Misappropriation of client funds can have serious consequences, regardless of jurisdiction you practice in. Although each region has its own unique regulations regarding trust funds, the basic line remains the same: money in a client’s trust account does not belong to the attorney until they have completed the task and invoiced for it. At the McGavock Reed Law Firm, attorney Reed is here to guide you through the mistakes that lead to the misappropriation of client funds.
But what exactly constitutes the misappropriation of funds? Aside from lawyers who deliberately steal, some attorneys have been known to misuse client funds without realizing it.
A lawyer who is involved in the misappropriation of client funds or property can face severe consequences, even if the misappropriation is unintentional.
Lax trust accountS and escrow oversight are commonly to blame for the commingling of client funds. Sometimes a lawyer who fails to reconcile his statements can overpay a client. Other times, a lawyer may accidentally charge expenses to trust instead of operating. Most commonly, lawyers fail to track deposits and accidentally pay themselves before the check clears resulting in an overdraft. Even an unintentional accounting blunder might result in claims of a trust account breach.
The McGavock Reed Law Firm knows that actual harm to the client is not required to commence disciplinary action. Even if you don’t spend entrusted money, commingling funds is considered an ethical infraction, even if no harm occurs.
Here are some practices that can lead to misappropriation, as well as tips for avoiding incidents that might result in penalties or disbarment. Read more about Trust Fund’s best practices here.
What exactly constitutes the misappropriation of customer funds?
When an attorney fails to deposit client funds directly and quickly into a trust account, or when the money is utilized for purposes not allowed by the client, then the lawyer has taken advantage of them.
Whether intentional or not, such behavior can have serious repercussions. The misappropriation of client funds is taken seriously by state bars, resulting in reprimands, suspensions, and disbarment.
Not putting filing fees onto a client trust account
Client money should always be transferred directly and instantly into the trust account. They shouldn’t ever be deposited in a legal firm’s operating account without written consent of the client, even if attorneys have already started working on the case.
The funds must remain in the lawyer’s trust account until they have been invoiced for finished services and the customer has had an adequate period of time to obtain and evaluate the bill.
Not putting debit or credit card payments straight into the client’s account
When a legal practice accidentally fails to deposit client funds into a trust account, it might be due to problems with the online payment merchant it uses.
Non-legal credit card retailers deposit the amount they charge into an account and withdraw it as a fee. Because charging fees is the lawyer’s duty, not the client’s, some lawyers seek to address this issue by having payments made with credit cards deposited into the operational account. They then transfer the funds to the client’s trust account. However, despite its good intentions, this strategy is not a legal option. Rather, it is a per say commingling of funds violation. For the best results, we recommend working with a legal-specific merchant such as Clio or MyCase.
Overdraft on a customer account
It is the attorney’s job to understand the amount of a client’s account and avoid overdrafts. If the attorney creates a check on the balance in a customer’s account and then uses another client’s cash to settle the overdraft, then they are taking advantage of client funds.
By invoicing for finished services and subsequently sending a check from the trust account to the firm’s operating account, attorneys can decrease the likelihood of an accidental misappropriation.
Using a trust account to cover non-client charges
While it is normal practice to utilize client cash to compensate the legal firm for expenditures incurred on the client’s behalf, lawyers should exercise caution when approaching this procedure.
Even when hard expenses are advanced on a client’s behalf, such as courtroom reporter fees, the client agreement should state that they represent the client’s financial duty. Soft expenses, such as overhead expenses, can also be covered by the client. However, the customer must agree to this method in advance, and it must also be stated in the client agreement.
Failing to repay customers for work that the lawyer has not done
If a lawyer takes payments from a client in fulfillment of an arrangement to conduct legal representation for the client but does not complete any of the mutually agreed-up work, the funds must be returned to the client. Failure to give back the funds is another category of lawyer misappropriation of client funds.
Safekeeping Best Practices for Attorneys
Because attorneys are ultimately accountable for the protection of these finances, the need for solid internal procedures can’t be overstated. Consider the following actions for securing customer funds:
Put it on paper.
Create a documented trust account plan and get it approved by your accountant. During the initial client meeting, the attorneys must go over your trust accounting methods and ethical standards with them. Also, they must make all personnel aware of regulations and monitor regulations. You can teach them about potential red flags as well as what to look for. Internal tips are the most common method for detecting lawyer misappropriation of client funds.
Restrict authorized signers
Increase the approval process by limiting the number of authorized signers. At the same time, ensure that no distribution is made without two written signatures, or preferably a contemporaneous inspection by a second party.
Requisition for documents
Implement a check requisitioning system that generates a clear record of transactions to ensure that no customer trust fund checks are negotiated without adequate documentation. This will help prevent misappropriation of funds.
Restrict access to Internet banking.
When using electronic banking, We keep a list of computer rights allocated to certain workers. This list must be approved by the administration or an appointed designee who cannot configure permissions for users on the system.
Conclusion
Wrapping up, this blog covered a few practices that have the potential to lead to misuse of client funds.
Contact the McGavock Reed Law Firm today!
You can contact the McGavock Reed Law Firm for a trust management consultation. Attorney Reed has extensive years of experience in practicing attorney ethics and has successfully defended clients facing misappropriation charges. The firm can be reached at 703-206-6926 or via email at info@macreedlaw.com to find a lawyer who specializes in defending attorneys accused of misappropriation of client funds.
Author Bio
The McGavock Reed Law Firm is your trusted law firm when it comes to attorney ethics. The firm excels at vigorously defending clients, ensuring optimal outcomes. With years of extensive experience, The McGavock Reed Law Firm stands at the forefront, dedicated to securing the results you deserve.