#13088 - Trust Accounting - Ethics

Trust Accounting

• In broad terms, a legal practice will have two types of accounts in the conduct of their business. They are:

  • Office account – used for the conduct of the business of the practice, including paying bills and receiving legal fees and profit costs; and a

  • Trust account – for receiving money paid by or for clients for specific purposes.

• Breach of trust money obligations is a fundamental breach of obligations as a practitioner LSC v Nguyen

• Five principles of trust account regulation

  1. Separation of practitioners’ and clients’ money

     • Two separate cheques can achieve this

  2. Designation of client money as ‘trust money’

  3. Separate identification of each client’s money and each transaction in relation to that money

  4. Precise record keeping which facilitates supervision and identification of irregularities

  5. External auditing, professional and criminal sanctions for breach (including some time in jail).

• Schematic of Trust Account Movements

  1. Write a trust receipt

  2. Make entry in receipt journal

  3. Credit entry in client’s ledger ‘card’

  4. Entry in payment journal

  5. Debit entry in ledger

  6. Write a trust cheque, or make an EFT

  • Can only take the money from trust to office account when you are entitled to it. Once you go through the process of billing, THEN you are entitled to the money.

  • If the money given to you includes a disbursement e.g. for a barrister, and some costs, must put ALL in trust account, then pay money to barrister, then transfer money to office account to satisfy bill.

  • Can’t move money to office account unless the client has given you directions that the money can be used for that specific purpose.

    • If the client doesn’t pay, you can sue them and hold a lien over their money (but if the money was given for a particular purpose e.g. to pay a client’s deposit on a next purchase, you can’t take it)

  • If you get a cheque that is to pay a particular invoice, and ONLY that invoice, can put it straight into the office account.

• Uniform Law

  • s 128 Definitions:

    • controlled money means money received or held by a law practice in respect of which the law practice has a written direction to deposit the money in an account (other than a general trust account) over which the law practice has or will have exclusive control

    • controlled money account means an account maintained by a law practice with an ADI for the holding of controlled money received by the law practice;

    • general trust account means an account maintained by a law practice with an authorised ADI for the holding of trust money, other than controlled money or transit money;

    • permanent form, in relation to a trust record, means printed or, on request, capable of being printed, in English on paper or other material;

    • transit money means money received by a law practice subject to instructions to pay or deliver it to a third party, other than an associate of the law practice;

      • this is cheque money, must be accounted for and put through receipting process but the money itself doesn’t go into the cheque account.

    • trust account means an account maintained by a law practice with an authorised ADI to hold trust money;

    • trust property means property entrusted to a law practice in the course of or in connection with the provision of legal services by the law practice for or on behalf of another person, but does not include trust money;

  • Authorised ADI s 149

    • Regulated by APRA

    • Entered into an arrangement with a nominated trust authority

    • Not under any obligation to supervise transaction and does not have any liability in regards to the account.

    • Must give reports, provide access to info to investigators. Civil penalty: 100 units

  • Meaning of trust money s 129

  1. Trust money is money entrusted to a law practice in the course of or in connection with the provision of legal services by the law practice, and includes –

     • Money received on account of legal costs in advance of providing services

     • Controlled or transit money received by law practice

     • Money received by the law practice that is the subject of a power exercisable by the law practice to deal with the money on behalf of another person

  2. The following is not trust money

     1. Money received for legal services that have been provided and in respect of which a bill has been given

     2. Money entrusted to a law practice in connection with a managed investment scheme or mortgage financing undertaken by the firm

     3. Money in connection with a financial service a law firm provided where the law practice or an associate provides the service as a representative of a person who carries on a financial services business and has a licence

     4. Money received for investment purposes

        • Unless it is in the ordinary course of legal practice and primarily in connection with the provision of legal services; or

        • The investment is to be made in the ordinary course of legal practice and for the ancillary purpose of enhancing the value of the money

     5. Money determined under s 152 not to be trust money

     6. Money declared not to be trust money under the Uniform Rules

  • Who do these rules apply to?

