High-Yield Investment Scheme Warning for Solicitors

The Solicitors Regulation Authority (‘SRA’) have reiterated their warning that firms should not become involved in the running of High-Yield Investment Schemes.  The notice follows five matters heard before the Solicitors Disciplinary Tribunal (‘SDT’) since October 2016.  One of the most recent cases is that of Mr Mandeep Dhariwal, an equity partner of Lawcommercial Trading Ltd, who was fined for breaching the SRA Accounts Rules (‘SAR’) and failing to maintain the public trust in legal services through his involvement in dubious investment schemes.

The SRA released a warning notice in 2013 deterring solicitors involvement in the ‘promotion or facilitation of financial arrangements that appear dubious… or bear the hallmarks of fraud.’  They went further to specify that ‘involvement’ could not be restricted by a ‘limited retainer’ if there simply should be no involvement.  The basis of the warning is that fraudulent enterprises often utilise law firms to create an air of credibility to their schemes; i.e. the use of the client bank account, the provision of undertakings and public knowledge of solicitors’ compulsory indemnity insurance.  The SRA further noted that movement of money through client accounts could see solicitors fall foul of the SAR and money laundering legislation.

In Mr Dhariwal’s case, the SDT heard that he facilitated a number of investments into graphene, diamonds, oil and film production schemes.  The SRA’s case rested on three main factors.  Firstly, that Mr Dhariwal’s use of the client account as a banking facility was a breach of SAR 1, 6 and 14.5.  Secondly, Mr Dhariwal’s involvement in these schemes created the illusion of credibility.  Thirdly, the three complaints received by Mr Dhariwal’s firm indicated that he had failed to maintain the public trust in the provision of legal services, thus amounting to a breach of Principle 6 of the SRA Principles.

SAR Rule 14.5 outlines that a firm’s client account should be used in respect of the provision of the normal regulated activity and/or instructions relating to an underlying transaction.  Mr Dhariwal advocated that, at the outset of his involvement, he negotiated and drew up agreements for the purchasers on behalf of his clients.  As time panned on, the involvement became far more uniform in nature, with many purchasers not legally represented, until such time that Mr Dhariwal voluntarily ceased acting.  The change in the nature of the work carried out meant that the firm’s client account effectively became a banking/escrow facility for payments made into investment schemes.  The forensic investigator providing evidence at the tribunal flagged 741 transactions processed through the firm’s account totalling £9,437,348.20.

The SRA suggested that, in contravention of the 2013 warning notice, Mr Dhariwal had given credibility to dubious schemes and had departed from the required protection that a firm, or solicitor, should provide to the public, a breach of SRA Principle 6.  They further submitted that he had not fully considered SAR 1, keeping client money safe, in processing these transactions. It was argued that, although only three complaints were made, it was reasonably foreseeable that damage could have been caused as a result of the schemes.

Counsel for Mr Dhariwal submitted that his actions did not meet the criteria for being struck off.  In mitigation, it was argued he made early admissions to the SRA, he had communicated in a cooperative manner and that he should be allowed to continue the work he had undertaken to progress his practice.

The SDT found there to be no dishonesty in Mr Dhariwal’s actions.  They noted that he was a ‘confident individual prepared to push the boundaries in order to expand his firm’ and that there had been no suggestion that he lacked integrity through his involvement. The SDT also took into account that he had made subsequent ‘efforts to achieve compliance’ within his firm, including resigning as their COLP and COFA. The tribunal fined Mr Dhariwal £40,000 and ordered him to pay costs of £20,250.

The SRA’s repeated warning and these recent cases come as a stark caution to solicitors involving themselves in potentially fraudulent schemes.  Of the five cases heard since October, three solicitors have been suspended and another struck off.  The SRA have emphasised that solicitors must do their homework before agreeing to act, making sure that they fully understand the scheme, that there is substance behind the proposal and that there is not any information that could raise alarm (i.e. foreign investments, request to send bank account details on headed paper and the provision of undertakings).  If the scheme sounds ‘too good to be true,’ it simply may be the case.

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