You will have read at the tail-end of 2024 that the Solicitors Regulation Authority (SRA) has raised concerns over the management of client accounts held by law firms, prompting a significant discussion within the legal community. The SRA’s consultation is live and Amy Bell will break down the details of the open discussions in an online Teal Compliance Event on 8 January 2025 (1pm – 2pm).
But why is the SRA so worried about these accounts? The answer lies in the multiple risks associated with them, which range from money laundering and cyber attacks to internal fraud.
Money Laundering Risks
Client accounts have long been seen as attractive targets for money launderers and financial criminals. The government’s national risk assessment has flagged these accounts as potential conduits for illicit money because they allow funds to move through the banking system under the law firm’s name rather than that of the launderer.
What is deemed as “suspicious” when it comes to money laundering?
Suspicious activity use of a law firm’s client account makes it difficult to trace the origins of the funds, thus making law firms inadvertent participants in money laundering schemes.
Just one read of Legal Futures and you’ll hear about the latest fine from the SRA in this regard.
Cyber Attacks and Fraud
Cybersecurity threats also play a significant role in the SRA’s concerns.
Law firms have become targets for cybercriminals who aim to access funds within client accounts.
One common scam, known as “Friday afternoon fraud,” involves hackers intercepting payment instructions and redirecting funds to fraudulent accounts. A classic example of an easy hit for financial criminals, having researched if a legal cashier might be dealing with property transactions late in the day without COFA support.
Despite efforts to combat these schemes, law firms remain vulnerable to sophisticated cyber attacks.
In addition to external threats, internal fraud is another pressing issue. There have been cases where individuals within law firms have managed to manipulate client accounts for personal gain. These internal breaches highlight the importance of robust internal controls and oversight.
High-Profile Failures
Unless you’ve been hiding under a rock, you will be aware that the legal sector has seen some high-profile law firm failures where the misuse of client accounts was a contributing factor. Axiom Ince is the biggest we have all witnessed of course, and the case is still on-going but it has made a significant impact on how the SRA see client accounts and protecting the consumer.
Although not all details of these cases have been made public, the SRA’s concerns are exacerbated by these failures. The misuse of client funds for purposes other than their intended use, such as financing deals, has brought the role of client accounts under greater scrutiny.
The SRA's Response
Given these risks, the SRA has periodically questioned whether solicitors should continue to manage client accounts. This isn’t a new concern; there have been previous efforts to encourage law firms to explore alternatives, such as third-party managed accounts. However, the recent increase in government focus on anti-money laundering (AML) and fraud has added urgency to the discussion.
In conclusion, the SRA’s concerns about client accounts stem from the significant risks they pose to both law firms and their clients. These risks include exposure to money laundering, cyber attacks, and internal fraud, all of which have serious implications for the legal profession. As the debate continues, law firms must remain vigilant in managing these risks and consider whether alternative arrangements might better protect their clients and their business.
Remember to join Amy Bell on our FREE Client Account Consultation Online Event at 1pm on 8 January 2024.
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We will update you throughout the course of the consultation and thereafter as well.
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Amy
