Protecting your firm if you fall victim to a scam

Who should read this practice note?

Managing partners, practice managers and staff of firms which hold a client account and who are responsible for:

• the secure management of the client account
• the firm's information security
• the management and day-to-day operation of the practice
• the firm's professional indemnity insurance (PII)
• business continuity management and handling their clients' business when something goes wrong

Compliance officers for legal practice (COLP) and compliance officers for finance and administration (COFA).

Data protection officers (DPO) or any staff responsible for data protection and cyber security compliance.

What is the issue?

Firms holding client accounts are vulnerable to the risk of theft of confidential data which could lead to the theft of client money held in client accounts. Firms of all sizes can be targeted. The effect on the scammed firm can be extremely serious both financially and reputationally.

All firms are at risk of falling victim to fraudulent scams perpetuated via email or social media platforms. Every day, business organisations are a target for fraudsters impersonating banks, brokers and other third party organisations who may wish to perpetuate fraud or to access personal data or confidential data.

It has been known for fraudsters to impersonate business clients and then direct those firms to engage in perpetuating fraud which has only become apparent to the firm many months down the line. Consequently, all firms are at risk, as are all types of transactions and not just those involving the client account and client funds.

You must immediately take certain actions if you find or suspect that your firm has been the victim of a scam, resulting in your client account being compromised. You must inform:

• your bank
• Action Fraud via their website or by telephone on 0300 123 2040
• your professional indemnity insurer
• your cyber liability insurer
• the National Cyber Security Centre (NCSC)
• the Solicitors Regulation Authority (SRA) by telephone on 0121 329 6827 or email at fraud@sra.org.uk

These actions could help safeguard your clients' money and potentially your firm's reputation and even its viability.

A firm's resilience and ability to recover will vary according to individual circumstances and the nature of the perpetrated scam. In the worst-case scenario, in a firm where the equity partners do not have limited liability or have made personal financial guarantees, the scam could lead to bankruptcy of individual partners and the firm's closure. Members of an LLP may, in limited circumstances, be held liable.

The ability to recover will be significantly greater if the firm and its senior management have prepared to handle the consequences of a serious fraud perpetuated as the result of a cyber intrusion.

As well as ensuring regular cyber security training for all grades of staff including senior management, the firm should also rehearse a cyber security incident and its immediate aftermath so that the necessary actions such as those highlighted in the bullet points above may be prioritised and executed. The NCSC provides a comprehensive suite of simulation exercises for teams and boards to carry out and test their preparedness called Exercise In A Box.

This practice note outlines the regulatory and legal requirements that apply when a firm's client account has fallen victim to scammers. It provides advice which aims to help the firm overcome problems which might otherwise lead to its failure and forced closure.

There are a number of reporting obligations that the firm needs to discharge immediately.

The firm must also restore the client account funds without delay. Its partners might be personally liable for the client fund shortfall.

There are then further actions necessary to bring about the firm's recovery and to improve security to the firm and to its systems.

This practice note is not concerned with advice on how to protect your firm from scams and cybercrime generally.

In view of the changing nature of the methodologies and increasing sophistication of scams, solicitors and non-qualified staff in firms should keep their knowledge of good and bad practice up to date by following advice from:

• the SRA
• the Law Society
• their banks
• their professional indemnity insurer
• organisations concerned with cybersecurity

Sources of such information are listed at the end of this practice note along with other useful information.

Firms should ensure that incident response policies and procedures are regularly reviewed and kept up to date. They should remain alert to potential warning signs so that they can take averting action and undertake due diligence where possible.

How do scams occur?

All institutions holding funds are vulnerable to sophisticated targeted attacks from fraudsters, for example through emails or telephone calls.

Criminals use a variety of ever changing and increasingly sophisticated means, electronic and/or verbal, involving impersonation and/or infiltration, in an attempt to obtain confidential financial information and data with the aim of stealing money from bank accounts. A firm's client accounts can be targeted in this way. Banks and clients can also be targeted in an attempt to defraud the client account.

To make their scam appear credible, criminals may use tactics such as convincingly passing themselves off as calling from a bank or referring to the details of a genuine transaction which they have acquired dishonestly. Or they may use the names of law firms, solicitors, parties to a conveyancing transaction, beneficiaries of trusts and wills or persons linked directly or indirectly to a client account, to make their activity seem credible.

Many scams will be designed to play on current credible threats. At the time of the coronavirus lock down many scams were perpetuated playing on opportunities and fears created by the new and novel situation.

One common email scam involved a supposed email sent from a British-Chinese dual citizen who had travelled to China and claimed to be seriously ill while in self isolation and was now emailing UK law firms to initiate the transfer of funds from the United States to the UK for the purposes of establishing a charitable fund in the event of the author’s likely untimely demise.

