Practice Watch: Cautions on cash and new scams

by Barbara Buchanan, Practice Advisor, Conduct & Ethic

Handling aggregate funds
Handling cash refunds
List of valuables for monthly trust reconciliation
Counterfeit bank drafts – yet another trust account scam
Signing trust cheques
United States subpoena scam
Direction in a will to retain a particular solicitor
PST news

Handling aggregate funds

Cash under the mattress, or in a safety deposit box? Think twice about whether you can deposit it in your trust account.

If you are acting for a personal representative of an estate who discovers cash amongst the deceased’s possessions and who wants you to deposit it into your trust account, be careful. You may deposit into trust cash that in the aggregate amounts to less than $7,500, but you may not deposit cash amounting to $7,500 or more (Rule 3-51.1). Be mindful of the words “in the aggregate” in subrule (3). Here’s how it works.

If your client finds $2,000 in the deceased’s safety deposit box, you may deposit that amount in your trust account, following accounting rules for deposit of cash. If your client finds $5,500 in the cookie jar a few days later and wants you to deposit the $5,500 into trust, don’t do it. In the aggregate, you would have received $7,500 in cash in a circumstance not permitted by the rule.

What can you advise the estate client who brings too much cash to your office? Here are two options:

You can suggest that the client open up an estate account and deposit the cash into that account.

You can suggest that the client use the cash to get a bank draft payable to your firm in trust.

Handling cash refunds

Lawyers may only receive or accept an amount of $7,500 or more in cash in the very limited circumstances permitted by Law Society Rule 3-51.1. Where a lawyer has received a cash retainer in accordance with subrule (3.1), and the client is later entitled to a refund, there are rules governing when the refund must be made in cash rather than by cheque.

What happens if a lawyer receives an $8,500 cash retainer (permitted) but when the lawyer issues the final invoice, $3,000 is left in trust? How does the lawyer refund the $3,000 to the client? Subrule (3.1) requires that any refund greater than $1,000 out of the $8,500 retainer must be made in cash. The lawyer must refund $3,000 to the client in cash, not by trust cheque.

What if a lawyer receives a $7,000 cash retainer but when the lawyer issues the final invoice, $2,000 is remaining in trust? How does the lawyer return the $2,000 to the client? Because the lawyer received less than $7,500 from the client, subrule (3.1) does not apply and the lawyer is permitted to return the $2,000 to the client by way of a trust cheque.

What if the client provided a cash retainer in a foreign currency? Subrule (4) requires the lawyer to convert the foreign currency into Canadian dollars based on the official conversion rate of the Bank of Canada for that currency as published in the Bank of Canada’s Daily Memorandum of Exchange Rates in effect at the relevant time. If no official conversion rate was published, the lawyer would use the conversion rate that the client would use in the normal course of business.

Lawyers are being cited for breaches of Rule 3-51.1. Make certain that you and your firm understand the rule. Breaches of the “no cash rule” are treated seriously. This is an important matter to the Law Society, for the legal profession and for the protection of the public.

List of valuables for monthly trust reconciliation

If you have received “valuables” (defined in Rule 3-47) such as paintings, sculptures, gold, jewellery, securities, bonds (anything of value that can be negotiated or transferred) to hold for your client, be aware of the requirement to list the items received and delivered and any undelivered portion as part of your monthly trust reconciliation (Rule 3-65 (2)(e)). A sample Valuable Property Record is available on the Practice Support / Articles section of the Law Society’s website. You can simply attach your list of valuables to your monthly trust reconciliation.

This may also be a good time to do some spring cleaning. Have a look inside your safe. Are you holding valuables that should be listed?

Counterfeit bank drafts — yet another trust account scam

Recently the Law Society issued a fraud alert relating to counterfeit certified cheques that set out the details of a scam that had arisen in Ontario. Other schemes have surfaced in which counterfeit bank drafts, rather than counterfeit certified cheques, are used as a means of accessing lawyers’ trust funds.

