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ALERT: Members Must Be Constantly Vigilant to Prevent Internal Fraud (Circular No 201/2019)

Circular No 201/2019
Dated 26 Sept 2019

To Members of the Malaysian Bar

ALERT: Members Must Be Constantly Vigilant to Prevent Internal Fraud

We have been informed by the Broker for the Malaysian Bar Professional Indemnity Insurance (“PII”) Scheme, Jardine Lloyd Thompson Sdn Bhd (“JLT”), that the number of internal fraud and embezzlement cases within law firms has been increasing significantly.  The fraud generally involves theft of cash, misuse of pre-signed blank cheques, and forgery of documents and signatures because of misplaced trust by principals of the firm in their staff and partners. 

From 1 Jan 2018 to 31 July 2019, the PII Scheme received 23 notifications involving internal fraud, from sole proprietors and small-firm practitioners in major cities.  A review of the notifications reveals that almost 50% of the fraud and embezzlement notifications are due to the habit of Members leaving their cheque books and pre-signed blank cheques, as well as entrusting the management of their office and clients, to their staff and/or third parties.  In one instance, a law firm lost a sum of RM10 million from its client accounts as a result of failing to regularly conduct account reconciliation over three years.

Members of the Bar must take note that all partners are jointly and severally liable for the loss of clients’ monies arising from such internal fraud.  Members are advised to review Circular No 158/2017 dated 19 July 2017, entitled “Fraud Alert: Know Your Office Manager”, which highlights a series of ongoing scams aimed at exploiting Members of the Bar.  Please click here to view the circular.

Beware — the risks are real, and on the rise. 

How to Prevent Internal Fraud

(1) Never pre-sign blank cheques.  Some small firms insist on the need to do so due to pressing circumstances.  The risks are clear.  Vigilance may possibly help to mitigate some of those risks.  Follow up with the staff immediately to sight all the proper documents for verification, eg photocopy of the cheque, cheque butt, acknowledgement of receipt of the cheque, vouchers, etc;

(2) Never entrust the management and handling of files, clients and/or accounts to employees without proper supervision by a partner / sole proprietor of the firm;

(3) Never entrust the management and handling of files, clients and/or accounts to third parties.  This includes prohibiting such persons from using your firm’s letterhead;

(4) All partners should be mindful of transactions involving client accounts, including those kept by other branch offices, as all partners are jointly and severally liable;

(5) Always implement “Know Your Client” measures for all clients — verify the identity and/or authority of your client and all persons you deal with, including intermediaries such as agents and brokers;

(6) Avoid paying clients’ monies to third parties;

(7) Avoid accepting cash.  Insist on payments by cheque or bank transfer;

(8) Confirm all instructions in writing; and

(9) Conduct your own periodic internal audit or checks on random files and accounts to ensure everything is in order.  This can help detect errors and/or omissions, which will also keep all partners and employees on the alert.

Such measures can help to keep everyone in the firm — both partners and employees — on their toes, and deter some who might entertain the idea of committing fraud.  Mistakes and misconduct may occur more easily when prevention or mitigation measures are not stringent enough.

Members are reminded to be constantly vigilant, and to report suspected or confirmed incidents of fraud to the Bar Council by email to the PII and Risk Management Department at pirm@malaysianbar.org.my.

Should you have any enquiries, please contact the officers of the PII and Risk Management Department by telephone at 03-2032 4511, or by email at pirm@malaysianbar.org.my.

Thank you.

Salim Bashir
Secretary
Malaysian Bar