Regulatory and Compliance Training & Consultancy

Improper use of client account as a banking facility

SRA Case Study: Investment scheme and an “escrow” arrangement

Scenario

A law firm was instructed to act as “execution only escrow agent” in a proposed investment transaction and was also referred to in the contracts used as the “Paymaster”. The retainer was purportedly limited to reviewing the terms of an “escrow agreement” and to release funds in accordance with it.

The retainer letter excluded any advice on the supposed underlying transaction and the firm made no attempt to understand it; it simply received and distributed more than £650,000 in accordance with the terms of the “escrow agreement”. The client told the firm that the matter involved investment in bearer bonds.

An investigation showed that there was no genuine legal transaction and circumstances disclosed several of the signs from the SRA‘s warning notice on money laundering. An “investor” who lost money complained that he thought the investment must be safe because the contracts had the name of a solicitors’ firm on them and he relied on the firm being the “Paymaster”.

SRA's View

The law firm received and paid out money without advising on or even understanding the purported transaction. It had no real knowledge of the transaction and made no attempt to establish its legitimacy or the money's source. In our experience, the use of “limited retainers" of this kind is often in itself a red flag because the firm is seeking to avoid addressing the suspicious nature of the transaction. There is a clear risk here that the law firm is in breach of rule 14.5. The risks inherent in acting in this way were in fact borne out by subsequent investigation.

To act in an “escrow” capacity a law firm must identify and understand the transaction and there must be good reason why it is the appropriate for the law firm to hold the money.

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