Know Your Employee
Internal Crime
Employing personnel who are honest is critical for every law practice. This would prevent or minimise the risk of internal crime.
A common form of internal crime committed by an employee is misappropriation of client money. For example, in 2015 it was reported that a former legal secretary was found guilty of misappropriating a total of $489,200 over a period of seven years from the law practice where she was employed. After obtaining proper authorisation of vouchers and signatures on cheques, she inflated the amounts by altering numbers and words. To support the inflated amounts, she falsified payment vouchers and destroyed the original vouchers.
Internal crime has adverse consequences for a law practice. Apart from financial consequences, the reputation of the law practice may be damaged.
Screening Procedures
In Australia, Lawyers Weekly and InfoTrack conducted a survey1 to understand the perceived impact and the processes law practices have put in place to protect against internal crime. The results showed that it is not uncommon for law practices to have experienced crime perpetrated by internal personnel. The survey found that the common crimes are not only those of a financial nature but also data theft and cybercrimes.
Most respondents to the survey felt that apart from ethics and compliance programs, pre-employment screening was an important process to protect law practices.
Prevention of Money Laundering and Financing of Terrorism
In relation to the prevention of money laundering and financing of terrorism, screening procedures when hiring employees is a prescribed requirement2. A law practice is required to develop and implement internal policies, procedures and controls.3 These policies, procedures and controls for the prevention of money laundering and financing of terrorism include screening procedures for new employees. For purposes of screening new employees, you could utilise an employment application form that contains relevant questions, for example, whether the person has been convicted of any offence of dishonesty or fraud, whether the person has been sentenced to a term of imprisonment, and whether the person is an undischarged bankrupt.
Law practices should be aware that criminals may target law practices and intentionally plant someone in the law practice to facilitate money laundering or financing of terrorism. Screening procedures are important to protect law practices.
The UK Solicitors Regulation Authority (“SRA”) has warned of this risk of criminals infiltrating law practices4:
We have seen cases over the last few years where criminals have targeted law firms to launder money by placing someone at the firm. Failing to undertake the appropriate level of vetting relevant to the role, when employing staff, may make a firm more vulnerable to infiltration and exploitation by criminals.
According to the SRA, the ways in which criminals infiltrate law practices include5:
1. identity theft – criminals impersonate a regulated person to obtain a job at a firm.
2. falsification of credentials – criminals claim to have qualifications or experience for a legal role which are wholly or partly falsified.
3. short term managers – individuals who take manager positions but only stay for a very short time.
4. targeting of certain roles – an example could be a criminal contact applying for positions which involve assessing conveyancing case files but do not require admittance.
The Financial Action Task Force (“FATF”), in their Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals (June 2013) report, explained why criminals target law practices:
1. either by virtue of a legal requirement or custom, a legal professional is used to undertake the otherwise legitimate transaction, which in that instance involves the proceeds of crime.
2. the involvement of a legal professional provides an impression of respectability sought in order to dissuade questioning or suspicion from professionals and/or financial institutions.
3. the involvement of a legal professional provides a further step in the chain to frustrate investigation by law enforcement.
FATF also explained that the use of a client account may be attractive to criminals, as it can:
1. be used as part of the first step in converting the cash proceeds of crime into other less suspicious assets.
2. permit access to the financial system when the criminal may be otherwise suspicious or undesirable to a financial institution as a customer.
3. serve to help hide ownership of criminally derived funds or other assets.
4. be used as an essential link between different money laundering techniques, such as purchasing real estate, setting up shell companies and transferring the proceeds of crime.
A person placed at a law practice by criminals could exploit the client due diligence processes of the law practice, eg by failing to carry out proper client due diligence measures.
As part of the screening procedures, you could take into account the risk associated with the role and function of the employee in the law practice, and carry out additional checks if necessary. For example, you could consider searching the Internet via Google or other search engines, and social media channels e.g. Facebook, LinkedIn for information on prospective employees.
Section 78 of the Legal Profession Act
If you know a person is an undischarged bankrupt or has been convicted of an offence involving dishonesty, you cannot employ or remunerate that person unless you first obtain consent of the Court in accordance with s 78 of the Legal Profession Act.
Other circumstances set out in s 78(1) of the Legal Profession Act, in which consent of the Court is required, include if the person has been struck off the roll, suspended from practising, convicted of an offence under s 33 of the Miscellaneous Offences (Public Order and Nuisance) Act, or listed as a tout under s 39 of the Family Justice Act 2014, s 62 of the State Courts Act or s 73 of the Supreme Court of Judicature Act.
Section 78 of the Legal Profession Act applies to the employment or remuneration of all staff in law practices, whether they are clerical staff, secretaries, accountants or paralegals.
In an application to the Court for consent, the law practice concerned would have to provide certain undertakings to be incorporated in the order of Court e.g. ensuring that the prospective employee would only perform a specified scope of work, and that he/she would not have dealings with the law practice’s money, whether it be in respect of clients’ accounts, conveyancing accounts, conveyancing (CPF) accounts or office accounts or otherwise.
More Than Just Good Practice
Screening procedures and the application of s 78 of the Legal Profession Act are key considerations when hiring employees.
The threat to a law practice has expanded from internal crime by individual employees to a systematic targeting of law practices to launder money or finance terrorism. Screening procedures when hiring employees is no longer just good practice but it must form part of a law practice’s internal policies, procedures and controls.
Knowledge Management Department
The Law Society of Singapore
Notes
1 InfoTrack, Screening Processes and Internal Crime in the Australian Legal Industry.
2 Rule 18(3) of the Legal Profession (Prevention of Money Laundering and Financing of Terrorism) Rules.
3 See Setting the Tone – Policies to Prevent Money Laundering, Law Gazette April 2017 at 36 to 39.
4 Solicitors Regulation Authority, Cleaning up - Law firms and the risk of money laundering (November 2014).
5 See above, note 4.