Mistakes in business are inevitable, from simple typos to missing a meeting or sending an email to the wrong recipient. Most times these mistakes are forgotten, or at least, quickly repaired.
However, mistakes when managing a trust account may be costly and serious. They can cause irreparable damage to a law practice’s reputation or even lead to the disbarment of a lawyer.
As well as this, it is expected that all law practices, whether a large law practice in Sydney or a country practice in Tenterfield, treat their trust accounts in exactly the same way and with the same controls.
At a regional seminar last month, John Mitchell, Chief Trust Account Investigator & Supervisor of the Law Society of NSW, firstly noted that as of March 2016, law firms in NSW controlled over $9.5 billion in trust accounts. Against this backdrop, John then outlined the most common (and expensive) mistakes that occur.
1. Failure to complete monthly trial balances and bank reconciliations
This represented the highest breach recorded by External Examiners in the 2016 External Examiners Reports. By simply not doing trial balances and bank reconciliations within 15 days of month end you are exposed.
2. Performing trial balances and bank reconciliations but not reviewing them
Lawyers full reliance on others, such as accounting staff, to manage their trust accounts is not acceptable. The flaw with this hands-off approach becomes obvious when errors are not rectified immediately which result in deficiencies of trust money, ultimately becoming the principal’s problem.
3. Know the person for whom you hold the money
The Act and rules state that it is the responsibility of the lawyer to deal with funds under the control of the law practice in accordance with the instruction of the person on whose behalf the money is held, unless otherwise required by law. That person is not always your client.
You should provide each person with a complete and understandable statement of all trust money received, held and disbursed. Costs cannot be taken from joint money without authorisation of both parties.
4. Back up
While you may be struggling to choose between using an in-house server/PC or private hosted server solution, the Legal Profession Uniform General Rules 2015 see little difference between the two – just that all records are backed up at least once a month.
However they do state that “A complete set of back-up copies is kept in a separate location so that any incident that may adversely affect the records would not also affect the back-up copy”. This is generally the case with private hosted servers, so confirm with your provider.
5. End clauses
The example to highlight this is on a conveyance where the purchaser refuses to settle until the damage to the kitchen sink is repaired. It is agreed and documented by the solicitor holding the trust money that $1000 will be retained from settlement money for repair of the sink.
- On whose behalf are we holding the money?
- On what condition is the person holding the money entitled to pay the vendor?
Therefore in drafting such agreements, it is important to address the end clause.
6. Notification of non compliance
It is a requirement that firms notify their designated local regulatory authority (e.g. the Law Society of NSW) in writing on any instances of trust account non-compliance/irregularity. This is not being done and external examiners are busy reporting such breaches.
Lawyers are encouraged to send an email to their respective local authority, advising the circumstances of the irregularity. This will be noted and a reply provided to the law practice to show External Examiners.
The key message here is that it is not the notification received that is concerning but notifications that are not being received.
7. Drawing cheques/EFT (Money Laundering)
Who affects electronic funds transfers in your practice? Is it the principal or the book keeper who authorises electronic funds transfers? If it’s the book keeper, there must be two persons authorised to effect electronic funds transfer. This rarely happens.
Lawyers must remain on guard for money-laundering transactions. For example, a prospective client contacts you to deposit money into your trust account for an intended purchase at auction. The client then advises that they were not successful at auction and to please draw cheques/effect electronic funds transfer to four nominated parties. The red flags with this type of transaction are no file, no client and therefore your trust account has been used as a catalyst for money-laundering.
If it doesn’t feel right, don’t do it.
8. Never borrow from your client
This may seem straight forward, yet the usual scenario is acting for a person on the sale of property where surplus funds have been received into trust. When the lawyer asks their client how they’d prefer to have the settlement monies disbursed, the client has responded ‘it is the last thing I need in my life at this time. I don’t know what to do with the money.’ The lawyer then offers to help by borrowing these monies at commercial rates of interest.
The borrowing solicitor has breached rule 12.
9. Register of financial interests
Generally if 75% of the partner’s fee base comes for one developer client, be careful. For example, Partner X has an interest in the joint venture to develop the shopping centre across the road. The developer suddenly needs urgent money and places pressure on the partner to access trust monies, seen as a good source of interest free finance.
The rules do require a financial interest register to be maintained but this does not need to record shares held in, for example, Coles. Rather the register records an interest in a client of the law practice whether dealing with the solicitor or associates of the law firm.
10. Lack of understanding trust money
A lack of understanding of the Act and rules, definitions of trust monies and how they are to be managed is not an acceptable defence to offer when found to be non-compliant of your obligations with trust monies.
So, be familiar with the rules in your state and stay up-to-date through regular attendance at trust account seminars/training.