Workshop: How to remain compliant when holding client funds

In this case both seller and buyer were confident in relying upon the law firm to see that the terms were met. An Australian distributor remitted the funds totalling US$48,000 as per the contractual arrangements. The law firm maintained a US dollar account with their clearer, to which the funds were remitted. As a result of the commercial dispute between the parties time was of the essence. The goods needed to be released to avoid the distributor’s customers cancelling their orders. The UK supplier similarly was late in paying his overseas supplier so wished everything now to go through swiftly.

The following day the firm were notified by their clearers that the funds had been received, and could be regarded as cleared three days later.

Comfortable with that information they remitted the funds to their client. Three days after they had paid out to their clients, they received a phone call from their bankers advising them that the same sum of US$48,000 had been unilaterally withdrawn from their clients account without giving reasons.

The lawyer dealing with the matter immediately reported the position to the firm’s COFA and arrangements were made for US$48,000 to be available to be paid into the client’s account the following morning.

Unsurprisingly fairly heated discussions took place between the law firm and the bank throughout that evening which eventually led to the clearers, who maintain their US dollar account in New York (not in London as had been assumed) admitting that the payment had fallen foul of US federal government compliance which is why the funds were unilaterally pulled back six days after first being credited to the client’s account.

It transpired that after the funds had been released to the law firm, someone within the clearer’s US compliance department decided to order London to pull the funds back because they suspected that they might be a receipt made in breach of Iranian trade sanctions, although that was never admitted.

It was only when the London law firm ran a Google search for their client’s name and ‘Iranian sanctions’ that they were able to surmise that the US authorities had apparently mistaken the first name of the client’s name for that of an Iranian freighter.

Simply asking the lawyers concerned would have clarified the matter but doubtless in the spirit of compliance and whistleblowing nothing could be said. Having made the discovery the lawyers approached the clearers to notify them of their findings and that in their view there had been no breaches of compliance. The firm were then advised that the following morning the funds would be returned to their clients account.

In light of the above and in order to satisfy SRA rules the lawyers requested from the clearers a letter of explanation as to how and why the funds had been withdrawn unilaterally by them and subsequently re-credited to the account. They also requested this so that it would be available to their auditors.

Quite bizarrely though when the law firm’s cashier contacted the bank the funds were there yet there was no trace that they had ever been withdrawn the night before, even though there was an email trail to that effect sent by the bankers.

This left the law firm in the position of knowing that monies had been removed and replaced from their clients account, having generated a COFFA report and yet no audit trail to support it. As a result a meeting was called with the senior area manager to acknowledge that there had been a mistake on the part of the bank’s administration in sanctions checking. Not unreasonably a letter was sought from the bank for the record explaining what had occurred.

This goes to the very nub of the relationship between solicitor and banker, and is why the narrative above is so important. The lawyers sought clean and unconditional confirmation from the bank that in future when funds were credited to their clients’ accounts that they could safely regard those funds as cleared and available for distribution and that they could never be subsequently withdrawn from the account by the bank, even if it transpired that the bank had failed to exercise its own money laundering in sanctions process effectively. Otherwise how can solicitors operate a client account and remit monies to their clients without the fear that funds would be clawed back?

Practitioners must bear in mind that when receiving funds from abroad one needs to check that the bank have completed their due diligence and screening compliance checks, which are imposed by correspondent banks, and that relying upon notification that monies have arrived in the UK for the credit of the solicitors appears to be insufficient.

The bank concerned produced a copy of their customer agreement which seemingly entitles them to take payments out of a solicitors account if “sometimes a payment is made into your account by mistake” and the bank interpret “mistake” as theirs, rather than anyone else’s.

It is a salutary lesson, but illustrates how compliance continues to make practitioners lives more complex.