A few bad apples can rot the good name built by thousands of lawyers who practice with integrity. Misappropriation of client monies is not a new concern within the legal profession. It has been happening for some time, and the figures now show just how serious the problem has become. Between the 2020 and 2024 policy years (as of 15 July 2026), 17% of notifications involved embezzlement-type claims, out of which 31.5% of the total paid sums were towards such claims. In 2025 alone, the number increased, with 23% of the notifications involving misappropriation of monies reported under the Professional Indemnity Insurance (“PII”) Scheme. These figures are more than just statistics. They are a sobering reminder that misappropriation of client monies is a serious concern within the legal profession that can no longer be overlooked. More importantly, every successful claim arising from the misappropriation of client monies has consequences not only for the individual client and firm involved, but also for the PII Scheme and, ultimately, Members of the Malaysian Bar.
This issue also gives rise to claims under Clause 11 of the Certificate of Insurance (“COI”). Clause 11 of the COI provides that the insurer shall indemnify the firm and its employees against any claim arising out of misconduct, except that no indemnity is provided to any person or employee who was a party to, or condoned, the misconduct giving rise to the claim.
In claims involving misappropriation of client monies, it is not uncommon to hear explanations such as, among others:
“
I don’t know anything, my partner managed everything.”
“
I had no access to the client account(s).”
“
The branch office operated independently.”
“
I had no information about the financial affairs of the firm.”
While these explanations may appear persuasive at first glance, they raise a more troubling question. If a partner genuinely has no knowledge of what another partner is doing, has no access to the client account(s) and exercises no oversight over the firm's financial operations, is that evidence of innocence or evidence of poor risk management?
A partnership carries many benefits, but not without its responsibilities and liabilities. Whether a partner is an equity partner actively managing the firm or a salaried partner with a more limited management role, a partnership is not simply a title without responsibility. In some firms, equity partners operate separate offices, manage their own client accounts and run their practices with minimal oversight from the other partners. In others, salaried partners assume that because they are not involved in the firm's management or financial affairs, they have little or no responsibility for what happens within the firm. Both assumptions can be dangerous. Regardless of the firm's internal arrangements, a partnership carries legal responsibilities and potential joint and several liability. Being described as a “salaried partner” does not, by itself, shield a partner from those responsibilities. A partner cannot enjoy the advantages of a partnership while simultaneously disclaiming responsibility for the firm's governance and financial controls.
One recurring theme in claims involving partner misconduct is the tendency for some firms to operate as though they were independent franchises. Such arrangements are often justified by statements like,
inter alia:
“
The other partner runs that office. I do not get involved in how he/she manages it.”
“
We maintain separate client accounts.”
“
I am only a salaried partner. I do not deal with the firm’s accounts.”
“
That is his/her branch and his/her clients. Why should I be involved?”
“
I trust my partner to handle their own affairs.”
“
We’ve known each other for so long. He/she wouldn’t do such a thing.”
In some firms, this separation goes even further. Partners occupy different floors or offices in the same building, maintain separate client accounts, employ their own staff, pay their own expenses and manage their own clients with little or no involvement from the other partners. To them, it may feel as though they are running separate firms. But perception does not change reality. The letterhead bears one firm name. The public sees one law firm, and the law recognises it as one partnership, one entity.
While such arrangements may be commercially convenient, they do not alter the fundamental nature of a partnership. Each partner remains part of the same legal practice and shares responsibility for ensuring that appropriate systems, controls and safeguards are in place to protect clients and client monies. A partnership should not function as a collection of isolated offices where each partner has little or no visibility over the activities of the others. If only one partner has access to client account(s) without meaningful oversight, the firm has already created a significant risk exposure. Professional obligations cannot be delegated entirely to only one partner and then ignored.
Many lawyers assume that what is commonly referred to as “innocent partner” coverage will automatically apply if they can show that they were not personally involved in the misconduct. However, the protection afforded under Clause 11 of the COI is not determined simply by whether a partner considers himself or herself “innocent”. Instead, Clause 11 excludes indemnity for any person who was a party to or condoned the misconduct. The distinction is significant. The question is not simply whether a partner participated in the wrongdoing, but whether the partner was a party to, or condoned, the misconduct.
