SOLICITORS DISCIPLINARY TRIBUNAL IN THE MATTER OF THE SOLICITORS ACT 1974 Case No. 11379-2015 BETWEEN: SOLICITORS REGULATION AUTHORITY Applicant and KIM SHARON EGOH, ARMAGHAN JAMAL KHALIQUE First Respondent Second Respondent Appearances Before: Mr P. S. L. Housego (in the chair) Mr J. P. Davies Mr D. E. Marlow Date of Hearing: 24 and 25 February 2016, 19 May 2016 & 29 June 2016 Ms Marianne Butler, Counsel of Fountain Court Chambers, Fountain Court, Temple, London EC4Y 9DH instructed by Bevan Brittan LLP, Fleet Place House, 2 Fleet Place, Holborn Viaduct, London EC4M 7RF for the Applicant Mr Robert Forman, Solicitor of Murdochs Solicitors, 45 High Street, Wanstead, London E11 2AA for the First Respondent throughout the hearing and for the Second Respondent on 29 June 2016 Mr James Ramsden QC of Essex Chambers, 81 Chancery Lane, London WC2A 1DD for the Second Respondent at part of the hearing on 24 February 2016 and on 19 May 2016. The Second Respondent appeared on 24 February, 19 May and 29 June 2016 JUDGMENT
2 Allegations 1. The allegations against the First Respondent and the Second Respondent on behalf of the Solicitors Regulation Authority ( SRA ) as amended with the permission of the Tribunal were that: 1.1 They failed to ensure compliance with the Solicitors Accounts Rules 1998 ( the SARs ) in breach of Rule 6 of the SARs, in that they either made payments from client account in breach of Rule 22 of the SARs or failed to prevent such improper payments being made. (In respect of the First Respondent only) or, in the alternative, that: (In respect of the Second Respondent only) and, that: 1.2 They permitted or acquiesced in the use of the firm s client account as a banking facility by allowing payments into, and withdrawals from the client account that were unrelated to an underlying transaction contrary (sic) in breach of guidance note ix to Rule 15 of the SARs. Against the First Respondent alone: 2.1 She failed to act with integrity and/or acted in a way likely to undermine the trust the public places in those who provide legal services in breach of Rules 1.02 and 1.06 of the Solicitors Code of Conduct 2007 ( SCC ) in that she facilitated or acquiesced in a conveyancing transaction that bore the hallmarks of fraud. 3.1 She failed to deal with the SRA in an open timely and cooperative manner in breach of Principle 7 of the SRA Principles 2011. Documents 4. The Tribunal reviewed all the documents including: Applicant Rule 5 Statement dated 16 April 2015 as amended dated 21 August 2015 with exhibit PS1 Hearing bundle (in chronological order duplicating much of the Rule 5 bundle) Note of Opening/Skeleton of the Applicant dated 22 February 2016 drafted by Ms Marianne Butler Tribunal judgment in case number 11295-2014 Monioro heard on 26 March 2015 Egoh/Khalique Dramatis Personae Note of closing of the Applicant dated 18 May 2016 drafted by Ms Butler Schedule reconciling page numbers across the Rule 5 and Hearing bundles Applicant s statement of costs as at date of issue Applicant s statement of costs from 16 April 2015 to 17 February 2016 Applicant s statement of costs from 18 February 2016 to 19 May 2016
3 First Respondent Statement of the First Respondent dated 22 April 2015 Answer and Statement of the First Respondent with exhibit KSE1 dated 2 July 2015 Answer to the amended Rule 5 Statement and Second Statement of the First Respondent with exhibit KSE2 dated 7 October 2015 Authorities bundle Bundle of documents provided by the First Respondent on 19 May 2016 Personal Financial Statement of the First Respondent dated 22 February 2016 Property Agents valuation of the First Respondent s residence Mortgage statement as at 1 March 2016 Letter from Lloyds Bank to the Respondent dated 16 April 2015 with attachments Character reference from the Second Respondent dated 23 February 2016 Second Respondent Answer dated 20 May 2015 Answer dated 25 September 2015 Note to the Tribunal on behalf of the Second Respondent prepared by Mr James Ramsden QC dated 23 February 2016 First and Second Respondents on 29 June 2016 Bundle of authorities Preliminary Matters 5. For the Applicant, Ms Butler referred to discussions between the parties flagged up in her Skeleton which had resulted in a proposal that subject to the consent of the Tribunal allegation 2.1 breach of Rule 1.02 the requirement for a solicitor to act with integrity (and by implication of Rule 1.06 the requirement not to diminish public trust) should be withdrawn in respect of the Second Respondent. It was also proposed that the Second Respondent would admit breaches of Rule 6 of the SARs on a strict liability basis (allegation 1.1 and 1.2). Allegation 2.1 would subsist against the First Respondent only. Allegation 3.1 had only ever been brought against the First Respondent. It was further proposed that the Second Respondent would take no active part in the hearing until the Tribunal reached the point of determining sanction and costs. It was the Applicant s submission that the Tribunal was best placed to consider why the Applicant had brought the allegations against the Second Respondent when the Tribunal had heard the case against the First Respondent. 6. For the Second Respondent, Mr Ramsden endorsed Ms Butler s submissions. He would have no cross examination for the First Respondent. The Second Respondent could not dispute the facts. He had no involvement but had statutory and regulatory responsibility for client account during the material period. 7. Ms Butler clarified that allegations 1.1 and 1.2 in the amended Rule 5 Statement had been brought against both Respondents worded or in the alternative but it was now proposed in respect of the Second Respondent only that the words or, in the
