Legal Risks – a conference reviewed

Three risk management targets identified by the Law Society of Scotland’s Insurance Committee formed the main agenda for the Legal Risks Conference, held in Edinburgh in May. Ross MacKay, chair of the Society’s Insurance Committee, opened the conference by setting out the committee’s targets, the relevance of which was illustrated by key claims statistics and trends taken from the Master Policy Annual Report (available on the Marsh Scottish solicitors’ website).

The risk management targets set by the committee are to raise awareness of:

• frauds and scams;
• information security risks;
• the causes of lender claims.

Lender claims

These remain an area of concern for the Society’s Insurance Committee. This is down to higher numbers of borrower defaults, mortgage fraud by borrowers, and the risk that lenders will seek to blame solicitors.

Linda Moir, of Master Policy lead insurers RSA, and Colin Macleod, of Master Policy panel solicitors Dundas & Wilson, spoke of the importance of adhering to the CML reporting requirements, and, having reported, waiting for written confirmation from the lender that the loan transaction can complete.

The point was made that the release of the loan funds by the lender cannot, in and of itself, necessarily be regarded as providing such confirmation.

The Society’s Insurance and Conveyancing Committees have collaborated in the production of a draft CML Handbook compliance checklist, which was provided to delegates at the conference. This can be found on the Marsh Scottish solicitors’ website (the “Marsh website”).

The Accounts Rules in the Consolidated Rules 2011, which are due to take effect from November this year, require the firm’s Cashroom Manager to ensure compliance with lenders instructions, including CML Handbook reporting requirements.

Further information regarding lender claims risk issues along with other conference “take aways”, will also be made available via the Marsh website.

Anti-money laundering: practical challenges

The emphasis of the Legal Risks Conference was on providing practical guidance for practitioners. Fergus McDiarmid of Macdonalds Solicitors drew on his extensive experience as a money laundering reporting officer to suggest practical measures to improve firms’ anti-money laundering (AML) procedures.

It was suggested that file opening protocols and checklists may be one effective way of mitigating this risk. Where practice systems are designed in such a way as not to permit any time recording, feeing or cash movements prior to AML checks being completed, this helps prevent potentially suspect transactions going ahead until proper vetting has been undertaken.

Other practical measures suggested by Fergus McDiarmid included:

• ensuring that you have a clear understanding of complex entities – and encourage referral to the firm’s MLRO;
• including brief but clear instructions describing the firm’s AML procedures within the staff handbook, intranet or equivalent;
• considering using a standard proforma risk assessment in the client vetting process;
• referring explicitly to client identification requirements, vetting of source of funds etc in your firm’s Terms of Business;
• providing training to staff on money laundering risks and on effective implementation of AML procedures.

Above all, the message was that client and transaction vetting are not “once and for all” procedures which can be completed at the start of the client relationship. “Knowing your client” is an ongoing process throughout the duration of the transaction and the client relationship. Consider what vetting checks new instructions from existing clients require. Should longstanding clients be subject to fresh AML checks? Are fee earners alert to risks which may emerge over the course of a transaction and which may require to be reported to the firm’s MLRO?

Frauds and scams

Awareness is critical to effective control of risks, and that is certainly the case in relation to fraud risks to which the profession is exposed, such as mortgage fraud by clients, identity theft, and a range of other frauds and scams.

The endeavours of determined and inventive fraudsters need to be matched by solicitors keeping themselves informed and vigilant, and ensuring robust controls are in place.

The risk management article “Frauds and scams beware” (Journal, March 2011, 42) effectively previewed many of the themes addressed by Morna Grandison of the Society in her talk on fraud prevention and detection.

A summary of her note on the identification of fraudulent documents is included in the panel to the left. The full text can be found in the risk management section of the Marsh website.

Information security

Many think of information security exclusively in terms of protecting IT systems against failure, hacking, and other misuse. John Craske (Head of Business IT at Dundas & Wilson) made clear in his presentation to the conference that information security is an issue for everyone in a practice, and encompasses issues such as storage of physical files, office security, clear desk protocols, use of laptops and other portable devices, protocols for conversations in public places etc.

The potential for significant reputational damage and Data Protection Act fines (up to £500,000) means that, regardless of any other regulatory implications, it makes good business sense to ensure that your information security procedures and processes are up to date, effective and implemented.

For more information, look out for John’s forthcoming article on information security in a future edition of the Journal.

Future articles and events

The conference included workshops addressing: limiting liability, led by Charles Sandison, a partner in the Commercial Law Practice; staffing risks, led by Liz Comerford, a partner with Blackadders; and risk registers, led by Douglas Smith of Marsh. These risk issues will be addressed in future articles in the Journal.

The Marsh solicitors’ password-protected website provides a range of risk management materials available to the profession free of charge. You can also stay up to date with the latest news on risk and risk management training by signing up for the Marsh e-bulletin. If you do not know your user name or password for the Marsh solicitors website, or want to sign up for the e-bulletin, please contact Calum MacLean (contact details below).

Identification of documents

National insurance cards should never be used as proof of identity.

Always review the original documents.

Do not rely on copied documents.

Look out for forged documents (genuine documents which have been unlawfully altered), e.g.:

• creasing in/damage to the laminated page in a passport
• replacement pages – stitching, different paper type
• overprinting
• Look out for counterfeit documents (fake documents):
• check for watermarks
• check paper type – counterfeits will often use shiny “standard” papers
• check for spelling mistakes
• check for ink smudges
• consider checking serial numbers and other reference details if in any doubt

Information security statistics

In 2010:

• 17,000 USB memory sticks left in clothes at dry cleaners
• 5,100 mobile phones left at airports
• 3,844 laptops left at airports

(source: Credant Technologies, 1 March 2011. Statistics taken from surveys of 500 dry cleaners and the lost property offices of 15 airports).

NB: Statistically, it is probably reasonable to assume that a large percentage of these would not be encrypted or otherwise protected.

Upcoming Update events

Risk Management Roadshow Inverness, 1 September 2011

• Aberdeen, 13 September 2011
• Dumfries, 22 September 2011

Legal Risks Conference

• Glasgow, December 2011

Check www.lawscot.org.uk/events for details

Calum MacLean and Marsh

Calum MacLean is a former solicitor in private practice who works in the FinPro (Financial and Professional Risks) National Practice at Marsh, the world’s leading risk and insurance services practice. For a user name and password to access the Marsh solicitors’ website, contact calum.maclean@marsh.com.

The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues.

Marsh Ltd is authorised and regulated by the Financial Services Authority.