Giveaways as to the fraudulent nature of the email included the authors email address but if the recipient took the email at face value and assumed that the author had been forced to take extreme measures to get around the “great firewall of China” then the email may have appeared genuine and a correspondence would have ensued inducing the law firm to provide either personal data or access to financial accounts that may then have allowed the fraud to be perpetuated.

Other examples of common scams directed at law firms include:

• sending emails from common service providers (for example telecoms, broadband, post and other business service providers)
• requesting payment for fairly modest sums hoping that admin staff will arrange payment at the same time as authorising multiple further payments at the end of a busy week, busy month or during the financial year end

Many scammers carry out detailed research on business websites, at Companies House, and on professional registers and social media. This enables them to target their scam emails (known as “spear” phishing), instant messages or text messages to specific recipients.

These targeted messages may include information about a plausible client or transaction which induces the recipient to engage in correspondence with the fraudster, genuinely believing that the fraudster is a known and recognised third party.

Regulatory and legal implications

Operating a compromised client account risks being regarded as a breach of trust and also as constituting serious misconduct because of the impact on clients.

It is essential that in the immediate aftermath of the incident you do everything that you can to contain the situation. This means engaging with the following organisations without delay in order to limit the damage and bring about the best possible result in rectifying it.

Informing your bank

You must contact your bank immediately if you suspect there has been an unauthorised or suspicious withdrawal from your client account. Delays in contacting the bank could lead to further loss of funds from the client account and reduce the opportunities to make recoveries.

Ask your bank's relationship manager and its fraud department to help you contain the losses, secure and protect the account and records and assist where possible in recovery of funds taken through criminal activity.

It is advisable to keep a record of the content and times of your communications with your bank.

While each bank may react differently and according to the individual circumstances, your bank can be expected immediately to freeze the client account to prevent further losses. The bank can also be expected to contact the receiving bank without delay to attempt to recover lost money, if the fraudsters have not yet taken it out from the receiving bank account. The bank will also co-operate with and support any police investigations to establish what has happened.

Informing the police

You must inform the police straight away that your client account has been compromised.

To report fraud, including online or internet crimes and to receive a police crime reference number, contact Action Fraud via their website or call 0300 123 2040

Informing your professional indemnity insurer

You must inform your insurer under the terms of your professional indemnity insurance (PII) policy of any claims or circumstances that may give rise to a claim.

This triggers a claim under your PII policy for the loss sustained to the client account.

When notifying insurers of the claim and circumstances, you should also consider your duty of client confidentiality. Client confidentiality and legal privilege can only be waived with the express consent of the client. There is no effective waiver of privilege where a client has not yet made a claim against the firm. You should describe to the insurer the nature of the problem without providing client details.

The situation is more straight forward if your terms of engagement or retainer made clear that if your firm has to make a notification under the professional indemnity policy of information about the client and the client file, the client file may in those circumstances be seen by an assessor or another person unconnected with the firm in the absence of the client's prior disagreement.

Informing your cyber liability insurer

It is a likely term of your cyber liability policy that you’re required to inform your insurer of any circumstances that may give rise to a claim. While you must maintain client confidentiality and legal privilege as with PII above, you should check your cyber liability policy wording as your insurer may place a time limit on when they need to be notified of a possible cyber security breach failing which the full level of cover may not be forthcoming.

However, it is in your interest when prioritising your actions to notify your cyber liability insurer as one of the first steps that should be taken. They are likely to be able to help you in the immediate aftermath of a scam perpetuated as the result of a cyber security breach. They will have supported many other insured law firms through similar incidents in the past and will be able to share expertise and resources with you. They may also be able to provide useful contacts such as forensic IT specialists.

If you have concerns about gaps in your firm’s existing insurance provision, the National Cyber Security Centre (NCSC) has recently published advice for organisations contemplating taking out cyber insurance (August 2020) in the form of a helpful checklist of points to consider.

Inform the ICO

If a fraudster has been successful in perpetuating a fraud that involved the handing over of any information that identified an individual such as any name, an email address, a sort code or an account number, medical or criminal records or any photographs, audio or video recordings then there will have been a breach of personal data and the Information Commissioner must be notified within 72 hours of becoming aware of the breach.

In cases where a breach is likely to result in high risk to the rights and freedoms of natural persons, the Information Commissioner must be notified without undue delay. Failure to notify within the appropriate statutory time frame may lead to an investigation and enforcement action from the Information Commissioner’s Office (ICO).