4 alternative should be replaced by the word and between allegations 1.1 and 1.2. In allegation 1.2 the drafting in the alternative in respect of payments into, and/or withdrawals from the client account was to be amended by the removal of /or. 8. For the First Respondent, Mr Forman clarified that the First Respondent denied allegation 1.1 but admitted allegation 1.2 save in respect of payments into client account. Mr Forman confirmed that the First Respondent consented to the application to withdraw allegation 1.2 against the Second Respondent. It would not affect the way in which he put his case on her behalf. The First Respondent did not seek to blame the Second Respondent at all. There was a reference in the First Respondent s statement dated 2 July 2015 to there being documents with the Second Respondent s name while she was absent from the office on holiday and that it was possible that he had some involvement but she had no knowledge of that. 9. The Tribunal considered the submissions made on behalf of all the parties. It had been assured that the proposed amendments in respect of the Second Respondent to allegations 1.1 and 1.2 and the withdrawal of allegation 2.1 against the Second Respondent stood alone and that there was no interrelationship in respect of those allegations between the two Respondents in that the First Respondent had no intention of seeking to place any blame upon the Second Respondent. The Tribunal could not identify any public protection issues arising out of the application or that the interests of justice would be compromised by the amendments. Having regard to all those factors the Tribunal granted the application in the terms sought. Procedural Issue 10. At the commencement of the Applicant s case, the Tribunal raised an issue about the way that allegations 1.1 and 1.2 were pleaded. Mr Forman submitted that allegation 1.2 was added by the amended Rule 5 Statement. Subsequently during the hearing the parties informed the Tribunal that if the Applicant succeeded in respect of allegation 1.1, it would not pursue allegation 1.2 but if it failed on allegation 1.1 then the Respondents admission to allegation 1.2 would stand. The Tribunal was content with this approach. 11. The First Respondent had dis-instructed Mr Forman after the second day of the hearing but re-instructed him late on the afternoon of 18 May 2016. He submitted a bundle of documents provided by the First Respondent to him just before the commencement of the third day of the hearing on19 May 2016, referred to below as the new bundle or new documents. The advocates for the Applicant and the Second Respondent made no objection to their admission into evidence. Factual Background 12. The First Respondent was born in 1964 and admitted as a solicitor in March 1996 and her name remained on the Roll. 13. The Second Respondent was born in 1969 and admitted as a solicitor in September 1996 and his name remained on the Roll.
5 14. At all material times Respondents practised in partnership as solicitors at Khalique Kingsley ( the firm ) in East London. Both Respondents were directors of the firm until it closed on 30 September 2011. 15. The allegations arose following an inspection undertaken by a Forensic Investigation Officer ( IO ) Ms Sarah Taylor resulting in a Forensic Investigation ( FI ) Report dated 16 March 2012. 16. The contents of the FI Report were raised with the Respondents in letters dated 16 March 2012. The First Respondent replied by way of her letter dated 22 March 2012. A further letter was sent to her by the Applicant on 4 March 2013 although no response was received. The Second Respondent replied by way of a letter dated 19 March 2012 and an e-mail dated 14 May 2012. The Applicant sent him a further letter on 11 July 2013 to which he replied on 15 July 2013. 17. On 21 September 2011, the Applicant received a complaint from Ms JT a Senior Fraud Analyst at Nationwide Building Society ( Nationwide ). The complaint related to the failure to register two charges in favour of UCB Home Loans ( UCB ) on Flats 3 and 4, 503 K Road, London totalling 732,1808. UCB was a specialist lender subsidiary of Nationwide. JT stated that the firm had acted for the seller (which was incorrect) and that she had verified through bank records that the firm had received the advance funds from UCB s solicitors, M Solicitors. The existing charge was not redeemed and consequently UCB s charges were not registered. JT had been unable to establish how funds were disbursed after having been received by the firm:...despite a telephone conversation with [the Second Respondent] last week and several chase up calls since, the firm is not cooperating with our request for information relating to the dispersal of our funds. We are now therefore reporting this matter as it would appear that our funds were not used for the purpose of purchasing the properties and providing us with a first legal charge We also have concerns regarding [M Solicitors ] actions in this matter and consider that they have acted negligently we are currently reviewing possible action against this firm 18. Although the firm closed on 30 September 2011, the IO spoke with the Second Respondent on 8 December 2011 and requested that he retrieve the file for the sale of Flats 3 and 4. The Second Respondent advised the IO that the files would be in storage and he would try to retrieve them. He also advised the IO that the First Respondent, a partner at the firm, would have been the fee earner dealing. 19. The IO spoke to the First Respondent about what the IO described as the sale of the two flats and she stated that she recalled the matter but would have to look at the files. 20. The IO entered into correspondence with both Respondents and served a notice pursuant to section 44B of the Solicitors Act 1974 on the firm. The IO s attempts to obtain the file were set out in the FI Report. However the original file could not in the event be located. The IO managed to obtain the relevant client ledgers and bank account statements relating to the transaction from the Second Respondent as well as the documents held by Nationwide. In an attempt to obtain information about the transaction, the Applicant obtained the file of M Solicitors, documentation from AS &
