Understanding how client funds should be handled is an important part of maintaining transparency and trust. Legal practitioners holding client funds must be able to account to beneficiaries at any time (Law Society of Ontario (LSO) ‘Bookkeeping Guide for Lawyers’ (www.lso.ca, accessed 25-03-2022)). Practitioners must pay special attention to the risks associated with how they handle trust funds.
The obligations of a trust account legal practitioner are set out in s 87 of the Legal Practice Act 28 of 2014 (LPA). The key rules on holding trust funds re-emphasize the sanctity of the trust funds (2021 (Sept) DR 20). They are:
- The practice’s accounting records must ‘distinguish in readily discernible form between business account transactions and trust account transactions’ (r 54.8);
- ‘Trust accounts not to be in debit’ (r 54.14.9);
- Update and balance trust accounting records monthly (r 54.10).
- Funds in trust must be ‘kept separate from other money’ (r 54.11);
- ‘[P]ay any amount due to a client within a reasonable time’ (r 54.13);
- Trust monies must be deposited promptly (r 184.108.40.206);
- Trust balances must not exceed trust monies held (r 54.14.8);
- ‘Transfer from a trust bank account to business bank account’ (r 54.14.12); and
- ‘Withdrawals from trust banking account’ (r 54.14.14)
of the Legal Practice Council Rules made under s 95(2), 95(3) and 109(2) of the LPA.
Trust funds shall in no circumstances be deposited in or credited to a business banking account (Tech4Law ‘Maintaining Trust Accounts’ (28 January 2019) (www.tech4law.co.za, accessed 25-03-2022)). Funds other than trust money found in a trust banking account at any time shall be transferred to a business banking account without undue delay. Transfer from trust to business should only be in respect of money due to the practice. Payment of disbursements out of the trust account is not permissible unless:
- Disbursements have been made and debited by the practice;
- A contractual obligation has arisen to pay the disbursement; and
- Fees and disbursements have been correctly debited in the accounting records of the practice (r 220.127.116.11.1 – r 18.104.22.168.3).
Only three types of withdrawals from the trust bank account are permitted, namely;
- a withdrawal to a trust creditor;
- a withdrawal for a trust creditor, and
- a transfer to the practice’s business account (r 22.214.171.124 – r 126.96.36.199).
A practice should transfer money from its trust banking account to a business banking account if the trust creditor from whose account the transfer is made is identified (r 188.8.131.52).
Transfer of the amount of money due to the practice, i.e. payment for completed and billed services and reimbursements for proper expenses made on behalf of the client, must be done as soon as practical (LSO (op cit)). A practitioner must initiate a trust disbursement in writing, e.g. cheque/payment requisition. A legal practitioner should not pay bills such as their office overhead expenses directly out of the trust account even when the cheques are being written out of funds that have already been earned (The Balance Small Business ‘Common Lawyer Trust Account Mistakes’ (www.thebalancesmb.com, accessed 28–03–2022). Payments from the trust banking account of a firm shall only be by cheque or electronic transfer made payable to or to the order of a specifically designated client (r 184.108.40.206 – r 220.127.116.11). A practitioner may not make out a trust cheque to ‘cash’ or ‘bearer’.
Trust bank account cellular or telephone banking is not used to disburse trust funds (r 18.104.22.168). Paying by electronic funds transfer (EFT) is convenient but comes with risks (GOLEGAL: Two important cases on EFT fraud (www.golegal.co.za, accessed 28–03–2022)). Before making any payment, the practice shall take adequate steps to verify the bank account details provided to it by the client for the payment of amounts due (r 54.13). Any subsequent changes to the bank account details must be similarly verified. All trust funds deposited with a bank where the arrangement with the Fund has been withdrawn or cancelled, must be withdrawn forthwith from such bank account (r 22.214.171.124).
A practitioner must ensure adequate internal controls are implemented to ensure compliance with the rules and to ensure that trust funds are safeguarded (r 126.96.36.199). A commitment to embracing, implementing and practising strong internal controls is integral to ensuring the protection of trust funds. Legal practitioners must be vigilant in carrying out their duties regarding money held in trust by the practice. Always check the client’s trust ledger to ensure you hold sufficient funds in trust before disbursing. Ensure that:
- withdrawals from the trust banking account are properly authorized;
- the amount withdrawn is correct; and that
- withdrawals are recorded in the correct accounting period
(Revised Guide for Registered Auditors: Engagements on Attorneys Trust Accounts 2016(1) (www.irba.co.za, accessed 28–03–2022)).
No trust ledger or any of the trust creditor’s account should have a debit balance (r 54.14.9). A debit balance suggests that a payment was made from an account that did not have sufficient funds. This in turn suggests that another trust creditor’s money was used to effect payment for another trust creditor (Tech4 Law ‘The ABC of Trust Audits’ (www.tech4law.co.za, accessed 25-03-2022)). Unauthorised payment from the trust account may occur when payment to the incorrect party is made as a result of fraud on the part of the payee, payment is made without being authorised, or a payment is made prematurely. s. ‘A trust account trial balance that balances is not an indication that transactions have been correctly recorded’ (Jannie Dannhauser ‘Trust account risk and risk to the practice’s business’ 2016 (Sept) DR 17).
