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No firm is exempt from the damaging effects of an ethics investigation or failed random audit by the state’s ethics committee. Standards of ethical practice apply to attorneys who work in quiet obscurity as much as to those with high profile careers. Deficiencies or negligent misuse in the handling of client funds can result in sanctions that include admonition, private reprimand, public censure, suspension of your law license and even disbarment. And the outcome can be far reaching, as it was recently for one practitioner, where a finding of misconduct in Florida also served as the basis of disciplinary proceedings and ultimately disbarment in Massachusetts. As part of these ethical obligations, attorneys must be diligent in the handling of their trust funds. Attorneys agree to protect and account for every penny of the funds that they hold in trust. While violations such as commingling and misappropriation of those funds constitute obvious misconduct, improprieties can also arise from transactions completed by attorneys or their administrators who are simply uninformed or careless in handling their trust accounts. IGNORANCE IS NO DEFENSE Real estate deposits, divorce settlements, insurance recoveries, jury awards — all are funds commonly entrusted to attorneys that legally belong to their clients and are returnable upon demand (to the extent that they have not been disbursed for services provided). It is not surprising that the transactions involving these funds come under the scrutiny of state disciplinary boards. Real estate transactions, in particular, are prone to trigger violations. An example is where money is exchanged at a closing and the seller promptly goes to the bank to present a check against trust account funds that are not yet cleared. While lawyers understand that it is an ethics violation to write checks against funds that have not been received, they may not be aware that banks are required to immediately notify the proper authorities when an attorney’s trust account check is presented against insufficient funds. A thorough understanding of bank clearing policies as well as the available payment options — such as the use of bank checks, expedited deposits and wires transfers — will help to avoid such predicaments. Another common problem results from small balances left in trust accounts after matters have been settled. Often a balance simply represents interest accumulated between the time the check was issued and cashed; in that case, the attorney must act swiftly to work with the bank to return the funds to the client. Of course the same is true if the balance is simply due to a miscalculation at the time of disbursement. In the matter of outstanding checks, every attempt must be made to ensure that the client cashes the check. In cases where the client cannot be located, you should make an application asking the clerk of the proper state agency to accept the funds. DUE DILIGENCE Though state laws differ, there are common practices that you should always follow in handling client funds. This will help ensure compliance and avoid even the appearance of wrongdoing. � Maintain the proper bank account. Always place funds “in trust” for your clients in banks approved by the respective governing agencies of your state. The account must be clearly labeled as a trust account, with that title printed on the checks and deposit slips. At any time upon request, you have a duty to render a full accounting of the transactions in your trust accounts to your clients. � Never commingle your clients’ funds with your own. Open an individual account (or “sub” account under an approved bank’s master escrow system) for each client for whom you are holding money and for your state-mandated IOLTA (Interest on Lawyers’ Trust Accounts) fund. Keeping client or third-person funds separate from your own gives notice that the funds are not yours, while at the same time safeguarding them from claims against your personal assets and those of your firm. � Make proper deposits and withdrawals. Always deposit settlement checks into your trust account promptly and be sure to designate withdrawals to named payees — never to cash. Also withdraw legal fees from the trust account promptly when due. Aggregating large sums of earned legal fees for extended periods of time may constitute passive commingling of funds. � Do not use client funds to pay bank charges. If your state’s rules allow you to maintain a minimal balance to cover any bank charges, a running balance of these funds needs to be maintained. Another option is to have the bank automatically charge your operating account for trust account fees. � Never take interest. While attorney trust accounts may be interest bearing, you can never keep interest earned on funds belonging to your client. All interest or other income earned on an attorney trust account belongs either to the client or person whose money generated the interest, or to your state mandated IOLTA fund. � Keep proper records. Always maintain clear and concise records of receipts and disbursements, as well as individual transactions affecting each client’s funds. Be sure to reflect the date, source and description of each item of deposit, as well as the date, payee and purpose of each withdrawal. Reconcile the balances regularly, and maintain the records for at least seven years. � Comply with your state’s rules of conduct. In most states, money held in trust may be placed in an out-of-state bank only by explicit written permission of the client. In some states, attorneys are prohibited from placing personal funds into their trust accounts, while in others, a minimal amount of personal funds may be deposited into the attorney trust account to pay bank service charges and other bank fees incurred in connection with the account. In some states there are no rules of conduct regarding signatories, while in others only attorneys admitted to the state bar have permission to sign attorney trust account checks and initiate wire transfers. In addition, the office that monitors attorney trust accounts varies from state to state — in some, it is the Office of Attorney Ethics. In others, it is the disciplinary boards of the state’s highest court. Register with your IOLTA Board. IOLTA (IOLA in some states) exists in every state. IOLTA is a program whereby lawyers pool client funds held for short periods of time into a designated interest-bearing checking account. The interest generated is used to support not-for-profit agencies that provide legal aid to the poor. While some IOLTA programs are creatures of legislation, others operate pursuant to rules promulgated by the respective state high courts. Participation rules vary from state to state. Some programs allow lawyers to participate on an “opt-out” basis, and others on an “opt-in” basis. Attorneys whose average daily trust balances fall under a specified minimum (e.g., $3,500 in Pennsylvania and $5,000 in New Jersey) may not be required to participate. Regardless of the rules that apply, all attorneys should register with their IOLTA boards and establish an IOLTA trust account if necessary. ADDITIONAL SAFEGUARDS There are some things you can do to further minimize your vulnerability to ethics violations. � Provide adequate training and supervision for your account administrator. Ensuring that the person who is handling the day-to-day administration of your trust account understands both the magnitude of the situation and the basic requirements of trust accounting will go a long way toward avoiding problems. In addition to providing training, you should establish procedures to check for and correct potential errors. If computer accounting programs are being used, be sure that your records are being backed up and hard copies made. Remember that oversight, not software, is the cornerstone of trust account maintenance. � Know your financial institution. Work with a banker who understands your firm’s business as well as the state rules that apply. Bank officers can be helpful in explaining situations to ethics committees on behalf of the attorney. Understand the bank’s schedule for posting and crediting deposits and its requirements for opening and maintaining trust accounts. The more progressive banks have recognized the need to create sophisticated but simple-to-use “master” escrow accounts that greatly reduce the record keeping burdens. These programs provide for income to be subaccounted on a daily basis to each of the attorney’s clients. The best of them take care of all 1099 reporting and remittance of interest to the state IOLTA funds — often at no cost to the attorney. � Take final responsibility for your trust account maintenance. The scenarios mentioned and the guidelines outlined above are as seen through the eyes of a single banker who, while dealing with trust accounts daily, does not profess full knowledge of the rules that apply to trust accounts in every state. If a mistake happens, don’t panic but take remedial action. If you follow the procedures outlined, the usual anxiety and stress related to an audit should be greatly reduced. Remember that even with a trusted administrator and a knowledgeable banker by your side, you own responsibility for ensuring that the duties imposed on you are met. Your license may depend on it. Judith Austin, based in Philadelphia, is a vice president of the professional service group at Bank of America. Contact her at [email protected]

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