“… while nobody sympathises with a money-launderer or other criminal, not only is there the possibility of a damages claim from a client, but also regulatory sanctions in addition …”
Solicitors could inadvertently breach their obligations to certain clients by allowing their Solicitors Accounts Rules (SAR) auditors to view those clients’ files.
Solicitors and other professionals are all too aware of their duty to report clients and others to the Serious Organised Crime Agency (SOCA) if they come across or suspect money-laundering or other criminal acts committed by their clients or others.
Solicitors are in a unique position, namely that there are particular exemptions that apply to them in relation to privileged information and information that comes to their attention in the course of conducting litigation. Suffice it to say that quite frequently circumstances arise in which solicitors become aware of or suspect money-laundering or other criminality but are excused from making a report to SOCA when these particular exemptions apply.
More importantly, in the absence of a statutory obligation to report, their obligation of confidentiality to their clients precludes them from making such a report. They have a positive obligation to the client not to make such a report.
Individual fee earners should still, however, make an internal report to the money laundering officer in their firm.
Accountants are not in the same position. Legal professional privilege and the litigation exemption do not apply to them, it only applies to lawyers. Accountants have a duty of confidentiality, but this is overridden by their statutory duty to report suspected money-laundering.
Once a year solicitors invite their accountants in to review their accounts for the purposes of ascertaining whether the solicitors have complied with the SAR. The accountants then make a report to the Solicitors Regulation Authority (SRA).
The SAR accountants are entitled to look at any file, and in the course of an SAR audit they will look at quite a number of files. In doing so they may come across facts and matters that they consider they have a duty to report to SOCA. The information may be in the form of file notes, correspondence or documents placed on the file in the normal course of conducting the matter, or it might be in the form of the solicitors’ own internal communications constituting or concerning an internal report to the firm’s money laundering officer, copies of which the fee earner running the file may have chosen to keep on the file.
Either way, the accountants may come across the information and may quite properly make a report to SOCA.
This is not just a theoretical risk. Just as solicitors often declare to their clients in their terms and conditions that anti-money laundering reports may be made to SOCA, accountants are including in their terms and conditions provided to solicitors terms to the effect that they may make reports to SOCA arising out of matters that come to their attention in the course of carrying out SAR audits. They would not go to the trouble of including such terms if the issue never arose.
In this way, privileged information belonging to clients, which the solicitors are obliged to keep to themselves, may “leak” out to SOCA, via an SAR accountant.
Every such “leak”, as well as being a breach of the duty of confidentiality to the client, will be a breach of the solicitors’ rules of professional conduct and may be a Data Protection Act breach. So, while nobody sympathises with a money-launderer or other criminal, not only is there the possibility of a damages claim from a client, but also regulatory sanctions in addition. Data Protection breaches have already led to professional firms being fined six-figure sums.
A common knee-jerk reaction on hearing about this issue is to make the assumption that if the client is a villian no court or regulator is going to punish the solicitor for an inadvertent breach. The matter is not, however, so clear cut. A large proportion of clients who are reported to SOCA may be innocent. What is being reported may be only a suspicion. In this instance there is not always fire when smoke appears. Even guilty persons are not always prosecuted, let alone convicted.
The consequences of a report for a client may be considerable. In the case of suspected tax evasion the client may be investigated by HMRC, and may have to incur substantial professional fees, even if in fact they owe no tax. In the case of many suspected crimes the suspect may be arrested and a receiver may be appointed over his or her assets, long before any trial to determine guilt (at which the client may be acquitted).
Solicitors may feel a degree of comfort in that the client may never discover that a “leak” from the firm of solicitors led to their financial losses. Though many firms might “get away with it”, such matters sometimes emerge, or clients determined to recover compensation will make an educated guess. Solicitors should not feel immune. Of course, solicitors will in any event wish to strive to comply with their obligations to their clients, not just hope that they will get away with failing to do so.
What then should solicitors do about this?
In the circumstances described above (suspected money-laundering but no obligation to report to SOCA), solicitors are entitled to, and in my view are obliged to, withhold a requested file from their SAR auditors if there is any risk that allowing the SAR auditors to read it might lead to a report to SOCA by the SAR auditors. It is not just internal reports that might be on the file that are in issue. Normal file documentation may contain the seeds of the original suspicion that led the solicitor concerned to make an internal report to his firm’s money-laundering officer. So keeping internal reports on a separate file, though very probably a good idea (so as to avoid future inadvertent and unlawful disclosure to the client), is usually not going to be a complete solution. Perhaps in some cases solicitors may feel entitled to weed files of suspicion-inducing materials before handing them over to SAR accountants, but that may depend on the extent of the materials, and in any event such a precaution requires a solicitor to be aware of the issue (of potential reporting by the SAR accountant) in the first place.
In many firms when the request for access to files is made by the SAR accountants, the files are collected by accounts staff or secretaries, in some cases perhaps without prior reference to the fee earner concerned, particularly if the file has been closed and archived.
Firms will already be keeping a list of files on which internal anti-money-laundering reports have been made. It would be wise to make it a part of the firm’s compliance regime to cross-compare the SAR accountants’ list of requested files with the internal anti-money laundering list.
Where solicitors decide that they have an obligation to their client to withhold a file from their SAR accountants, this will undoubtedly lead to a qualified report by the accountants to the SRA. The solicitors may well then wish (or be obliged) to explain themselves to the SRA. Otherwise unexplained qualifications may lead to an inspection by the SRA, taking up time and valuable resources in the case of all concerned.