Law firms have been warned about the dangers of falling prey to clients engaging in sham litigation to launder money.

In new guidance published this week, the Solicitors Regulation Authority said litigation firms are at particular risk because they are involved in high-value transactions where the true ownership of assets can be obscured.

In such schemes, criminals and their associates might orchestrate fake disputes and instruct lawyers to pursue a claim in the courts: the resulting judgment or settlement agreement then serves as a front to the transfer of illicit funds or assets.

The regulator did not indicate there had been a particular spike in sham litigation, but cited the case of client Narinder Kaur, who used several firms in purported litigation with her brother. In fact, she was using this as a front to hide funds in a variety of client accounts.

‘The legal sector’s vulnerability to sham litigation for money laundering means that firms must remain vigilant,’ said the SRA. ‘Litigation is not an activity within scope of the MLR 2017 which makes it attractive to money launderers. This exclusion means that the requirements of the MLR 2017, for example verification of identity, do not apply to purely litigation work.

‘Law firms, however, are still within scope of the Proceeds of Crime Act and should be capable of identifying red flags, as well as investigating the circumstances further to prevent their services from being misused in sham litigation.’

Firms are told in the guidance to look out for these warning signs:

  • Unusual client information and identity verification
  • Clients who show an unusual knowledge of law firm processes
  • Instructions from clients far from their home address
  • Unsolicited contact, particularly from individuals who the claim is against
  • Payment preferences and settlement urgency
  • Unreliable appointment attendance.

The SRA recommends that firms satisfy themselves that the client is who they claim to be and keep detailed records of all transactions. Anyone with suspicions about money laundering should submit a report to the National Crime Agency.

Firms can also strengthen their defences through early involvement of compliance officers, regular refreshment of accounts rules and making sure policies and procedures are up to date. E-verification systems should not be solely relied upon to check up on clients.

Kaur, also known as Nina Taria, had successfully sued her brother and then approached firms for a supposed judgment debt claim against him. A man posing as her brother then contacted the affected firms and offered partial payment from a stolen credit card. Kaur was convicted on multiple counts of fraud and jailed for 10 years.

The SRA said all the firms contacted by Kaur had suspicions about her, with some turning her away at the outset but others getting to the stage of receiving payments.