At the time of reporting the breach the appropriate form should be used from the ICO website and as much helpful information should be disclosed to the ICO as possible. This should include:

• detailing the firm’s applicable policies, procedures and training to prevent fraud
• identifying the reasons behind the fraud
• confirming what measures have been taken to protect the individuals affected and to ensure that such a breach does not happen again

Informing the SRA

You must inform the SRA promptly on 0121 329 6827 or email at fraud@sra.org.uk.

The SRA will work closely with you to safeguard your client's interests. It might also be able to assist in expediting police involvement.

Funds stolen from the client account will amount to a breach of the SRA Accounts Rules because the rules impose absolute liability regardless of personal fault.

If you’re a compliance officer for legal practice (COLP) or compliance officer for finance and administration (COFA) you have additional reporting duties.

The theft may put the financial viability of your firm into immediate question if the amount stolen and needed to be immediately replaced exceeds the means of those liable to repay it. This is covered in 5.3 of the Accounts Rules.

Informing affected clients

If a particular client's money has or may have been stolen in the scam, you must inform the client. Informing clients who may be affected about the client account shortfall will also ensure that you’re acting in the best interests of clients.

You may wish to say to the client, preferably with your insurer's agreement, that you’ll be notifying your insurers and will be passing on the client's details.

Informing staff

If the scam is sufficiently serious to have warranted all of the actions outlined above, and in the event that there has been a breach in personal data that could lead to regulatory action and enforcement, it may be prudent to ensure that all staff are aware that the firm’s systems have been compromised and are informed of the measures that the firm is taking to support and safeguard the affected individuals.

This will ensure that all staff are aware of the situation and that staff or management are taking responsibility in the aftermath of the fraud so that any relevant enquiries from clients, regulators and other relevant parties are directed appropriately and efficiently.

Ensure you do not compromise your insurance coverage or fall foul of the reimbursement provisions

Ideally, you should get agreement from the insurer on what you may tell clients and other parties.

Do not make any admission of liability or any offer of settlement to any third party without specific consent from your insurers.

Do not disclose the involvement of your own insurers beyond the extent that you’re required. Firms must disclose certain insurance details to clients and/or claimants. Both these regulations apply only to the compulsory element of the insurance, that is the minimum terms and conditions of cover. This means that only details of the primary layer insurer have to be provided.

The obligation to disclose comes from two different sources:

• the SRA Indemnity Insurance Rules
• the Provision of Services Regulations 2009

Informing other clients and other parties

This is dealt with under Section 5: the practicalities of dealing with client monies after a shortage has been identified.

Cyber-incident response

In the immediate aftermath of a cyber-based scam, you should decide if you need to make use of a Cyber Incident Response (CIR) service.

CIR services should be well-placed to advise you on what action needs to be taken. They should have proven knowledge and experience that will enable you to contain the incident and prevent recurrence.

The government has certified a number of providers. Further information, along with contact numbers, can be found on the National Cyber Security Centre (NCSC) website.

Unless you have relevant add-on insurance to your standard PII policy, the cost of these services is unlikely to be covered.

If you hold cyber-insurance, depending on the extent of its cover, you might be able to get assistance with or recover some of the following costs:

• costs of response
• investigation
• neutralising cyber-infection
• putting right damage to, or loss of information from, IT systems and networks and of data breach
• informing clients and reputational damage
• fines (where insurable by law)
• cyber-extortion

Depending on the severity of the incident it may also be reported to the NCSC. Action Fraud may be able to advise on whether the NCSC should be notified.

Replacing the stolen funds - plan of action

You should be able to demonstrate that you’ve taken prompt action to inform your bank and to contain the damage.

The SRA regards a deficiency in the client account as exposing clients and others to a risk of financial loss and damage to public confidence. The SRA will expect urgent assurances from you that you’ve put in place measures to replace the stolen funds without delay. The SRA set out its expectations in their Warning Notice: improper use of client account as a banking facility.

It should be possible to obtain early indications from either the insurer or the bank, or both (depending on the circumstances), as to the steps they are prepared to take to replace the funds.

Under the SRA Accounts Rules, it is your duty to remedy breaches.

Rule 6 of the SRA Accounts Rules 2019 provides that any breach of the rules must be remedied promptly upon discovery, including money improperly withdrawn from the client account.

If the client account shortage continues, the SRA might deem the firm to have committed serious regulatory breaches.

Professional indemnity insurance

As part of the assurances the SRA will seek from you as to how you’ll replace the stolen funds. The SRA will want to know whether you’ve submitted a claim against your PII policy and whether and when the insurer is likely to pay.