6 Co ( AS ), and also some relevant documentation from D LLP ( D ) all of whom represented clients involved in the transaction. 21. In the First Respondent s letter to the Applicant dated 22 March 2012, she stated that so far as she could recall, the firm was instructed by two companies T and MW Ltd ( MW ) to purchase the freehold of 503 K Road. Part of the funds for the purchase was sent to the firm by M Solicitors at her clients request. The clients intention was to create leases out of the freehold. However the clients purchase did not complete and the clients were informed of this. 22. The client ledger card for the matter 503 K Road stated that the matter opened on 29 August 2008 and the clients were T and MW. 23. A copy of the Register of Title number NGL 684 as at 14 August 2008 showed that the freehold owner of 503 K Road was CW. The title was subject to two restrictions, namely a charge in favour of Bank of Scotland and a restriction that any disposition of the property required the written consent of the joint administrators/receivers of the proprietor. Under the schedule of notices of leases there was no reference to leases for Flats 3 and 4. 24. Companies House searches showed that Mr GR was a director of T (now in liquidation) between 10 October 2003 and 1 March 2010 and also of CW between 24 February 2003 and 25 February 2010. 25. Nationwide provided the IO with copies of the two UCB mortgage offers to Mr GR in relation to his purchase of the leaseholds of Flat 3 and 4. Both offers were dated 4 August 2008 and indicated that Mr GR was borrowing 372,000 in respect of each property. Both Mr GR and UCB instructed M Solicitors to act on their behalf. Although both mortgage offers were subject to special conditions relating to the release of the mortgage in favour of the Bank of Scotland on Flats 3 and 4, the leasehold titles did not exist and the charge in favour of the Bank Scotland was over the freehold title of 503 K Road. 26. The property 503 K Road was subject to three existing leases; one for an advertising panel on the outside of the building created in 1990 and two flats (basement and ground floor) created in 1991. Witnesses 27. None save that the First Respondent gave evidence on her own behalf. Otherwise than set out below it is recorded under the relevant allegation. The First Respondent stated that she met Mr JB in 2001. Mr JB became her client. He introduced her to GR and she had known him for about a year before the transaction in question. Most of her work for Mr JB was corporate. She had undertaken hundreds of transactions for MW and other companies which Mr JB owned. The First Respondent believed that this was the last transaction that the firm did for GR but she did not know during the course of the transaction. The First Respondent stated that GR was amenable to deal with and had the same terms from the firm as other commercial clients. She did not associate him with more risky aggressive deals. There was no indication at all of any question about his probity and she confirmed that she was completely convinced that
7 he was decent and honourable. It was not unusual then for solicitors holding money for commercial clients to send it to another firm of solicitors. She had done that for MW and other commercial clients and she received money for clients from other firms of solicitors. Findings of Fact and Law 28. The Applicant was required to prove the allegations beyond reasonable doubt. The Tribunal had due regard to the Respondents rights to a fair trial and to respect for their private and family life under Articles 6 and 8 of the European Convention for the Protection of Human Rights and Fundamental Freedoms. (Paragraph numbers and cross references in quotations have been omitted unless they aid comprehension. Submissions include those in the documents and those made orally at the hearing.) Ms Butler s General Submissions 29. For the Applicant, Ms Butler submitted that all the documents before the Tribunal in the hearing bundle were subject to Civil Evidence Act notices and no counter notices had been served. The evidence of the IO Sarah Taylor was not in dispute. 30. The First Respondent was now a locum at a property development company owned by the Second Respondent and his family, The Second Respondent had no practising certificate and was devoting his time to the property development company. 31. Ms Butler submitted that the allegations stemmed from a conveyancing transaction that was to proceed during August and September 2008 involving the property 503 K Road. As a result of the conveyancing transaction there had been a massive fraud on UCB in which 733,000 had been lost. The Respondents were directors of the firm which had acted for T and purportedly also for MW. It was never alleged that the firm was a party to the fraud. However a fraud occurred and the profits of it were paid away through the firm s bank account. What might have been the intended structure of the transaction was set out in an e-mail from BMS to AS its retained solicitor, dated 11 June 2008. T would buy the freehold of 503 K Road from the administrators of CW of which GR was also a director, for 900,000 and simultaneously T was to create leases from the freehold which would then be sold on to GR. There were two sources of money; BMS in the amount of 177,000 and the balance of the money would come from UCB. Mr GR had obtained a mortgage on 4 August 2008 from UCB in the sum of around 733,000 for the purpose of purchasing the leaseholds. M Solicitors acting for UCB and GR in respect of the purchase of the leases drew down the mortgage monies from UCB and paid over 732,188 to the firm. Mr GR was alleged to have told the Respondents that the 732,188 was a gift from himself to T which could be used for the purposes of purchasing the freehold from CW. It was understood UCB would obtain a charge over part of the freehold after the purchase. 32. Ms Butler submitted that notwithstanding the fact that the administrators of CW had not agreed and ultimately never agreed to sell the freehold to T, the firm paid over the entirety of the purchase price for the freehold comprising the money from UCB received via M Solicitors and from BMS via AS to the Receivers solicitors D who
