Partnerships are wonderful things. The traditional belief that partners can do anything they like, as long as they do not interfere with their secretaries or the petty cash, still holds true. Fraud within the legal profession represents the last taboo, even though it affects firms of all sizes, locations and types. It is a perennial hot potato, spoken about in hushed terms and usually believed to be the province of dodgy clients or third parties, who try to trick partners into illegal projects to give their fraud the semblance of respectability. The Law Society has recently issued warnings about money laundering, banking instrument fraud, mortgage fraud and property fraud, while the media – particularly professional publications and national newspapers – reinforce the threat by sensationalist reporting of the most salacious cases and tempting opportunities. When cases of client and partner fraud become public, they attract scandalous headlines. Fraud is creative, covert and alluring by its nature, qualities that make great editorial copy. Even when not played out in the public arena, fraud can rock a firm to its core – careers crumble, sudden changes to management structure and day-to-day processes create havoc, and trust plays second fiddle to rampant suspicion and gossip. The extent of fraud within the legal profession should make prevention a priority for UK firms. Unfortunately a general unwillingness to address the topic – which points towards deep-seated fear – suggests that the incidence of fraud is far higher than anyone will admit. Professional reticence is amazing. While it is almost impossible to find anyone who will admit that intra-partnership fraud is a significant business issue, trying to obtain advice on how to prevent it in the first place is no easy task. Law firms rely on trust – internally and externally. Intra-partnership fraud attacks the essence of trust, honour, camaraderie and goodwill, which are the foundations of modern partnership. While limited measures exist to police the 'honouring' of trust within firms, much can be done to limit the chances of successful intra-partnership fraud. The starting point for most significant cases of fraud within law firms is staggeringly mundane – the majority are perpetrated against the partnership itself.
Common frauds include:
lMisappropriation of partnership funds
lSolicitors making personal payments from client accounts
lAdvance fee and prime bank instrument fraud
lBogus expense claims
lClassic procurement fraud
lMortgage fraud
lWill fraud
lRunning a separate business from the firm
lLegal aid fraud
There are countless examples of these frauds. These include a solicitor in the northeast arranging the sale of a client's land using a complicated transaction that involved the purchasing company borrowing large sums from a bank and making payments to a sham company he had set up with an almost identical name to the real vendor.
Another large firm's financial controller banked hundreds of thousands of pounds of client monies during a decade-long scam. She set up a separate bank account in the firm's name with herself as the signatory and paid in cheques sent in error, double payments from clients and unexpected VAT refunds. A clerk, in a similar sting, paid money into a newly opened high interest account in the firm's name. By using it as a holding account he was able to steal the interest. A Scottish solicitor was recently convicted for a multi-million pound advance fee fraud committed with a client. In another case, an employee was caught running an internet pornography business from his firm's offices. A partner was quietly 'retired' when it was revealed that he consistently faked expense claims for overseas trips for fictitious trials, including taking a string of mistresses with him – all on expenses. One of the biggest causes of claims to the Office of the Supervision of Solicitors is multiple mortgage applications made by a solicitor on behalf of a client. The client gets his or her mortgage and the solicitor two, three or more.
The latest game in town is provided by internet fraud. Multi-nationals conduct transactions over the internet, making them a prime target for hackers and industrial espionage. New technology also means that old-style frauds can be perpetrated quickly and quietly, making them even more difficult to detect. Predictably and unimaginatively perhaps, legal tricksters blow their cash on fast cars, expensive holiday homes and luxury items – not Swiss investment portfolios. Similarly, many lawyers with severe financial problems – a surprising percentage of the legal population – view fraud as the best way out of trouble. It is a practice that thrives during recession; long-term fraud is usually uncovered when a partnership experiences extended difficult trading conditions. Fraudsters can easily hide the evidence while a partnership flourishes. But they become desperate, panic and make mistakes when corporate streamlining and budget reviews threaten to expose their criminal activity. When opportunity knocks, lawyers are always eager to answer. If the chance for lucrative fraud arises, many will take a one-off risk. Opportunistic fraud develops into a long-term criminal lifestyle that can ultimately shatter a partnership and its finances.
Successful frauds are notoriously difficult to spot internally and externally. While most long-term fraudsters are exposed internally, colleagues worry that they will blow their own careers as well as the whistle, making lawyers, associates and support staff reluctant to reveal wrongdoing. The professional culture that dictates that grassing up colleagues isn't cricket persists, with those who 'blab' ostracised. This is the underlying problem with identifying and dealing with fraudsters. It is common for at least two other people within an organisation to be aware that fraud is being committed, so law firms should introduce policies that encourage and reward employees for disclosing fraud. A communications programme that outlines the firm's policy and raises fraud awareness is an excellent starting point. The simple solution is to avoid recruiting fraudsters. How often are references from previous employers and character references really followed up? Firms are vigorous when assessing junior staff, but waive policy when recruiting partners. Serious frauds are usually committed by serious players in a firm's structure. Are you entirely confident that your newest partner has not left a trail of suspicion behind at previous firms? Many frauds occur because of management laxity in high-risk, back-office financial areas, leaving employees unsupervised. Partners must have wide access to and knowledge of all operations. If only one person knows how the expenses system works, you have a potential problem. Training in IT systems and financial administration will help keep staff informed and able to spot irregularities; glitches can herald a nascent fraud. Client money management should be exemplary; unfortunately, there are numerous examples of people getting their hands on client cash through dubious means. Review your firm's systems to eliminate cash seepage. To comply with the Solicitors' Accounts Rules, an independent accountant's report on clients' monies is required to be submitted annually to the Law Society. Partners should ensure that suitably experienced accountants are engaged for this work and that their report on weaknesses and controls, 'a management letter', is reviewed at partner level and acted on. Watch out for odd instructions, peculiar settlement requests, atypical transactions and dodgy clients. All signal that something is amiss. Fraud is like burglary: the best defences, systems, training and staff supervision will not stop all fraud. Law firms know this, but instead of using it as an excuse to do nothing, they should eliminate obvious opportunities and install crisis plans to deal with it quickly, quietly and effectively.
George Bull and Tim Luddington are partners in the professional practices group at Baker Tilly accountants.