The definition of a claim in the PII Minimum Terms and Conditions wording provides that an obligation on the part of an insured firm to replace a client account shortage amounts to a claim under the firm's PII policy.

The large sums likely to have been taken will usually mean that the insurer can be expected to appoint panel solicitors to investigate. The insurer will probably reserve rights and investigate coverage. The insurer may also investigate whether the firm can recover their loss from anyone else, for example, from their bank.

The insurer should be able to confirm within two days of being informed by you of the fraud whether it has decided to appoint panel solicitors to commence investigation. This should not, however, in the circumstances, be a reason to delay paying the claim.

Insurers have a duty to treat their customers fairly. Clause 7 of the Participating Insurer's Agreement imposes an obligation on the insurer to act with the utmost good faith in the course of its dealings, as well as to pay claims without avoidable delay after liability under the policy has been established and the amount payable by the insurer has been agreed.

There is a risk that if the bank and the insurer are plainly uncooperative and persist in their deliberations, the SRA will expect the principals to make good the client account shortage from their own resources in order to meet the urgency of the situation or to insist upon closure of your firm.

In these circumstances, you may wish to hire independent expert legal advice to assist you as this might work out a less financially damaging option than negotiating with your insurer or your bank.

Obtaining independent expert legal advice

The impact of any delay in making good the client account on the scammed firm's viability while the regulator, insurer and bank carry out their processes should not be underestimated. It could result in the firm's forced closure.

It may be advisable to procure specialist legal advice to assist you in getting through this difficult phase to ensure the firm's survival. Specialist legal advice in the immediate aftermath of a cyber-attack will assist in prioritising measures that will ensure the firms continued reliability and that appropriate resources are directed in the most efficient manner. Specialist legal advisers may also be able to facilitate where necessary the procurement of forensic IT support or forensic accounting in order to ascertain the true extent of a long-term fraud or scam.

Information on sources of external expertise is provided at the end of this practice note.

Other general insurance policies

In addition to your PII policy and any cyber-insurance you might hold, you should check your firm's other general insurance policies for cover and for assistance with reputational damage or business interruption which might help you recover your business.

Developing SRA policy

Lenders will want to be notified about how a mortgage transaction will be completed. The insurer might also wish to prioritise which clients should be paid first or to pay a client in instalments and refund the balance later.

A deficient account cannot be used (beyond a de minimis transition to realisation of the extent of the problem) because any withdrawal will be a breach of the Accounts Rules. Some degree of tolerance, of a few days, less than a week, would allow plainly identifiable recent receipts to be used for required payments.

However, how you can operate as a firm is far from straightforward.

There are legal as well as regulatory requirements that affect how you might be able to act.

In certain circumstances, it may be an offence under Section 3 of the Fraud Act 2009 not to disclose information to others, such as clients, that a shortage to the client account has arisen as a result of the fraud.

GDPR and UK Data Protection Act 2018 include information security obligations when processing personal data and the Information Commissioner has the power to set penalties for breaching these obligations.

The ICO advises that you should be clear about who needs to be notified about the breach of data security and why, and the decisions you have taken aboutyou notifying the affected parties and the ICO. Links to the ICO's guidance can be found at the end of this practice note.

The SRA's Warning Notice: bogus law firms and identity theft takes a robust view of how the regulator perceives the situation.

Recovering the client account

Clients whose funds are needed without delay will need to be informed of the theft and that urgent steps are being taken.

To overcome a barrier to getting your firm back in business, the bank might decide to set up a new client account which will enable you to deposit the funds securely. Your bank will let you know whether and when it can authorise you to use the client account again.

Any new receipts should be credited to a secure client account through which transactions can take place without any impact from the shortage. The usage of the account will have to be in line with SRA requirements.

You may well breach your duty to act in the best interests of clients if you pay client money into an already deficient account without fully informed consent. No properly advised client would pay funds into a deficient account with the risk of only receiving a proportion back. Failing to inform clients exposes them to a risk of loss (see section 4.2).

Until the missing money is replaced, you should not take costs from the client account. The SRA's advice is that you should work closely with the SRA on what you need to do to start operating the client account again. You should consult the SRA's Supervision function in these circumstances, on 0370 606 2555.

Losses from scams have tended to be of two kinds – one leading to a general shortage and one not.

In the former, thieves may gain access to banking details enabling them to operate the account. Alternatively, they may telephone the firm posing as bank employees and persuade them that the client account is at risk and to transfer the monies into a 'safe' account – thereby facilitating the theft. In these scenarios, the money taken could be 'anybody's' and there will be a general deficiency to the client account.

In the second category, as a result of learning about an imminent payment through intercepting communications (typically emails), the thieves impersonate a genuine party in a transaction to instruct the firm to change the destination account for the expected payment.