8 promptly paid the monies back. D had made repeated enquiries as to the source of the funding and the capability of Mr GR to enter into the transaction given an Order made against him dated 21 December 2006 in respect of proceedings pursuant to the Company Directors Disqualification Act 1986. Following the return of the purchase monies by D to the firm on 15 September 2008, the BMS monies 173,357.55 were correctly returned by the firm to AS the following day but the balance of the monies were not repaid to M Solicitors being instead paid away by the firm, principally to MW or associated persons, between 16 September 2008 and 6 August 2010 with the result that UCB lost all its money. Charges over the freehold interest were never created because the freehold was not sold to T. On 11 November 2009, the freehold of 503 K Road was sold to P Properties Ltd for 1.5m. 33. Mr M, the principal of M Solicitors had already been before the Tribunal as a result of his involvement in the intended transaction at a hearing on 26 March 2015 and a copy of the judgment was before this division of the Tribunal. Breaches of Rule 1.04 failing to act in the best interests of his client lender and Rule 1.05 relating to standard of service were found proved but not breach of Rule 1.02 failing to act with integrity on the basis that the Tribunal found that he was not an experienced conveyancing solicitor and did not understand what he was doing. He apparently believed himself to have been acting in a re-mortgage of the two flats despite having signed incorrect certificates of title. 34. Ms Butler submitted that the transaction commenced on 5 August 2008 and the First Respondent went on holiday on 7 August 2008 and the file was taken up by someone else until she returned on 25 August 2008. There was a question about who was dealing with the file during that period. This was a small firm with only three directors of which the Respondents were two. Ms Butler referred the Tribunal to the Second Respondent s response to a letter from the IO about the FI Report, on 19 March 2012 and his email to the Applicant dated 14 May 2012 stating that he had no personal information and absolutely no knowledge about the matter. Ms Butler also referred to a short statement made by the First Respondent to the Applicant dated 22 April 2015, in respect of which in her Answer and Statement dated 2 July 2015 the First Respondent stated: 70. The Tribunal will note that I prepared a short statement signed on 22 nd April 2015. I made that statement following a request from the Second Respondent that I prepare a short statement confirming that I had seen the Applicant s statement and to confirm that I would cooperate. In the initial draft that I prepared, only the first four paragraphs appeared. The Second Respondent requested that I add in paragraphs 5 and 6 to confirm that he had no involvement in the distribution of funds, and which I agreed to. Therefore paragraph 5 was intended to mean that the Second Respondent had no involvement in the distribution of client funds following the transaction. Clearly he had involvement in the transaction itself, and I am sorry that the statement could suggest otherwise. In respect of paragraph 6, I do believe that I instigated the payments, but as described above, client account cheques of at least 25,000, and all transfers, required a second authority, in the case of cheques, signature by the Second Respondent and in the case of transfers, the authority either of the accountant of (sic) the Second Respondent.
9 Paragraphs 5 and 6 which she added to the 22 April Statement stated: 5. I confirm that [the Second Respondent] was not aware of the details of this matter and he had no involvement in it. 6. I authorised all payments in this matter and as far as I was aware I believed that all the payments that I was making were proper payments in accordance with Rule 6 and Rule 22 of the SAR. I believed that I was being fully compliant with the SAR and that is what I would have led [the Second Respondent] to believe. 35. Ms Butler submitted that from the documents put together from third parties almost the entirety of the correspondence had the Second Respondent s initials along with those of the First Respondent even when she was on holiday. She referred the Tribunal to specific documents which seemed to indicate the Second Respondent s involvement during the holiday absence and after it. The First Respondent s statement of 22 April 2015 said that he was not involved but now in her statement of 2 July 2015 she said that he did have an involvement as quoted above. 36. The Tribunal drew Ms Butler s attention to the First Respondent s July 2015 Answer and Statement listing 22 instances where she assumed the Second Respondent dealt in the matter. Ms Butler submitted that the whole situation was difficult for the Applicant; although this was a very small firm with three directors and a handful of associates and trainees, the First Respondent said she could not specifically recall the Second Respondent s involvement but her evidence inferred based on documents that he was involved but she carefully did not say that she recalled that he was involved. The position seemed to change and so on 31 August 2015 the Rule 5 Statement was amended to advance allegation 1.2 against the Second Respondent with the consent of his solicitors. Then in his response dated 13 November 2015, the Second Respondent provided his statement which contended that, notwithstanding the documentary evidence and position of the First Respondent the transaction was in fact being handled entirely by the First Respondent. He conceded that he may have passed on messages as shown in the AS documentation but that was the extent of his involvement. He did not explain why his initials appeared on the vast majority of the documents emanating from the firm in respect of the transaction or why there were documents from D marked for his attention. The Applicant was still concerned about who had dealt with the transaction in the First Respondent s absence and would explore that in evidence but it had to be aware of its duty as prosecutor and in the light of the Second Respondent s evidence and the First Respondent s stated lack of recollection as to the extent of his involvement in the intended transaction the Applicant had applied to withdraw allegation 2.1 against the Second Respondent. 37. Allegation 1 - The allegations against the First Respondent and the Second Respondent on behalf of the Solicitors Regulation Authority ( SRA ) as amended with the permission of the Tribunal were that: 1.1 They failed to ensure compliance with the Solicitors Accounts Rules 1998 ( the SARs ) in breach of Rule 6 of the SARs, in that they either made payments from client account in breach of Rule 22 of the SARs or failed to prevent such improper payments being made.
