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Nip It in the Bud – Preventing Embezzlement and Internal Fraud

In 2022, there were four notifications made to the Insurer regarding the embezzlement of client account monies by staff of law firms. 
In these cases, the monies were embezzled by the conveyancing or accounts clerks and, in one instance, by a legal assistant.  These dishonest persons were placed in positions of trust with little to no supervision and thus they were presented with the opportunity to misappropriate funds. 
In one notification, the partners, without verifying the details, relied completely on the clerk’s advice on the disbursing of several payments.  In another notification, a legal assistant was found to have been carrying out external deals with the firm’s clients. After being confronted by the partners, the legal assistant destroyed the firm’s laptop.  There was also a notification where the accounts clerk, who had been working at the firm for 20 years, had been embezzling money continuously over the years amounting to more than RM750,000.
The fact that this major issue has occurred in several law firms is certainly a cause for concern and serves as a reminder to lawyers that they must always keep a watchful eye on what happens to the money that flows in and out of the firm.  It is still important to know everything pertaining to any money that staff are handling, even if they are trusted long-serving staff.
The following are some prevention measures to minimise the occurrences of embezzlement and internal fraud:
  1. Do not pre-sign blank cheques.  Although some firms may insist that there is a need to do so, the risks are very clear and very much real;  
  2. When dealing with cheques, always refer to the payment vouchers and cross-check with the files to confirm the recipients and amount.  It is ideal to have two signatories, keep a photocopy of the cheques issued, and reconcile bank statements at the end of every month; 
  3. Maintain a stranglehold on the firm’s accounts.  Verify thoroughly all the payments that are made to and from the firm’s accounts ie all client accounts (including from all the firm’s branch offices if any), and the firm’s general accounts;
  4. Do not allow any member of your staff to manage and handle files, clients and/or accounts without the supervision of a partner / the sole proprietor of the firm;
  5. Set a conservative limit for cash payments and avoid approving cash payments exceeding the limit.  Maintain a record of the approvals; 
  6. Any request for payments made from and to the firm’s accounts must be verified against confirmed written instructions;
  7. Create a policy to accept payments for amounts above a set limit by cheque or bank transfers to minimise cash transactions;
  8. Ensure that each branch office is carefully supervised by an advocate and solicitor assigned to that branch;
  9. Where possible, conduct background checks on potential new members of staff, eg reference checks, bankruptcy search etc;
  10. Practise due diligence.  Conduct periodic internal audits and/or random checks on files and accounts.  This can help detect errors and/or omissions, and also keep everyone on alert; and
  11. Inform the authorities if you suspect a possible scam.  Report any suspected or confirmed incidents of fraud to Bar Council.
Implementing these measures in your firm may deter those who are tempted to commit fraud.  
Members of the Bar must take note that all partners will be jointly and severally liable for the loss of clients’ monies arising from such internal fraud.  Similarly, sole proprietors will be solely liable for such losses that occur in their law firms.  Therefore, it is imperative that Members be vigilant to avoid these incidents from occurring.  While building rapport and maintaining professional relationships among colleagues are certainly important to contribute to a healthy workplace, Members should not turn a blind eye to the fact that abuse of trust can occur in their office by their staff. 
After all, the unseen enemy is always the most fearsome[1].

[1] Martin, George R R. A Clash of Kings. New York, N Y: Bantam Books, 1999.