One ruse involves a new client, located outside of Canada, requesting your assistance to recover a debt from a Canadian company. You send a demand letter and receive a bank draft for the full amount from the alleged debtor payable to your firm in trust. The bank draft is drawn on a Canadian bank and looks completely real. If you call the telephone number printed on the bank draft, the call is professionally answered and the bank draft is declared valid. In fact, it’s not.

If you deposit the bank draft in your trust account and then pay out a handsome sum to your new client, minus your fees and disbursements, then you may be a victim.

Regardless of the pretext the rogue uses to lure you into relying on a forged document to pay out trust funds, there seem to be some common elements.

The client presents as a businessperson or someone trustworthy (one individual claimed to be a pastor) and may be located outside of Canada. The services required are for a simple matter. The client wants to be paid quickly and may urge you to transfer the money electronically. (The amounts involved are usually much less than the $25,000,000 required for an electronic transfer from trust (Rule 3-56(3.1)(a)). The cheque or bank draft required to pay your client, whether for an outstanding debt, as part of a purchase and sale or for some other reason, is provided quickly and easily.

How do you protect yourself? Know your client. When you open the new client file, keep in mind the client ID and verification rules that will soon come into force across Canada. If you are dealing with clients that you do not know well, relying on a phone number to verify the document may not expose the scam. Ask your bank to contact the issuing bank to verify the authenticity of the draft or cheque and to confirm that the funds have cleared. If you draw on your trust account without the bank draft or certified cheque being verified or cleared, your firm may be exposed to loss.

Signing trust cheques

Law Society Rule 3-56(2)(c) provides that a lawyer who withdraws funds from a trust account by cheque must ensure that the cheque is signed by a practising lawyer. Notwithstanding this rule, the Professional Conduct Department has recently investigated several cases where lawyers have permitted non-lawyers to be the sole signatories of trust cheques, or where non-lawyers have signed trust cheques without the knowledge of the lawyer.

Lawyers are reminded to ensure that trust cheques are being handled in a proper manner. As well, lawyers should discuss this rule with representatives of the financial institutions handling their trust accounts to try to ensure that these institutions properly monitor the signatories on trust cheques so that improperly signed cheques are not processed. Failure to comply with Rule 3-56(2)(c)exposes lawyers to the risk of fraud, as well as to possible disciplinary consequences.

United States subpoena scam

Reports have been received of bogus United States District Court subpoenas being emailed to BC clients. If your client receives an electronic subpoena commanding him or her to appear to testify, please see the alert on the U.S. Courts website: www.uscourts.gov/index.html.

Direction in a will to retain a particular solicitor

Reports have been received that some solicitors are drafting wills in which they nominate themselves to do the estate work. The wills contain a direction that the personal representative must use the same solicitor or law firm to provide the legal services as who drafted the will. This is improper. The personal representative makes the decision whom to retain as counsel, and the direction in the will does not impose an obligation to use the drafter (Foster v. Elsley (1881), 19 Ch. D. 518). If your client expressly asks you to insert such a clause without your prompting, you can explain that since the personal representative customarily chooses legal counsel, there may be little advantage to inserting the clause other than to make the client’s wishes known.

PST news

The Ministry of Small Business and Revenue has recently issued Bulletin SST 061 (revised April 8, 2008) regarding PST on legal services: www.sbr.gov.bc.ca/documents_library/bulletins/sst_061.pdf.

The Bulletin, aimed at lawyers and notaries, provides basic information regarding taxable legal services and non-taxable legal services. It mainly puts into plain language the content of two earlier versions (March 1992 and April 2008).

You can contact the Consumer Taxation Branch if you have questions at 604-660-4524 in Vancouver or toll-free at 1-877-388-4440, or email your questions to CTBTaxQuestions@gov.bc.ca.

Further information

Feel free to contact Barbara Buchanan at 604-697-5816 or bbuchanan@lsbc.org for confidential advice or further information regarding any items in Practice Watch.