10 Submissions for the Applicant 37.1 Rule 6 of the SARs provided: All the principals in a practice must ensure compliance with the rules by the principals themselves and by everyone else working in the practice Rule 22 provided: 1. Client money may only be withdrawn from client account when it is: (a) properly required for a payment to or on behalf of the client (or other person on whose behalf the money is being held); (b) properly required for payment of the disbursement on behalf of the client;... (d) transferred to another client account; (e) withdrawn on the client s instructions, provided the instructions are for the client s convenience and are given in writing, or are given by other means and confirmed by the solicitor to the client in writing 37.2 For the Applicant, Ms Butler submitted that allegation 1.1 was put as a breach of Rule 22 or in the alternative of Rule 6 - the obligation of all principals to ensure compliance with the rules - in that the Respondents either made the payments or failed to prevent them being made. Following the return of the intended purchase price by D to the firm on 15 September 2008 and the firm s return of monies to AS on 16 September 2008, the balance held on the client account was 732,954.59. Ms Butler submitted that the payments made period between 26 September 2008 (when costs were transferred for the benefit of the firm) and 6 August 2010 as set out in the Amended Rule 5 Statement, did not fall within the circumstances permitted under Rule 22 and were, accordingly, improper withdrawals. 37.3 Ms Butler submitted that the case against the First Respondent for a breach of Rule 22 was as follows: In circumstances in which the funds of 732,188.00 were transferred to the firm by M Solicitors as purchase monies for the freehold, M Solicitors was the other person on whose behalf the money was being held (Rule 22(1)(a)) and upon the failure to complete the purchase of the freehold on 15 September 2008, this money should have been repaid promptly to M Solicitors. Instead, the funds were kept in the client account and dissipated over the subsequent 22 months and 22 days. The First Respondent was not entitled blindly to follow Mr GR s instructions that they were allegedly his monies (and consequently the money of T and MW). Even on the First Respondent s case, whilst the First Respondent contended in her written evidence and in re-examination that there were written instructions provided from her alleged clients T and MW, for the transfers, there was no evidence of any written instructions and in any event:
11 o the First Respondent accepted in oral evidence that she incorrectly treated T and Mr GR as being one and the same and so treated instructions from Mr GR as being instructions from T; o the First Respondent was inconsistent as to how she said that she received her instructions even from Mr GR (referring for example to receiving instructions from Mr GR over the telephone rather than in writing); o the First Respondent was inconsistent as to whether she was receiving instructions from Mr GR or Mr JB in respect of the payments out; and o the last payment out of the client account was on 6 August 2010, some five months after Mr GR ceased even to be a director of T. 37.4 As to the detail of what occurred, between 26 September 2008 and 6 August 2010, 18 disbursements were made from the firm s client account as set out in a schedule by the IO in the FI Report. Ms Butler submitted that most of these payments went to MW or individuals connected to it. In summary 10 transactions took place with MW totalling 600,285.94: Two transactions of 385,723.94 and 386,723.94 with T both issued on 30 May 2009 and subsequently cancelled On 19 March 2009, 20,001.51 was transferred to a ledger in the name of S On 1 July 2009, 100,000 was transferred to a ledger in the name of Mr and Mrs JB and on the same day 100,000 was transferred from that client account to MW Ltd. A company search showed that Mr JB was a director of MW between 5 July 2004 and 28 July 2010 and Mrs B was a director between 28 July 2010 and 4 August 2010; On 6 August 2010, 6,438 was transferred to a ledger in the name of BL and on the same date 36,438 was transferred from that client account to MW Ltd. On 15 September 2009, Mr JB was appointed company secretary and director of BL Ltd (which was dissolved on 4 May 2011). 37.5 Ms Butler clarified that the Applicant did not say that T could not act through Mr GR rather it said that the money held by the firm was not GR or T s money and that the First Respondent had no basis to believe that it was. The primary basis on which the case was put against the First Respondent was that she should have known that; she should have been very concerned that it was someone else s money probably UCB s. Ms Butler submitted that the First Respondent said that she could not recall what the instructions were. However she was not entitled to treat any instruction in respect of the money on behalf of T as valid. The payments stood or fell together. In her Skeleton, Ms Butler set out that the First Respondent s position was that the payments out of the client account fell within the circumstances of Rule 22 in circumstances in which she did not know that the monies belonged to UCB and where her clients T and MW instructed her to remit the funds as set out in the ledger. She admitted however that if the withdrawals were contrary to Rule 22 then she would be in breach of Rule 6