    • The provisions apply to Australian-registered foreign lawyers too s 131

  • Non-trust money

    • If a law practice receives or holds money that is non-trust money (see exceptions (d)-(f) (other than money for the payment of legal costs due to the law practice), it must give the person written notice that it won’t be treated as trust money, it is not subject to provisions, and a claim against the fidelity fund can’t be made. Civil penalty: 100 units s 134

  • Dealing with trust money

    • Can’t deal with trust money unless a principal holds a practicing certificate authorizing the receipt of trust money; or allowed to have it under rules s 150. Civil penalty: 250 units.

    • A law practice must deal with trust money in accordance with this Law and the Uniform Rules. Civil Penalty: 50 units s 135

    • Must comply with specific directions as soon as practicable and keep written directions for 7 years after the matter is finalized. Civil penalty: 50 units s 142

    • A law practice must maintain a general trust account (or more than one) Civil Penalty: 50 units s 136

    • A law practice must deposit trust money (other than cash) into the law practice’s general trust account as soon as practicable after receiving it Civil penalty: 100 units s 137 Unless

      • They have a written direction by person to deal with it otherwise

      • The money is controlled money or transit money or

      • The money is subject to a power given to practice to deal with it on behalf of another person

    • Cannot mix trust money with other money. Civil penalty: 50 units s 146

  • Holding, disbursing and accounting for trust money in general trust account s 138

    • A law practice must hold trust money exclusively for the person on whose behalf it is received and disburse it only in accordance with direction from that person. Civil penalty: 50 units s 138(1)

    • The law practice must account for the trust money as required by the Uniform Rules. Civil penalty: 50 units s 138(2)

  • Withdrawing trust money s 144

    • only withdrawn using cheque or EFT. Civil penalty: 50 units Civil penalty: 50 units s 144(1)

    • May do any of the following in relation to money held in trust account or in controlled money account s 144(2)

      • Exercise a lien for legal costs reasonably due and owing

      • Withdraw money to pay legal costs owing

      • Deal with the balance as unclaimed money after deducting costs owed and exhausting any other means of distributing it in accordance with the client’s instructions

      • Money cannot be used to pay debts/satisfying a judgment owed by legal practice s 145(1)(2)

  • Controlled money s 139

    • As soon as practicable, must deposit it in the account specific. Civil penalty: 50 units s 139(1)

    • Must hold controlled money exclusively for the person on whose behalf it was received: 50 units s 139(2)

    • Must not disburse the money except in accordance with written directions. Civil penalty: 50 units s 139(3)

      • These written directions must be kept for 7 years. Civil penalty: 50 units s 139(5)

    • Must maintain the controlled money account as required by the rules Civil penalty: 50 units s 139(4)

    • Can’t use the account for anyone else’s controlled money. Civil penalty: 50 units s 139(6)

  • Transit money s 140

    • Must deliver the money as required by the instruction as soon as practicable after it is received Civil penalty: 50 units s 140(1)

    • Must record and keep brief particulars sufficient to identify the transaction. Civil penalty: 50 units s 140(2)

      • Must keep these particulars for 7 years. Civil penalty: 50 units s 140(3)

  • Trust money in the form of cash

    • Must deposit all cash (other than controlled money) into the general trust account as soon as practicable even if it has a written direction to deal with it otherwise. Once deposited, then can deal with as asked. Civil penalty: 50 units s 143(1)

    • For controlled money, must be deposited in controlled money account. Civil penalty: 50 units s 142(2)

  • Keeping trust records

    • Must keep trust records. Civil penalty: 50 units. s 147(1)

    • Must keep in in accordance with rules, accurate, convenient to investigate, and for 7 years. Civil penalty: 50 units Civil penalty: 50 units 147(2)

    • Must not knowingly receive money under a false name. Civil penalty: 100 units. s 147(3)

  • Deficiency in trust account

    • A law practice, or Australian legal practitioner, or any other person must not, without reasonable excuse, cause a deficiency in any trust account or ledge, or a failure to pay or deliver any trust money. Penalty: 500 units or imprisonment for 5 years, or both s 148

  • Reporting irregularities s 154

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