Trust funds may not be used until the practice has earned it (Tech4 Law (op cit)). Amounts received by practice in advance to cover a prospective liability for services rendered or to be rendered or for disbursements (including counsel’s fees) to be made, must be deposited forthwith to the credit of its trust banking account (r 54.14.13). Fees that are already earned should be deposited into the business bank account upon receipt. All deposits to the trust account should be made daily and all monies received should be deposited intact to the trust account (i.e. don’t split deposits between the trust account and business account) (Legal Ethics and Practice Program: Trust Account School (www.scbar.org, accessed 28 – 03 – 2022)). Retaining cash from a transaction is not permissible. Keep detailed records of the deposit to identify each item deposited. Funds belonging, in part to a client, and in part presently or potentially to a practitioner or practice, must be deposited in the trust bank account, but the portion belonging to a practitioner or practice may be withdrawn when due(Los Angeles County Bar Association (www.lacba.org, accessed 28– 03–2022)).
Every legal practitioner, when first receiving instructions for rendering litigious and non-litigious legal services, must provide the client with a cost estimate notice in writing (National Bar Council: Frequently Asked Questions Concerning Advocates on the Legal Practice Act 28 of 2014 (https://nationalbarcouncil.co.za, accessed 28–03–2022)). Every firm shall, within a reasonable time after the mandate given by the client has been discharged or earlier termination of any mandate, account to the client in writing (r 54.12). Each account shall contain details of:
- amounts received by the practice from its respective clients (and that these amounts are appropriately explained);
- disbursements made by the firm are included;
- fees and other charges charged to or raised against the client are included; and
- the amount owed to or by the client is clearly shown (r 54.12.1 – 54.12.4).
A fee in respect of litigious or non-litigious legal services must be in accordance with the tariffs made by the rules (South African Law Reform Commission: Report of the International Conference on Access to Justice, Legal Costs and Other Interventions (www.justice.gov.za, accessed 28–03–2022)).
Attorney-and-own-client fees are the fees and costs due to the legal practitioner by the client for the disbursements and services rendered by that practitioner to the client. Party-and-party fees are fees awarded by a court to a successful litigant to be recovered from the unsuccessful litigant(s), which will only represent a portion of the successful litigant’s attorney-and-own-client fees. The distinction between these two aspects is important in that the recovery of legal fees in litigation by a successful party is to a large extent regulated by statutory tariffs (Law Society of South Africa (LSSA): Submissions by the Law Society of South Africa on Issue Paper 36 Regarding the Investigation into Legal Fees – Project 142 (www.lssa.org.za, accessed 28–03–2022)). The attorney-and-own-client fee is however to a large extent dependent upon the agreement between the legal practitioner and the client. As regards attorney-and-own-client fees, clients make a choice right at the outset to instruct a specific attorney.
A classic retainer is a sum of money paid by a client to secure an attorney’s availability over a given period. Such a fee is earned by the practitioner when paid since he or she is entitled to the money regardless of whether they perform any services for the client (Merill, Arnone and Jones LLP ‘Non-refundable Retainer Provisions In Fee Agreements – Are they Proper?’ (www.majlaw.com, accessed 28–03–2022)). If it is contemplated that a practitioner will bill against the advance payment for actual services performed, then the advance is not a true retainer because the payment is not made solely to secure the availability of the attorney. Instead, such payments are more properly characterized as either a security deposit or an advance payment of fees for services (State Bar of California Arbitration Advisory RE: Enforcement of “Non-Refundable” Retainer Provisions (www.calbar.ca.gov, accessed 28–03–2022)).
Any funds held by a trust account practice in respect of which the identity of the owner is unknown or which is unclaimed after one year must be paid over to the Legal Practitioner Fidelity Fund (Fund) by the trust account practice after the second anniversary of the closing of the accounting records of the trust account practice, following the date upon which those funds were deposited in the trust account – s 87(4) LPA. The ownership of unknown or unclaimed funds passes to, and vests in the Fund. Unknown or unidentified funds are recorded in the suspense account. The age analysis of trust creditors must be compared to the previous year’s age analysis for balances that have not moved. Carefully review the monthly trust reconciliations for any trust cheques/debits that have not cleared within two or three months of issuance and for any trust balances remaining on closed or inactive files.
Unidentifiable/unclaimed trust money is a “soft target” for the misappropriation of trust funds. The existence of “suspense” and other similar accounts creates an ideal opportunity for fraud and misappropriation should motivation permeate as well (SAICA ‘Feature: Attorney’s Trust Account – What to keep in mind!’ (Vincent Farris) (www.accountancysa.org.za, accessed 25-03-2022)). A suspense account is ‘an account in the general ledger that temporarily stores any transactions for which there is uncertainty about the account in which they should be recorded’ (Fidelity Fund ‘Do you know whose money it was’ (March 2015) (www.fidfund.co.za, accessed 28–03-2022). The requirement that such funds vest in the Fund is meant to manage exposure to the risk of theft. Consider, too, whether you have any earned attorney fees that have yet to be distributed. A legal practitioner cannot invest funds, make payments or take any fees from a suspense account.
Once the owner of the funds is known/identified, the funds are removed from the suspense account and allocated to the owner’s account. Practitioners need to have in place a system where a suspense report and reconciliation are regularly generated and reviewed as means to monitor movements in and out of suspense (Fidelity Fund (op cit)). Practitioners should monitor the suspense account closely and ensure that all journals are pre-authorised.
It is prudent to disclose to the owners of trust funds where and how their funds were applied, as they have the right to know if their funds were applied appropriately (Legal Practitioners Fidelity Fund ‘Accounting to clients: How transparent are you?’ (www.fidfund.co.za, accessed 28–03–2022)). This ensures transparency on the part of the practice towards its clients and, therefore, enhances its reputation and engenders trust from the clients and the broader public. Practitioners need to strive for favourable audit/inspection reports by complying with laws, rules and regulations, prescribed practices, and accounting standards on proper accounting for trust monies.
|Please note that our blog posts are informal commentaries on developments in the law at the time of publication and not legal advice