Whether a partner falls within the protection of Clause 11 will depend on the facts of each case. Insurers may examine not only whether the partner was directly involved in the misconduct, but also whether the partner exercised appropriate supervision, oversight and management of the practice. A lack of direct involvement does not, by itself, establish that the partner neither participated in nor condoned the misconduct. Simply asserting that one is an “innocent partner” is therefore unlikely to be sufficient. Nor is it enough to say, “I did not know” or to rely on the firm's internal arrangements as a shield from responsibility. As the maxim states,
ignorantia juris non excusat (ignorance of the law is no excuse). In some circumstances, silence or inaction may also be construed as acquiescence:
qui tacet consentire videtur (he who is silent is taken to agree).
The real question, therefore, is not merely: “Did you know?” It is also: “What did you do to ensure that you would know?” That is where risk management becomes critical. The risk is here. What are we doing about it?
If there is one lesson to be drawn from these claims, it is this:
do not wait until something goes wrong to find out what is happening within your own firm. The most effective protection is not an indemnity policy, but good risk management. Sensible checks, meaningful oversight and proper financial controls can significantly reduce the risk of misconduct and help detect problems before they escalate. The following are some practical measures that every law firm should consider:
(1) Do not allow one person to control everything.
Put checks and balances in place so that no single partner has complete control over client monies or the firm's financial affairs.
(2) Communicate regularly.
Partners should keep each other updated on significant matters under their conduct so that everyone has a reasonable understanding of what is happening across the firm.
(3) Make oversight part of the firm's culture.
Every partner should remain informed of the firm's affairs. No partner should be left to operate entirely on their own without appropriate supervision or accountability.
(4) Keep branch offices connected.
Where a firm has multiple offices, regular reporting to the principal office — particularly on office and client account transactions — should be part of normal practice.
(5) Review bank statements independently.
Where appropriate, have bank statements sent to both the principal office and the relevant branch office. An independent review often helps identify unusual transactions before they become major issues.
(6) Ensure that all client account transactions are subject to dual authorisation.
Every payment should be approved by at least two authorised signatories to reduce the risk of unauthorised or improper withdrawals.
(7) Implement a maker-and-checker process for all client account payments.
One authorised individual should initiate the transaction, while another independently reviews and approves it before the payment is completed. The final approval should be given by a partner of the firm.
(8) Protect online banking with additional security.
Multi-factor authentication, approval workflows and other security measures can significantly reduce the risk of unauthorised electronic transactions.
(9) Reconcile your accounts consistently. Regular reconciliation of office and client accounts helps ensure that balances are accurate and allows discrepancies to be detected and investigated promptly.
Clause 11 exists to protect genuinely innocent partners, not those who turn a blind eye to what is happening within their own firms. Given that misappropriation of client monies is already a serious concern within the profession, “I did not know” cannot be the starting and ending point of a partner's risk management strategy. Genuine innocence should be supported by genuine oversight. Good risk management, therefore, serves two purposes. First, it helps prevent misconduct from happening in the first place. Second, where misconduct nevertheless occurs, it may help demonstrate that the partner genuinely did not participate in or condone it.
Preventing partner misconduct is not only about protecting your own firm. Every successful claim under the PII Scheme increases the cost of the Scheme, and those costs are ultimately reflected in the premiums paid by Members. In other words, when misconduct occurs, the profession as a whole bears the consequences. By fostering a culture of accountability and ensuring that no partner operates without appropriate supervision, firms can better protect their clients, their colleagues and the firm’s reputation.
Related Articles
(1)
Lawyers Taking on Responsibility as Partners or Sole Proprietors of Existing Firms;
(2)
Be Awake or Be Awakened, by Murad Ali Bin Abdullah, Advocate & Solicitor;
(3)
Partnership: More Than Just Sharing a Firm, by Balakumar Balasundram, Advocate and Solicitor of the High Court of Malaya;
(4)
Jurisk! Volume 17 Issue 1 February 2022 Page 9 – 13 “Partnership…Should I? Should I Not? By Mak Jun Yeen, Advocate & Solicitor;
(5) Click
here for ELEVATE tools; and
(6) Catch the full episode of MyBar Risk Management Podcast Episode 1 – Trust Matters: Conversation on Client Account on
YouTube.