12 of the SARs by reason of being a principal. In these circumstances Ms Butler submitted that Allegation 1.1 against the First Respondent was made out. 37.6 The Tribunal asked for clarification of inter client ledger transfers which were recorded on the ledger on 19 March 2009 in the sum of 20,001.51 to S and on 1 July 2009 in the amount of 100,000 to Mr and Mrs JB and on 6 August 2010 in the amount of 6,438. The second amount was then transferred on the same date to MW and the third was transferred to a ledger in the name of BL. Ms Butler submitted that these transfers were connected to Mr JB and Mr GR and were caught up with the lack of integrity allegation. 37.7 The Tribunal queried whether the payments out fell within Rule 22(e) as being for the client s convenience. Ms Butler asserted there was no evidence of written instructions but accepted that the file was not available. The First Respondent accepted in oral evidence that she had incorrectly treated Mr GR and T as the same and did not distinguish in respect of any written instructions between T and MW. Ms Butler submitted that there was a credible basis for doubting that in any event there would be proper instructions because of her inconsistent evidence. Submissions for and evidence of the First Respondent 37.8 For the First Respondent, Mr Forman referred to her Answer and Statement dated 2 July 2015 where she dealt with these matters: As I mention earlier in this statement, the ledger was held in the name of [T] and [MW] as both companies instructed the Firm in relation to the purchase of the freehold, even though it was proposed that [T] would be the registered proprietor on purchase of the freehold of the Property, that is, I understood that the purchase of the freehold of the Property was the subject of a jointventure between the companies and that all monies were to be held to their joint credit. Given the passage of time and absence of the file to jog my memory, I do not recall how instructions were received to distribute the funds, save that I recall from my initial conversation with Messrs [GR] and [JB] before I went on holiday, that both were to provide instructions and I understood that that authority would extend to the distribution of funds. I cannot recall what written authorities, if any, were on file. Mr [JB] must have been aware that we held the funds given his requests for payment, and at no stage did Mr [GR] question any of the transfers to or on behalf of Mr [JB]. I believe that it was me who acted upon client requests for a payment or transfer to be made. In the case of all large payments, that is, cheques and external transfers, more than one authorisation was required. Before a client account cheque could be issued, a request would first be made of the Firm s accountants to draw the cheque, and then, I seem to recall, if the cheque was drawn for less than 25,000 it would require one signature, and either the Second Respondent or I would sign, depending on availability, and if for 25,000 or more, it required both of our signatures. When making an external transfer, we would arrange those through the Firm s online facility, which
13 required two of myself, the Second Respondent and the Firm s accountant to effect it. Generally I would have input the payment and either the Second Respondent or the Firm s accountant would have acted as authoriser. I note that cheques were issued on 30 th May 2009 and subsequently cancelled, which I assume were both on client instructions. The transfer on 19 th March 2009 to the [S] ledger would have been requested by [JB] on behalf [MW] on account of his interest in that matter which I do not now recall. Generally he would have telephoned instructions, which I would have made a note of, and then asked him to come in and sign an authority to enable me to complete it. I was aware of the requirements under SAR 1998 that such transfers needed to be authorised in writing. Mr [JB] didn t generally e-mail, and as his offices were down the road from the Firm s offices, he found it more convenient to attend in person.... The funds were paid away on client instruction, as I believed that the client was legally and beneficially entitled to that money. 37.9 Mr Forman referred to an email letter in the new bundle from Mr JB to the First Respondent dated 17 May 2016. JB said: It was my usual practice to instruct [the firm] in writing for all transfers of funds. Furthermore I introduced Mr [GR] of [T] to [the firm] and accompanied him to your offices when you were instructed and authorised in various matters. I also recall seeing a letter from solicitors confirming the release of funds. I regret I cannot recall the name of the solicitors The First Respondent s evidence was that it was her practice to obtain written instructions; she said that she tried to get written instructions and she believed that she did. Eight years had elapsed and she could not recall exactly what occurred. The file was unavailable and the papers contained evidence that the third director of the firm, Mr DH had given authority to others to destroy the archives. The First Respondent gave evidence that her authority was not requested and she had no management function in the firm and was never to her knowledge a shareholder. 37.10 The First Respondent stated in evidence that she could not categorically say who gave the instructions for payments to MW whether it was one or both of GR or JB. She did not know why when GR had paid in the 770,000 gift the bulk of it subsequently went to MW with which GR had no apparent connection. She speculated that it could have been for another joint venture that they were involved in. In cross examination by Ms Butler, the First Respondent stated that she was not concerned that for two years GR and JB gave her instructions to disburse the monies as the money was T s and GR was a director of T. She now knew that she could not make staged withdrawals from client account and should not have allowed it. She stated that the written authorisation to transfer monies to MW and associated entities and not to T would have been on the file. The First Respondent agreed that payments continued to
