlying transaction, he is engaged in carrying out or facilitating day to day commercial trading in the same way as a banker. This is objectionable because solicitors are qualified and regulated in relation to their activities as solicitors, and are held out by the profession as being regulated in relation to such activities. They are not qualified to act as bankers and are not regulated as bankers. If a solicitor could operate a banking facility for clients which was divorced from any legal work being undertaken for them, he would in effect be trading on the trust and reputation which he acquired through his status as a solicitor in circumstances where such trust would not be justified by the regulatory regimen.”
- That the use of a client account as a banking facility is objectionable in itself (the point made by Middleton and Levi above)
“The second strand is that allowing a client account to be used as a banking facility, unrelated to any underlying transaction which the solicitor is carrying out, carries with it the obvious risk that the account may be used unscrupulously by the client for money laundering. This was the danger referred to in paragraph 58 of the Tribunal decision in Wood and Burdett (8699/2002) which is referred to in note (ix) itself. That this was one of the dangers at which the rule was aimed is reinforced by the express mention in note (ix) of the criminal sanctions attaching to money laundering.”
- That the use of a client account as a banking facility increases the risk of money laundering taking place
“The third strand arises in the particular context of insolvency or risk of insolvency. In such context, to allow a client account to be used as a banking facility is objectionable for several reasons. In the first place, it allows the client to achieve that which the client will normally be unable to achieve from any bank. It is the common practice of banks, as happened with the Club’s bank in this case, to withdraw facilities upon notification that there has been a winding up petition. The solicitor is therefore giving the client a commercial service which would otherwise be unavailable to it through the device of using a solicitor as if he were a bank. Secondly there is the risk of disaffection and opprobrium which is involved in favouring one creditor over another. This exists in the absence of any risk of insolvency, but becomes more acute in the event of insolvency or potential insolvency. This arises irrespective of whether dispositions would or would not be subject to invalidity by the operation of section 127. A third reason is the risk of section 127 (of the Insolvency Act 1986) applying so as to require creditors to reimburse payments from the client account in a subsequent liquidation. A solicitor who knowingly makes or facilitates such payments may be subject to a personal liability, quite apart from the liability of the payee to reimburse the amount transferred.”
- That the use of a client account as a banking facility increases the risk of insolvency
So what can we conclude? The basic lesson is that firms have to be extremely careful about how and when they provide services to their clients which involve transactions passing through client account.
The SRA have identified ‘inadequate systems and controls over the transfer of money’ as an ‘emerging risk’ in their Risk Outlooks and so are going to continue to be vigilent and ensure that firms do not use their account as a banking facility. In the Risk Outlook 2015-2016, the SRA state:
“Law firms can handle large sums of money and can make attractive targets for those wishing to launder the proceeds of crime.
The risk of money laundering is reduced by preventative measures such as the Money Laundering Regulations 2007 and rule 14.5 of the SRA Accounts Rules 2011, which prohibits the passing of money through client account in the absence of a genuine underlying transaction. If law firms fail to meet their legal and regulatory obligations, there is a serious risk to the public interest.
Good anti-money laundering systems and controls over client account allow firms to manage this risk and protect their businesses from being used to enable criminal activity.”
As the SRA states in the Warning Notice:
“Whether there is a reasonable connection is likely to depend on the facts of each case but where the legal services are purely advisory, it will clearly be more difficult to show a reasonable connection. The fact that you have a retainer with a client does not give you licence to process funds freely through client account on the client’s behalf. Throughout a retainer, you should question why you are being asked to receive funds and for what purpose. You should only hold funds where necessary for the purpose of carrying out your client’s instructions in connection with an underlying legal transaction or a service forming part of your normal regulated activities. You should always ask why the client cannot make the payment him or herself. The client’s convenience is not the paramount concern and, if the client does not have a bank account in the UK, this considerably increases the risks. You should be prepared to justify any decision to hold or move client money to us where necessary.”
[i] Br J Criminol (2015) 55 (4): 647-668.