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Solicitors could face disciplinary action over dubious investment schemes

General lack of awareness about regulatory aspects and aggregation risk

31 July 2017

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Solicitors and law firms involved in questionable investment schemes could face disciplinary action, the Solicitors Regulation Authority has warned in its latest risk forecast for the profession.

The SRA’s 2017/18 Risk Outlook includes the increasingly familiar reminder that legal practitioners can be used to legitimise dubious schemes whose promoters seek credibility with potential investors and typically look to take advantage of a firm’s client account as a banking facility.

“We have included one new priority risk this year – questionable investment schemes. We know that the numbers of solicitors who would willingly get involved are very small, but the harm to the public and potentially the reputation of the profession is significant,” said SRA chief executive Paul Philip.

Common examples where a solicitor or law firm has been used to legitimise questionable schemes include: new build property abroad, hotel room leasing, bank instrument trading, carbon credits, and diamond trading.

Frank Maher, partner at Legal Risk, a law firm specialising on advising other law firms on risk management, added: “We have advised many firms who have become embroiled in hotel, student let, and similar schemes. There is a general lack of awareness about the regulatory aspects among many. They pose a big risk, because if one goes wrong, they all go wrong.”

Firms particularly face the aggregation risk, under which multiple claims may be subject to one limit of professional indemnity insurance (PII), added Maher. “Firms need to consider this (and not just in relation to investment schemes) when determining the appropriate level of cover to buy. It also begs the question why the SRA are continuing their relentless quest to reduce the level of minimum cover.”

While the SRA acknowledges that very few solicitors would ever knowingly become involved in the schemes, there have been cases where solicitors and law firms have either acted for the promoter, potential investors, or both; or passed investors’ money through their client account, sometimes as an ‘escrow agent’.

The regulator described how promoters often tell investors that the solicitor’s PII insurance and the Compensation Fund will protect their investment, yet this isn’t necessarily true. If solicitors agree to move money through their client account, they will breach rule 14.5 of the Accounts Rules, which prohibits solicitors from providing banking facilities.

There has been an increase in reports of these facilities being provided over the last three years, with 32 in 2016, and their use can lead the SRA to discovering dubious schemes. Some promoters and solicitors have tried to avoid rule 14.5 by creating spurious ‘legal services’, such as certifications where none are required, but this could lead to an allegation of dishonesty.

The SRA advised solicitors and firms on how to avoid becoming involved in the schemes. Good practice includes: carrying out due diligence on promoters, not allowing the client account to be used as a banking facility, and being clear who the clients are and are not.

The regulator has also published several warning notices about investment schemes on its website, which it may have regard to when exercising its regulatory functions.

A failure to heed the guidance and warning notices could lead to disciplinary action in the public interest. “Where solicitors have allowed their client account to be used as banking facility, or have become directly involved in questionable schemes, we will take action to protect the public,” says the SRA. “Solicitors who act dishonestly or become involved in criminal activity can expect us to take disciplinary action, and for their case to be referred to the Solicitors Disciplinary Tribunal.”

In April, the Solicitors Disciplinary Tribunal handed Clyde & Co a joint-record fine of £50,000 and three of its partners £10,000 fines each after the firm’s client account was used as a banking facility.

The firm and two of its partners had failed to heed the warning notice on money laundering by acting as an escrow agent in client transactions that had the hallmarks of dubious financial arrangements or investment schemes.

Matthew Rogers is a reporter at Solicitors Journal

matthew.rogers@solicitorsjournal.co.uk | @lex_progress

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