Civil Fraud Quarterly Round-Up: Q2 2020
Decision date: 29 November 2012
High Court uphold decision of SDT to fine solicitor who allowed individual to use client account as banking facility.
A solicitor (P) appealed under section 49 of the Solicitors Act 1974 against a decision of the Solicitors Disciplinary Tribunal (SDT). He had faced an allegation of permitting the use of a client account for banking facilities when there was no underlying legal transaction. The SDT found the allegation proved, fined him £7500 and imposed a costs order of £20,000.
P practised on his own account under the name ‘Alliance Solicitors’. One of the firm’s clients was a company called ‘Club SYR Lyd’, whose principal was Y. The company would import expensive motor vehicles from abroad at reduced prices, and sell them in the UK at a substantial profit. The initial purchases were made with the assistance of funds from investors, two of whom were B and M (large car dealerships). B and M did not wish to provide their funds directly to Y, wanting assurance that the money would be sent to those selling the vehicles.
P agreed to hold the funds which B and M advanced in a special client account ‘to provide the security to B and M they require’. This was outlined in a client care letter dated 31 March 2006. Investors paid funds into the account (called the ‘German Autos’ account). P explained that he would send the funds directly to the vehicle manufacturers. If the transaction was to fall through within 7 days, the funds would be returned in full within 7-14 days on written demand. Once the vehicles were on the transporter to this country the money would pass over. The transaction was so completed, with P checking invoices purchase orders and other documentation to ensure the funds were released properly in accordance with the arrangements. In the case of B and M, P’s work was limited to that role. However, with two other investors, P also used a template to draw up a joint venture agreement between the Club and them.
The Solicitors Regulation Authority (SRA) investigated the firm’s book of accounts in 2008 and found the ‘German Autos’ account, and further found that the account recorded total credits and debits from April 2006 to mid-2008 of almost £12 million. The B and M transactions amounted to £1 million of that sum. It was accepted, at that stage, by solicitors on behalf of P that the B and M arrangements did not involve his legal expertise.
At a hearing on 12 May 2012, P faced a charge that he ‘permitted his client bank account to be utilised by a client and/or third parties to receive and pay out monies where there were no underlying transactions’. It was submitted by the SRA that P had provided banking facilities through the German Autos client account without there being any underlying legal transaction. It was said that this offended the principle stated by the SDT in the case of Wood and Burdett, restated as note (ix) to Rule 15 of the Solicitors Accounts Rules, namely that it was not a proper part of a solicitors everyday practise to operate a banking facility for third parties, clients or otherwise.
P submitted that the mischief at which the principle in Wood and Burdett was aimed was money laundering, and it was not alleged that he had been dishonest or engaged in any way with such activity. He argued that providing there was an underlying legal transaction, even if a solicitor were not required to use legal expertise, there was no need to ask whether the legal work was more than minimal. In the case of B and M for example, he had to examine the invoices and check for legal problems.
The SDT found that the allegation was proved as there was no underlying legal transaction in relation to the B and M situation. The work he had done could just have easily been carried out by a clerk or a person in a non-legal office. With regard the other investors, there was the drawing up of joint venture agreements, and therefore no breach.
The SDT took into account hat P had been fined on a previous occasion in respect of various account breaches. They imposed a fine of £7,500 and he was ordered to pay cots of £20,000.
Mr Justice Cranston held that there was no error in the SDT’s approach in the appellant’s case;
‘It was entitled to treat the principle in Wood and Burdett, incorporated in the guidance note to rule 15, as a ground of decision, independently of any breach of a rule or an allegations that the conduct adversely affected professional reputation’.
He rejected the submission on behalf of P that the principle in Wood and Burdett should be limited because its origins lie in a concern with money-laundering; ‘that is certainly one of the legal purposes behind the principle but by no means the only one’. There would be a suggestion that if solicitors could operate a banking service for third parties, without doing any legal work, they would be trading in effect on the trust and reputation which they had acquired through their professional status as solicitors.
It was held that ;
‘It seems to me that there is a distinction between what the appellant was doing and the role of a solicitors operating an escrow account or acting as a conveyance or the executor of a will. Here the moneys of Mr Yap (Y) and the various investors were mixed and there were no escrow condition as to their dispersal. In any event, if solicitors are involved escrow conditions are typically related to legal work. While many of the functions associated with conveyancing and acting as an executor are of an administrative nature, their long association with the legal profession gives them the character of professional services. They are part of the everyday practice of solicitors. What the appellant did here, as described in the client care letter, was purely administrative. He was the custodian of funds. That had no association with the professional duties of a solicitor and was not in relation to an underlying legal transaction’.
The appeal was accordingly dismissed.
Lord Justice Moore-Bick, having agreed with the decision and reasoning given, further added that;
‘In most cases the receipt of client funds will result from the provision of services forming part of the solicitor’s normal regulated activities, but some recognised professional services, such as acting as an executor, will not fall into that category. There is clearly scope, therefore, for funds to arise from the underlying transactions of a kind which, although they form an accepted part of the professional services provided by solicitors, do not fall within the definition of regulated activities. They are likely, nonetheless, to be legal activities in the broad sense of the expression.’
Whilst not a scheme that was so obviously open to abuse as that considered in Wood and Burnett, in the present case there was simply no underlying transaction out of which the funds in question arose, much less one that could be said to involve the provision of legal or recognised professional services.
This case deals with an important question of when and for what purpose it is appropriate to hold a client account. The principle in Wood and Burdett does not solely apply to situations in which money laundering is a concern or risk, but is held to include holding funds for reasons that are associated neither with the professional duties of a solicitor nor an underlying legal transaction.
Skip to content Home About Us Insights Services Contact Accessibility