14 August 2010 after GR ceased to be a director. Mr Forman pointed out that the last payment for T took place on 30 May 2009 before GR resigned as a director on 1 March 2010. As to who gave authorisation to transfer the rest of the payments recorded on the ledger, the First Respondent stated in evidence that she had instructions to accept authority from either or both of them (that is GR or JB). 37.11 Mr Forman submitted that M Solicitors failed to mention during the transaction that this was mortgage money and never contacted the firm to request its return. In her Answer and Statement and in evidence, the First Respondent stated that she understood the purchase was a joint venture between the companies T and MW and that all monies were to be held to their joint credit. GR and JB had worked together in joint ventures before. In evidence the First Respondent clarified that she had not enquired about what kind of joint venture T and MW were engaged in; it was not unusual for commercial clients to undertake joint ventures. She was not asked to prepare a declaration of trust for the joint venture and did not think that was unusual; she had acted for other clients without a declaration of trust. 37.12 Mr Forman submitted that the question was about the First Respondent s knowledge and understanding as well as to assess whether she had complied with the SARs. So far as the First Respondent was concerned everyone was happy about the disbursements being made. The slow release of the funds was indicative that the First Respondent had not turned a blind eye but was completely unaware of what was going on with the funds received from M Solicitors or she would have been keen to get rid of the money. 37.13 Mr Forman clarified that the First Respondent admitted breach of Rule 6 in respect of allegation 1.1 on a strict liability basis established in case law although she did not know that the monies came from UCB and so was not culpable. If it was said that there was no legitimate reason for the money to be used there must be a duty to remedy the position. In respect of breach of Rule 22, in order for a transfer to be proper the money must be properly required and it could not be if the money was never properly available to be used in the first place irrespective of culpability. Submissions for the Second Respondent 37.14 Mr Ramsden submitted that from the outset the Second Respondent had admitted allegations 1.1 and 1.2 limited to breach of Rule 6; the Second Respondent was the principal with no involvement in the payments. Mr Ramsden regarded the pleading of allegations 1.1 and 1.2 in the alternative as an error; they were distinct and complementary allegations. Mr Ramsden also submitted that the admissions by the Second Respondent fell to be assessed by reference to the underlying transaction and the principal allegations brought against the First Respondent. He relied on the new documents which he submitted undermined some aspects of the Applicant s case and submitted that the Applicant should have provided the new documents a long time previously. Depending upon the Tribunal s findings, the matters in respect of which the Second Respondent made admissions would be regarded as strictly confined to breaches of the SARs. Mr Ramsden submitted that there was no suggestion and, based on this application and the Tribunal finding in the case of Mr M, there was no support for any finding that breach of the SARs was connected with or in any way to facilitate
15 or to assist in an underlying mortgage fraud. The breaches of the SARs were technical at the lower end of the scale. 37.15 The Tribunal sought clarification precisely which of the payments in the matter the Second Respondent admitted to have been improper. Mr Ramsden clarified that on the basis that the residue of the sum advanced on the UCB loan sat in client account and was paid out subsequently to various recipients on individual instructions, the Second Respondent accepted that those payments ought to have been subject to closer scrutiny. This admission was made on the premise accepted by the Applicant that the monies belonged to UCB and would otherwise have been used for the transaction which was aborted and the Second Respondent always accepted on a strict liability basis that as ultimate supervisor of the firm he had responsibility under the SARs. Finding of the Tribunal against both the First Respondent and the Second Respondent 37.16 The Tribunal considered the evidence including the oral evidence, the submissions for the Applicant and for the First and Second Respondents. First Respondent 37.17 Allegation 1.1 related to the payment out of client account of monies which the Applicant alleged belonged to UCB a mortgage lender in respect of an abortive transaction and the Applicant also alleged that all the payments after the reimbursement of the bridging lender BMS were improper as the money should have been paid back immediately the transaction failed. The firm originally received the monies from M Solicitors another firm acting for the same client T. M Solicitors also acted on the lender UCB s behalf. It was not disputed that the monies in question belonged to UCB. It was also alleged that there was no evidence of written instructions for the payments. It was alleged against the First Respondent that the payees themselves were improper payees for that money, as the First Respondent did not distinguish between Mr GR and T and MW. 37.18 The First Respondent admitted breach of Rule 6 but denied breach of Rule 22. The Tribunal noted that the file for the matter had been destroyed and the transaction took place eight years previously so that memories had faded. The Tribunal found that a client account ledger was opened in the absence of the First Respondent on holiday in the name of two companies T and MW. The First Respondent stated that she had not looked at the ledger. On her own evidence she did not distinguish between the individual GR and the corporate entity T. Her evidence although sometimes confused was that she was satisfied that she had received instructions that the money was to be paid out to Mr JB s company MW. She said that she had instructions from Mr GR and/or Mr JB over a two-year period to make the payments out. She regarded Mr GR, Mr JB, T and MW as clients and the money was all paid out from the T and MW client account ledger. The Tribunal found that technically the payments were improper because the money was UCB s however the Tribunal also found on the evidence available that there was no reason for the First and Second Respondents to think that the transaction was not exactly as Mr GR described to the First Respondent. There was no evidence that the First Respondent was told anything other than what the First Respondent testified that Mr GR told her i.e. that the balance of monies over and above a bridging loan from BMS, that is an amount in excess of 700,000 was
