The Solicitors Regulation Authority (SRA) have been warning law firms about being targeted by fraudsters promoting high-yield investment schemes which have turned out to be ineffective and/or fraudulent since 1997. A further warning notice was issued on 10 September 2013 and more recently, on 21 September 2016 highlighting that this is still a prominent issue.
The SRA have highlighted that it is the duty of the solicitor to ensure that they do not become involved in potentially fraudulent financial arrangements and highlighted in particular, the following principles:
· Best interests of the client; and
· Behaving in a way that maintains the trust the public places in us and the provision of legal services.
Some of the common characteristics of such arrangements are:
· A high rate of return and disproportionate rewards;
· Confusing and complex transactions with obscure descriptions;
· Security being offered to ‘investors’ includes an undertaking from a law firm or that money will be held by a law firm – at times including reference to indemnity insurance or the Compensation Fund; and
· The need for speed and confidentiality to secure the deal.
The types of legal services that promoters may request include:
· Moving monies through client accounts;
· Advising on and drafting contracts that have little genuine content; and
· Certifying or verifying documentation.
It is vital that when approached (by any prospective client) that you comply with your obligations under the Money Laundering Regulations and related legislation. Your client informing you that there is a need for speed to secure the deal can be an attempt to prevent you from carrying out the usual due diligence checks. Do not fall into this trap.
It is also important to ensure that you are complying the with the Solicitors Regulation Authority’s Accounts Rules 2011 when dealing with investment money. In particular, Rule 14.5 requires that you must not allow money to move through your accounts or an account you control unless you are doing so in respect of instructions which relate to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities. In simple terms, there is a legal task and you are not simply holding funds or making payments.
The SRA has advised that fraudsters have evolved their schemes to avoid the usual red flag indicators and have kept up to date with warnings so they know what solicitors should be looking out for. Therefore, it has become increasingly difficult to identify a fraudulent investment scheme however, the following are investment schemes that the SRA has seen been carried out and which have failed:
· Carbon credit trading;
· Diamond trading and fine wines;
· Land banking;
· Hotel rooms;
· Overseas agricultural rights;
· Famous works of art being the ‘security’ for an investment scheme; and
· Property developments abroad.
The SRA has warned that the nature of these schemes is now so well known that any solicitor who becomes involved may face being closed down and alleged to have acted dishonestly. The latest warning notice states, “Failure to comply with this warning notice is likely to lead to disciplinary action”. As such, it is important to ensure that you are aware of the content of the SRA’s warning notices.
If you are faced with a prospective investment scheme and you are unsure if it is genuine, contact our Professional Practices department immediately. Do not accept instructions which you are unsure of until you have taken expert advice.