Professional Negligence Article

Professional Negligence: The unusual suspects

The Proceeds of Crime Act placed greater responsibilities on solicitors to report ciminal activity on the part of their clients. But in doing so, they may lay themselves open to negligence claims. Simon Robert-Tissot looks at a recent case that may help guide lawyers through the maze
For some time, solicitors have had to balance the need to act in the best interests of their clients, while at the same time avoiding potential civil liability. For example, failing to comply with a client’s instructions may risk the solicitor being in breach of both his contractual obligations to his client (including his duty of confidentiality) and his professional duties. Conversely, if he follows his client’s instructions where a third party is beneficially entitled to the monies transferred, the adviser may, where ‘dis-honest assistance’ can be shown, be held to have accessory liability as a constructive trustee. Since the Proceeds of Crime Act 2002 (POCA), solicitors have also had to consider the possibility of criminal liability. The money-laundering regime places additional obligations upon professional advisers to ‘know their clients’ and to think about the sources of funds and the commercial effects of particular transactions. These increased duties make it easier for third parties to assert and establish that the professional had the requisite knowledge for dishonest assistance in a breach of trust. POCA also obliges solicitors to report particular transactions to the authorities. So long as these obligations are met, criminal liability can be avoided. However, the obligations are onerous and the penalties for non-compliance severe, as the six-month jail term recently imposed on solicitor Gavin McCartan illustrates. The position of solicitors is made still more complicated in comparison to that of other professionals by the fact that they must question whether they must disclose privileged communications. In the recent case of Bowman v Fels [2005], the Court of Appeal considered the impact of legal professional privilege in relation to POCA. The decision is helpful in the litigation context, but the judgment raises as many questions as it answers in relation to corporate transactions, where the difficulties described most often arise. The legal quagmire often faced by professionals is amply illustrated by the case of Hosni Tayeb v HSBC Bank plc [2004]. Mr Tayeb had opened an account with HSBC to receive the proceeds of a sale transaction. HSBC received the monies and credited Mr Tayeb’s account. However, later the same day a bank employee became suspicious about the transaction and froze the account. Subsequently, the funds were returned to the transferor’s account and Mr Tayeb’s account was closed. Mr Justice Coleman criticised the bank for failing to adhere to money-laundering regulations, and considered the potential liabilities to which the bank had been exposed. He stressed the obligation on professionals handling client money to verify the source of the funds and to make disclosure to the National Criminal Intelligence Service (NCIS) if they have a genuine suspicion of criminal activity. Mr Justice Coleman said that the employee should not have simply returned the funds to the transferor in an attempt to "disengage from the transfer", but should have investigated. He suggested that the bank should have frozen the account while reporting the matter to NCIS, since if it had done so, it would still have been behaving honestly and no liability to a third party was likely to arise. However, Mr Justice Coleman did not explain how freezing the account and refusing to comply with client instructions would not amount to a breach of contract, nor did he explain how to deal with the situation where NCIS failed to respond quickly or where the client required the monies to be applied immediately for a particular purpose. Mr Justice Coleman also cautioned that freezing the account could give rise to potential liability for tipping off under POCA. In the earlier case of Bank of Scotland v A Limited and Ors [2001], the bank knew that the customer was being investigated for suspected fraud and was asked by the police not to take action which might tip off the customer. However, the bank believed it was about to be instructed to pay monies out of the account by the client and so, without informing its client, it applied to court for instructions, naming the client as the defendant. Surprisingly, the Court of Appeal held that the application should have named the Serious Fraud Office (SFO) as the defendant. Lord Justice Woolf also held that the parties would have to bear their own costs unless the SFO had acted unreasonably. The bank was actually ordered to pay both sides’ costs because it had made the application against the wrong party. To avoid civil liability where there are genuine suspicions about the source of the funds, the safest course of action is likely to be to refuse to pay the funds away (or even back to the client). Otherwise, the solicitor honours his duties to his client but risks being liable as a constructive trustee to the rightful owner of the monies paid away. Mr Justice Coleman in Hosni Tayeb suggested that the firm could obtain reassurance by seeking the court’s guidance. However, Mr Justice Tomlinson in Amalgamated Metal Trading Limited v City of London Policy Financial Investigation Unit and Ors [2003] held that a declaration that the funds are not the proceeds of crime would only be made where the firm adduces positive evidence to that effect. Avoiding criminal (as well as civil) liability weighs heavily on the mind of any professional adviser. However, since POCA, legal professionals are unsure as to exactly when they are required to make a report, particularly when this would appear to conflict with the duties they owe their client. In Bowman v Fels the Court of Appeal clarified that Section 328 POCA, which makes it an offence to become ‘concerned in an arrangement’ involving money laundering, was not intended to apply to solicitors conducting litigation. In practice, this should include solicitors involved in settling litigation and/or ADR. Of course, solicitors will still need to be alert to money laundering through sham litigation. This clarification is useful for litigators, but to what extent does Section 328 of POCA apply to transactional lawyers? The Court of Appeal did not explain why the wording of Section 328 did not apply to litigation, making it difficult to know whether the case can be applied beyond the litigation context. Transactional solicitors therefore await guidance from the Law Society. However, it is worth remembering that there remains the separate duty to disclose under section 330 of POCA for those acting in the regulated sector. The Court of Appeal also clarified that Section 328 does not override legal professional privilege, as clearer language would have had to be used to achieve this. Again, transactional lawyers are left wondering whether this finding applies to them, since legal professional privilege applies as much to protect communications generated during non-contentious work as it does to those produced during litigation. Again, we must wait for Law Society guidance. Solicitors making reports to NCIS must consider whether relevant information is privileged and thereby protected from disclosure. For example, information obtained from a counter-party or a third party may not be privileged. Likewise, privilege may be overridden where the client is involved in the commission of a criminal offence. To summarise, solicitors continue to have to judge the most appropriate action when faced with potential liability for breach of contract/confidentiality for failing to carry out their clients’ instructions, or potential liability to third parties for knowing assistance in a breach of trust. At the same time, solicitors must comply with their obligations under POCA. Bowman v Fels has provided helpful guidance to litigators, but has done little to clarify the position for transactional lawyers. We must hope that the Law Society will soon give clear guidance to them about the scope of their obligations, and the applicability of legal professional privilege. Although not binding, such guidance would give some comfort to solicitors when making best efforts to comply with the current money laundering regime. Simon Robert-Tissot is a partner in Barlow Lyde & Gilbert’s professional liability and commercial litigation department.
Author: Simon Robert-Tissot
Source: Legal Week