Trust Accounting: Avoiding Fraudulent Activity

Updated: Mar 11

In July 2019 the Law Society of British Columbia issued an advisory regarding changes to the trust account and cash rules.



In July 2019 the Law Society of British Columbia issued an advisory regarding changes to the trust account and cash rules. The specific intention: to combat money laundering. This provides a timely opportunity to review those rules and consider similar provisions that operate in other jurisdictions. Read on for a discussion about money laundering, issues surrounding the accepting of cash payments and the importance of ensuring there is always a legal matter associated with a lawyer’s receipt of funds.



money laundering (mass noun)


The concealment of the origins of illegally obtained money, typically by means of transfers involving foreign banks or legitimate businesses.

The operation of client and trust accounts causes the lawyer to act as the safe keeper of property, most commonly constituting actual money. The lawyer is bound to accept, report upon and use that money based on highly prescriptive legislation, however, is also limited by their ability to vouch for the provenance of those funds. My client has provided these funds to me – but from where did my client receive the money in the first instance? While transfers from financial instructions add a layer of verification (electronic or via cheque/check), cash is naturally problematic. The lawyer is a type of gatekeeper with a positive duty to make reasonable enquiries before becoming involved in transactions.


The Law Society of British Columbia has tightened the definition of trust funds:

“funds directly related to legal services provided by a lawyer or law firm received in trust by the lawyer or law firm acting in that capacity, including:


(a) received from a client for services to be performed or for disbursements to be made on behalf of the client, or

(b) belonging partly to a client and partly to the lawyer or law firm if it is not practicable to split the funds.”


A lawyers’ trust account must not even be used to hold charity monies unconnected with the provision of legal services no matter how well-intentioned – for example, the temporary holding of donations (refer



CASE STUDY


A Canadian Lawyer operated a trust account. During 2013 approximately CAD$25m was received into the trust account and later disbursed to other parties. The lawyer performed no other specific legal matters for the client other than the disbursement of the funds. As a fee – the lawyer collected 1/10th of 1% as a commission being $25,845 in total. The key issue was that the lawyer failed to make reasonable inquiries regarding the circumstances relating to the funds. There was no connection with a specific legal matter – the trust account was used as a type of clearing account for redistribution of monies rather than for legitimate commercial purposes connected to the profession of law. The Code of Professional Conduct Rule 3.2-7 states “a lawyer must not engage in any activity that the lawyer knows or ought to know assists in or encourages any dishonesty, crime or fraud.” In terms of framing a penalty, the disciplinary committee relied on section 55 of the Legal Profession Act 1990 (as existing at the time of conduct) which is a broad power to make “any other order that the committee considers appropriate”. There was no need for the society to prove illegality – the fact that a trust account was used to facilitate suspicious conduct unconnected with any legal advice and involving transfers to offshore entities was a sufficient transgression. The Law Society imposed a fine of $25,845 (essentially ensuring the lawyer did not benefit from the transaction) and suspending their license for six months

Of particular note is rule 3-59(5) which specifies “a lawyer or law firm that receives or accepts cash in an aggregate amount greater than $7,500 under sub-rule 4 (in respect of a client matter for professional fees, disbursements or expenses in connection with the provision of legal services) must make any refund out of such money in cash.” This is mirrored in Ontario within By-Law 9 Part 3, 6 (e). Canadian lawyers are not bound to accept cash should they not wish to, with the more onerous record-keeping and reporting requirements making this a less attractive option.



The approach elsewhere


In New South Wales and all States/Territories of Australia, lawyers are subject to the requirement that any money received in cash must be placed in the general trust account regardless of why it has been received. They are also subject to the provision that only monies with a connection to a legal matter can be placed in trust. Thus, a client providing their lawyer with monies “from the charity cake sale” cannot be held to be trust money, it is something else entirely. Cash money that is received for a legal matter cannot be refunded in cash – there is a strict restriction on withdrawing from a general trust account to the methods of electronic funds transfer and cheque only. Any business that receives cash of AUD$10,000 or greater must report that fact to the Australian Transaction Reports and Analysis Centre.


In New Jersey, similar to all other areas of the United States who have adopted the American Bar Association’s Model Rules, withdrawals from trust must be either by electronic wire transfer or bank account check. The direct withdrawal of cash is unacceptable as is any check made payable to cash (refer R. 1:21-6(c)(1)(A)). Cash received by an attorney must be deposited to an attorney trust account after a reasonably short time. The Internal Revenue Service requires all receipts of USD$10,000 or greater (or two connected transactions of same or higher value) to be reported on IRS Form 8300.


In England and Wales, Rule 14.5 of the current 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”. This rule requires any money received to have a distinct connection to a legal matter. Where a law firm believes it has been subject to a fraudulent transaction they are encouraged to submit Suspicious Activity Report. Naturally, this may put the lawyer into conflict with their duty to their client.



The money laundering process


Cleaning dirty dollars and pounds involves a three-step process: placement, layering and integration. Of course, the laundered currency doesn’t look any physically different at the end of the process than the start. The difference is provenance – the attempt to legitimize the history of where it came from and hampering of a regulatory body’s ability to trace it. Laundering is all about washing clean the history of the money and providing a new backstory of authenticity.


Placement involves the task of introducing funds to a financial system and good governments attempt to limit this by enforcing the reporting of cash transactions. To place money into an environment, it must be banked, which is why the launderer often requires a lot of small transactional behavior to achieve their aim. Gambling is an obvious ploy, however, others include restaurants or any other type of transactional business that is performing relatively poorly in comparison to industry average. The receipt for non-services or fake orders has to be believable and commensurate with healthy business activity.


Layering may involve both the creation and enaction of complex transfer activity by inter-company funds movement and also the purchase of material assets. The aim is to provide a confusing financial trail, difficult for auditors to follow.


Integration is the legitimization of the funds by association with outwardly bona fide financials. Assets purchased during the layering stage might be sold and reported as business income or income reported by the subsidiary presented with a veneer of authenticity.


In summary, lawyers operating client and trust accounts bear a particular risk with regard client-initiated fraudulent behavior, particularly if they are careless with client identification and unwilling to think critically about true client intention. The combination of attorney-client privilege and the general notion of acting on client instruction can make the lawyer an unknowing participant in the laundering process. At a minimum, all legal professionals must ensure all monies received have a direct connection to a legal matter underway and quantitative nexus – that is, be not excessive or unnecessarily held.

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