UK: When Partners Cheat

Like the end of a romance, discovering that a partner has cheated stings every law firm to its core. Trust built up over decades of service disappears in the blink of an eye when fraudulent partners, valued and admired by their colleagues, are discovered all along to have had their hands in the till.

In too many cases, it is a star lawyer, who, having brought considerable work into a firm, increased profits, become a partner quickly and built up a position almost beyond scrutiny, is found to have raided the expense account or creamed off client funds.

As the recent well-reported cases of city law firm partners claiming false expenses, or moving money out of client accounts, demonstrate, it can be months or even years before the losses come to light, during which time irreparable damage may be caused to the firm and client relations.

Many signs of wrong-doing are, however, evident from much earlier on, and by taking some simple steps, firms can minimise the likelihood of falling victim to these breaches of trust, investigate suspected wrong-doing expeditiously, and manage the fallout of a rogue partner.

Prevention is better than cure

There are different sorts of fraudulent partner, for example, the conscientious type who patiently bides his time, or the star performer who confidently believes he won’t be caught. Either way, such individuals create masks to hide erratic behaviour and record keeping, which others in the firm may be willing to turn a blind eye to. Although frauds do not happen simply because processes fail, a failure to examine all aspects of a business will be much more likely to lead to its undermining. Firms should be aware at all times of cheating partners, and be ready to spot them. Here are some tell-tale signs and ways of managing risk.

  • Be aware of any activity spikes which appear at odds with the market. For example, if numerous property transactions appear suddenly, they may be a consequence of the solicitor involved hiding dubious practices behind a veneer of respectability. Similarly, a sudden growth in the number of personal injury claims being managed in a crowded market could be the product of an unlawful referral source

  • A typical fraudulent partner will operate over several years, and so look for radical changes in new work or improbable billings. Make sure the source of the work and the actual work done are appropriate and in line with market figures for similar work. The high number of chargeable hours may be in fact the outcome of overcharging clients, especially if they are high net worth people. One fraud, for example, involved a partner billing more than 15 hours a day every day of the week for over a year

  • Consider developing accounting practices superior to the Solicitors’ Accounts Rules (to stop theft of client monies)

  • Assess the lifestyle of the partner. Does their standard of living suddenly jump considerably? A lifestyle incompatible with income and position may indicate unlawful earnings

  • Accounts, HR or legal secretaries may be the ones who spot the cheating or fraud. Firms need a culture of openness where no one is afraid to raise their fears and suspicions about the managing partner or chief executive. A system of confidence(s) may be developed, perhaps using mentors or another peer-based process for whistle-blowing and expressing doubts. Build a firm culture where no one is too important to challenge, and a culture of checking work and cross-scrutiny

  • Have mechanisms in place for the regular and efficient auditing of expenses and fees. A tight financial system will prohibit the incurring of large business expenses on personal credit cards. Other carefully observed financial control procedures include self-certification to be avoided after a certain level, after which proof is needed and certification should only be done by a department head or the finance team

  • Carry out external audits from time to time

Investigating partners

Investigations might occur either routinely, as a form of regular audit to deter and prevent fraud, or when suspicions are raised about a specific individual. The level of investigation depends on the severity of what has happened, distinguishing theft and fraud from innocent error. Investigators must also consider whether a partner is acting alone, or with the involvement of others. Investigators should include consideration of the following:

  • Bringing in external investigators. External, independent consultants bring fresh pairs of eyes and will have less concern about treading on toes than internal investigators, plus specialist skills and experience

  • Consideration of the wide range of evidence available. Electronic evidence will often be the best, for example, from hard drives and telephones. Evidence of changes in personal spending can be found in credit checks and car insurance registers, as asset acquisition usually leaves a trace. Social networking sites show changing social circles and displays of wealth. All of these open and closed sources of information are best accessed by those with the training and skill to do so, as pitfalls (like the Data Protection Act) may catch the unwary

  • Calling in the police. This is something that requires careful thought. Once the police are involved, the firm will lose control of the investigation. However, the police will be able to investigate avenues not open to the firm itself, and a swift report to them may help put the firm itself beyond criticism. There may of course be specific obligations to report to authorities and, for example, money laundering obligations must be considered.

  • Firms must also consider regulatory obligations, and it will be necessary to report matters to the SRA

  • Notification of PI insurers immediately is important to ensure cover is not prejudiced

Disaster management

Once it has been ascertained that a partner has been cheating, the first step in managing the problem is often to confront them. There may be considerable anger and bitterness from other partners, as well as associates and others who worked with the partner, and from the firm’s clients and the wider legal community.

One important factor is the media. There may be copious reporting in the legal (and potentially the mainstream) press. Ensure that the firm’s press officers are fully involved, and in some cases you may even wish to consider getting an external public relations firm involved.

Numerous processes will commence, all of which will need the firm to manage or give substantial input. Criminal and regulatory proceedings are the most obvious. Many of the following will play some part: the police; the Serious Fraud Office; the CPS; PI insurers; the SRA and Law Society (or even Bar Council and Bar Standards Board); and later down the track lawyers acting for the victims; and the Official Receivers if the defendant is declared bankrupt. If there is a foreign element to matters then they will become even more complicated, and extradition proceedings may be necessary.

Proceedings to recover firm or client money may be a possibility, although these are also likely to be expensive, as asset tracing is complex and multi-jurisdictional.

Above all, the general approach the firm should adopt is to confront the issue head on and properly resource a full investigation supervised at a senior level. Client confidentiality and privilege and criminal court proceedings may necessarily reduce the information revealed, but in general the best idea is to approach all inquiries in a “cards-on-the-table” fashion. Don’t let information trickle out: it will do much more damage.

Conclusion

In most cases, the disruption caused by a rogue partner is preventable and thus avoidable. No system will ever be perfect, of course, and a determined thief will be able to circumvent all but the strictest of rules. Oppressive procedures are not always desirable as they undermine the collegiality and trust of the partnership. All regulations and procedures which increase scrutiny must be balanced with freedom and trust. However, the combination of fewer temptations, increased scrutiny and sensible detection processes will, one hopes, act as a strong deterrent to wrongdoing and keep the firm safe.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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