SRA warns on fraudster infiltrators as small firms lose £7m

Philip: No room for complacency

The Solicitors Regulation Authority (SRA) has warned law firms to be on the alert for fraudster infiltrators after incidents at two small practices led to potential losses of over £7m.

The SRA said both incidents involved “firms branching out into different work areas” after fraudsters approached them, offering to expand their services and providing “bogus credentials to support their supposed expertise”.

Once appointed and away from supervision, the new recruits “had access to client money which appears to have been stolen”, resulting in “potential losses of more than £7m for those involved”.

The SRA said: “Small firms are being targeted. This may be because the fraudsters think their apparent offers of assistance or new work will be more readily accepted and that principals in those firms may not have been able to keep up to speed with warnings such as this one.

“Reports of infiltration highlight the need for the profession to make sure that it carries out proper due diligence on those seeking to join a firm.”

The SRA said solicitors were under a duty to use sound financial and risk management processes, protect client money and provide a proper standard of service to clients.

“Taking on new staff for areas where managers do not have the relevant expertise could mean they might not be properly supervising employees.”

The SRA said approaches of this type, particularly if unsolicited, “need to be treated with extreme caution”.

Law firms were advised to get as much verification as possible from third parties such as banks and other professional firms before making decisions.

“One check or reference from another firm is unlikely to be sufficient because the fraudsters may control or have influence over more than one firm.”

Firms were also advised to carry out internet searches and checks on official websites such as those of the SRA and other regulators.

“Solicitors should be aware of unusual aspects of the proposal. This could be someone bringing work to the firm saying that they will pay the sole principal or partners a ‘salary’ from the new work they bring.”

The SRA said that since the reports of infiltration were still being investigated, no further details of the two cases could be given out.

However, the regulator cited a case study published on its website to highlight the importance of proper vetting of law firm employees in 2014. Names and other details were changed to protect identities.

A sole practitioner, Mr Smith, laterally hired a partner who had 20 years’ experience of immigration work, Mrs Green, but did not ask her to sign an employment contract and failed to obtain “any evidence of her credentials”.

When an employee carried out an internet search, he discovered that Mrs Green had been suspended from practice three years ago, for five years. Confronted by Mr Smith, she admitted it, but the firm continued to employ her.

Her employment was only terminated after clients complained of a lack of progress on their cases and that they made payments to her greater than those recorded in the firm’s accounts.

The firm notified the SRA about misappropriation of client money. When the SRA investigated it found that conveyancing transactions carried out, under the supervision of Mr Smith, by “an unadmitted person who had been with the firm for five years”, displaying multiple rule breaches.

The SRA discovered that the conveyancer had been dismissed from his previous firm for misconduct. Mr Smith was not aware because he had carried out no pre-employment checks.

Mr Smith was referred to the Solicitors Disciplinary Tribunal, where he was suspended, ordered to pay costs and had conditions imposed on his future practice.

Paul Philip, chief executive of the SRA, said: “Many law firms handle large amounts of money, making them an attractive target for fraudsters.

“We know that most firms have strong systems in place to make sure they are employing the right people, as well as protections to make sure staff are properly supervised and money in the client account stays safe.

“But these recent cases show that there is no room for complacency and that undertaking careful due diligence for any potential employees is essential. Leaving the door open for fraud is damaging to both the firm and public trust in solicitors.”

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