When the duped firm sends the money of client A to the wrong account there will be a liability to A to account for the missing money, and to replace that money, but there is no general deficiency. There is no obligation to pay A from other clients’ money nor does the debt to A mean that other clients’ money is affected. Client A would theoretically sue the firm for an account and the firm would be insured in respect of that claim. No-one else would be affected.

The SRA in these circumstances would still be expected to insist that the firm makes good the loss without delay.

Closing your firm

Ultimately, if it becomes clear that money will not be forthcoming from the bank, insurers or from private sources within a timescale acceptable to the SRA, the firm will have to close.

It may nevertheless be possible to arrange for an orderly closure, recognising that the client funds will still need to be replaced.

The SRA might still require recovery of the stolen money from the principals' own funds.

Once again, specialist legal advice might be valuable to the firm at this stage. Refer to our practice note on closing down your firm for more information on the regulatory requirements.

Practice Advice Service

We provide support for solicitors on a wide range of areas of practice and problems. The Practice Advice Service can be contacted on 0207 320 5675 from 9am to 5pm on weekdays or by email at practiceadvice@lawsociety.org.uk.

External sources

Action Fraud National Fraud and Cyber Crime Reporting Centre – this website provides information on reporting fraud and also reporting if you have received a potential scam message or computer virus but no money appears to have been lost or you have not responded to it. A Business Reporting Tool enables companies to report multiple instances of fraud and internet crime more efficiently.

The SRA's professional ethics helpline – for advice on conduct issues and compliance with the SRA handbook. Call 0370 606 2577 (inside the UK) 9am to 5pm, Monday to Friday.

The SRA's Supervision helpline for advice on risk, systems and controls. Call 0370 606 2555.

Cyber Incident Response (CIR) service – the government's list of certified cyber-response providers, with contact numbers.

The Information Commissioner's Office offers guidance on data security breach management. It has also produced guidance on reporting a breach and other related guidance.

SRA guidance, 25 November 2019, Warning Notice: improper use of client account as a banking facility.

Law Society reporting

We’re interested in hearing your experiences in dealing with scams, in order to gather intelligence to best support the profession and keep our guidance up to date.

Email scamsreporting@lawsociety.org.uk to share your experience with us.

Law Society advice

Cybersecurity information – guidance, free training, information sharing and accreditation.

This includes a free online CPD course for members developed by the UK government as part of its National Cyber Security Strategy with the support of both the Law Society and the Institute of Chartered Accountants in England and Wales.

The course aims to:

• increase awareness of cybersecurity issues so that you can apply the knowledge in your own context
• help you to protect both yourself and your business
• help you to be more aware of security issues and more confident of discussing these with clients

The course covers:

• what cybersecurity is
• how it affects you and your clients
• why you should care about it
• cyberthreats to your business and you
• cyber-attacks (phishing and hacking) and their impacts
• mitigating the impacts

SRA advice

The SRA publishes a 'scam alert'.

SRA article In the shadows: Risks associated with bogus firms.

Solicitors' Assistance Scheme

The Solicitors' Assistance Scheme (SAS) offers general confidential help and advice for all solicitors in England and Wales, their families and employees, on professional and personal problems. The first hour of the advice is free.

The SAS website has a list of solicitors who specialise in giving advice on situations where there is a delay in making good the client account due to, for example, disputes about liability.

Phone: 0207 117 8811
Email: help@thesas.org.uk

Law Care

Law Care provides support to legal professionals in the UK and Ireland facing personal and professional problems via a free confidential helpline.

Telephone: 0800 279 6888

External advice

Coronavirus-related fraud reports increase by 400% in March (Action Fraud).

Weekly Threat Report from the NCSC

Joint US and UK Advisory: COVID-19 exploited by malicious cyber actors (NCSC).

Issues around Cyber criminals pretending to be WHO

Cyber Essentials is a government-backed and industry supported scheme to guide businesses in protecting themselves against cyberthreats.

Law Society practice notes on related areas

• Professional indemnity insurance – your regulatory obligations relating to PII
• Mortgage fraud – protecting you and your firm from being used to commit a mortgage fraud
• Property and registration fraud – to assist you when acting in property transactions. Fraud targeted at the properties of both individuals and companies, including identity and other types of fraud and the presentation of forged documents to Land Registry for registration
• Anti-money laundering – to help you comply with the Proceeds of Crime Act 2002, Terrorism Act 2000 and Money Laundering Regulations 2007 and all amending legislation up to October 2013. It also details good practice
• Closing down your practice – the numerous actions you need to take when closing your practice