16 money that he was personally providing to T. (The Tribunal s more detailed findings under allegation 2.1 below are relevant to the conclusion just stated.) The Tribunal accepted her evidence and there was no evidence otherwise. The Tribunal also found that what GR had told the First Respondent was not true. The Tribunal found that on the evidence it had not been established to the required standard that the First Respondent was without written instructions; she had given evidence that she usually required instructions to be confirmed in writing and Mr JB had supported that by way of a letter although it did not bear a statement of truth. Taken together this was sufficient to raise doubt about that aspect of the Applicant s allegation. The Tribunal found allegation 1.1 in so far as it related to Rule 22 not proved mainly because the evidence did not show to the required standard that the First Respondent (or indeed the Second Respondent) was aware that the money which they authorised for payment belonged to someone other than their clients. However the Tribunal found allegation 1.1 proved on the evidence to the required standard against the First Respondent on a technical basis only for breach of Rule 6 because the payments were improper being made from monies which as a matter of fact did not belong to the firm s clients. Second Respondent 37.19 The Second Respondent had only admitted allegation 1.1 on the basis that the First Respondent had been at fault and that he was therefore liable as a principal under Rule 6. He denied breach of Rule 22. At the hearing, the Applicant did not proceed against him in respect of breach of Rule 22 and the Tribunal found that in any event no evidence had been produced against the Second Respondent in respect of it. The Tribunal found allegation 1.1 proved against the Second Respondent under Rule 6 on the evidence to the required standard based on the same facts as it had in respect of the First Respondent; the monies did not belong to the firm s clients. 38. (In respect of the First Respondent only) or, in the alternative, that: (In respect of the Second Respondent only) and, that: Allegation 1.2 - They permitted or acquiesced in the use of the firm s client account as a banking facility by allowing payments into, and withdrawals from the client account that were unrelated to an underlying transaction contrary (sic) in breach of guidance note ix to Rule 15 of the SARs. 38.1 Rule 15(3) as interpreted by guidance note ix to Rule 15 provided: Client money must be returned to the client (or other person on whose behalf the money is held) promptly, as soon as there is no longer any proper reason to retain those funds Note ix stated: In the case of Wood and Burdett (case number 8669/2002 filed on 13 January 2004), the Solicitors Disciplinary Tribunal said that it is not a proper part of a solicitor s everyday business or practice to operate a banking facility for third parties, whether they are clients of the firm or not. Solicitors should not, therefore, provide banking facilities through a client account.
17 Further, solicitors are likely to lose the exemption under the Financial Services and Markets Act 2000 if a deposit is taken in circumstances which do not form part of a solicitors practice. It should also be borne in mind that there are criminal sanctions against assisting money launderers. There had been references to returning monies promptly and the Tribunal asked for clarification of where that was to be found in Rule 22. Ms Butler submitted that it was part of Rule 15(3) but the words properly required and properly required for a payment to on behalf of the client... in Rule 22(1)(a) incorporated a requirement for prompt payment. This covered allowing more than 700,000 to remain in client account for two years. 38.2 For the Applicant, Ms Butler submitted that the First Respondent admitted this allegation in her Statement dated 7 October 2015: I admit that by allowing staged withdrawals from the client account between 30th October 2008 and 6th October 2010 and, although upon client instruction, to persons other than the clients, payments were made unrelated to an underlying transaction and effectively therefore a banking facility was provided and which was contrary to guidance note ix to Rule 15 of the SARs... Having regard to my knowledge of the source of funds, that is, that the money belonged to [T] as gifted by [GR], I should have insisted upon the return of funds directly to [T] in one payment. 38.3 Ms Butler submitted that if all the money had been returned to T on the same day as funds were sent back to AS there would have been no breach of Rule 15 or of this allegation but there would have been a breach of allegation 1.1 regarding an improper payment to T because it was alleged that the First Respondent had no reasonable basis to believe that this was T s money. Ms Butler clarified that had there been no allegation in respect of mortgage fraud it would probably have been decided that there was no public interest in pursuing allegation 1.2 but allegation 1.1 about improper payments to T would still have been brought. 38.4 Ms Butler set out in her Skeleton that the First Respondent s position was that she denied that the payments into the client account were unrelated to an underlying transaction, contending that the payments were all connected to the attempted purchase of the freehold interest in 503 K Road by T; she denied that the withdrawals from the client account between 29 August 2008 and 26 September 2008 were unrelated to any underlying transaction; but she admitted that by allowing staged withdrawals from the client account between 30 October 2008 (Mr Forman amended this date in submissions to 6 November 2008) and 6 October 2010 payments were made that were unrelated to an underlying transaction and effectively therefore a banking facility was provided. She accepted that she should have insisted upon the return of the funds to T in one payment. 38.5 Ms Butler submitted that by Rule 15(3) client funds must be returned to the client (or other person on whose behalf the money was held) promptly as soon as there was no longer any other proper reason to retain them. In those circumstances it was submitted that where the funds of 732,188 were transferred by the firm to M Solicitors as