Ultimate guide to legal cashiering #2: Tips and traps

We’re continuing our ‘Ultimate guide to legal cashiering’ blog series with an overview of the main traps with strategies to defeat them, primary issues around accounting regulations with advice on assured compliance, and three examples of law firms who’ve learnt the hard way by breaching legal accounts rules and being punished by industry regulators.

 

What can go wrong?

The 5 villains of legal cashiering, and how to defeat them.

There are plenty of things that can go wrong if the people processing your accounts don’t have the relevant background and knowledge. Here are five major traps which you need to avoid at all costs…

Villain 1 – Theft from client and/or office account

Legal cashiers often have direct access to and full control over business bank accounts and accounting systems. This autonomy makes it easier for them to commit fraud or theft compared to other roles, especially when left to their own devices.

How to defeat it? Ensure that there is relevant authorisation and checking procedures are in place at your practice.

Villain 2 – Money laundering

Law firms traditionally have a reputation of trust, which makes them an attractive target for money launderers looking to legitimise ‘dirty’ money. Falling victim to this can have serious consequences on both your bank account and your reputation.

How to defeat it? Know exactly who your client is and where their money is coming from by carrying out the appropriate money laundering controls. If unexpected funds are sent to your practice, make sure you are following correct procedures in the returning of these funds.

Villain 3 – Delaying deadlines

The consistent pressure for practitioners to hit deadlines in their fee-earning work can see cashiering deadlines fall down the pecking order. This is the fastest way to alert regulators to a potential breach at your law firm.

How to defeat it? Invest in a trusted legal accounts software and use automated workflows to ensure all financial matters are completed on schedule. Always be aware of upcoming accounts and regulatory deadlines.

Villain 4 – Breaches of SRA, CLC or HMRC rules

Poor legal cashiering will soon put you on the radar of the relevant regulatory bodies who may deem it necessary to investigate your accounts. These investigations will leave no stone unturned, and often end in substantial fines to your law firm or even intervention and closure.

How to defeat it? Stay up to date with the latest regulations, use a qualified legal cashier and always adhere to the accounting rules.

Villain 5 – Intervention and closure

If regulators are left unsatisfied with your processes and procedures during their investigation, your law firm may be forcibly closed or you may even be struck off as a solicitor. This is absolutely the worst case scenario.

How to defeat it? When you notice malpractice, be honest and take immediate steps to remedy it. Doing this can result in reduced fines, and shows a willingness to embrace change.

 

The rules of regulation

When you’ve provided outsourced software and cashiering services for over 40 years, you notice some issues crop up more often than others. If your accounts are regulated by the SRA, then here are some ground rules you need to live by.

5 SRA rules and 5 best practices that you HAVE to get right

SRA Accounts Rule 2.5 – Residual balances

Ensure client money is returned promptly to the client or third party as soon as there is no longer any proper reason to hold those funds. When struggling to return residual funds to a client, keep records of attempts made and have steps in place of donating the money to charity, or sending to your relevant regulatory body.

SRA Accounts Rule 6.1 – Duty to correct breaches

Correct any breaches promptly upon discovery. Any money improperly withheld or withdrawn from a client account must be immediately paid into the account or replaced as appropriate.

SRA Accounts Rule 8.1 – Maintain accurate, contemporaneous and chronological records

Record all client monies in client ledgers. Maintain a list of all client balances and provide a cash book showing a running total of all transactions through client accounts held or operated by you.

SRA Accounts Rule 8.2 – 5 Weekly statements

Obtain, at least every five weeks, statements from banks, building societies and other financial institutions for all client accounts and business accounts held or operated by you.

SRA Accounts Rule 8.3 – Conduct 5 weekly reconciliations

Complete, at least every five weeks, for all client accounts held or operated by you, a reconciliation of the bank or building society statement balance with the cash book  balance and the client ledger total. Also referred to as a three way reconciliation.

Don’t confuse expenses with disbursements

When it comes to completing your VAT returns, expenses and disbursements mean very different things, and should be treated as such. Remember that while expenses form part of your service provided to a client, a disbursement is a payment which has been paid for on behalf of the client. It’s extremely important to understand the difference from a VAT treatment perspective.

Monitor fraud appropriately

Don’t take anything or anyone at face value. Be on the lookout for people pretending to be someone they’re not (especially in phishing emails), as well as entire organisations which are fictional. Always do your due diligence.

Complete money laundering checks

You are bound by law to carry out AML checks on any and all new clients. Be sure to undertake a thorough risk assessment at the start of every working relationship, and follow up with additional checks every few years.

Manage your suspense ledgers

Suspense ledger accounts are a temporary solution for storing unallocated and unidentified funds – with an emphasis on the ‘temporary’. As soon as you can accurately allocate the funds, transfer them away from the suspense ledger immediately. Consistently review the suspense ledger and ensure that no entries remain for significant periods of time.

Meet regulatory deadlines

Deadlines are there for a reason. Not only is sticking to them great for your all round organisation levels, a bit of forward-planning can go a long way in keeping you out of hot water too.

 

From nightmare to reality

3 real life horror stories

The consequences of poor legal cashiering may sound like a nightmare, but they can come all too true if you’re not careful. Take a look at these three recent horror stories below as proof, and do your best not to follow in their footsteps.

1 – Mishcon de Reya fined record sum for breaching money-laundering rules – January 2022

Prestigious UK law firm Mishcon de Reya was fined £232,500 following an investigation by the SRA into work the firm performed between September 2015 and April 2017.

The regulator said that Mishcon de Reya’s conduct had “potential to cause significant harm by facilitating transactions that gave rise to a risk of facilitating money laundering.”

The moral of the story? Always carry out the required level of due diligence and ongoing monitoring.

Source: The Guardian

2 – Paralegal steals £438k from law firm to feed gambling habit – May 2022

A former paralegal at national law firm BLM was jailed for three years and three months after pleading guilty to stealing £438,000 from the firm.

The employee took advantage of a changeover in claims management systems to authorise payments into their own bank accounts, with no system in place to check the authenticity of the bank details used.

The moral of the story? Breaches from within are often the hardest to prevent. Always have a relevant authorisation procedure in place.

Source: Legal Futures

3 – Fine reduced after law firm self-admits to breaching accounts rules – January 2021

South-west firm Ashfords was fined £16,200 after admitting to holding more than £1m in a client account without providing any underlying legal services.

Because Ashfords reported the matter to the SRA and accepted the allegations at the earliest opportunity, the maximum reduction of 40% was applied to the fine (reducing it from £27,000).

The moral of the story? Don’t be afraid to admit to your own mistakes.

Source: Legal Futures

 

DOWNLOAD E-BOOK

Want to read our earlier blog in this series? Access ‘Ultimate guide to legal cashiering #1: The basics‘.