A lawyer in possession of client funds and property is a fiduciary who must segregate and safeguard those assets. In NYS, the Rules of Professional Conduct outline the fiduciary, banking and recordkeeping responsibilities for attorneys. A brief review of those rules follows:
Attorneys must hold escrow funds in a ‘special’ account (referred to as a special, escrow or trust account interchangeably) which has been designated as such in the account title. The account title must be imprinted on deposit slips and pre-numbered checks. The account must be held at a bank which has agreed to furnish ‘dishonored check notices’ pursuant to statewide court rules. An attorney trust account should never be overdrawn and should not carry overdraft protection.
The purpose of an attorney trust account is to safeguard clients’ funds from loss and to avoid the appearance of impropriety by the lawyer/fiduciary. The account must be used solely for funds belonging to clients. Withdrawals must be made to named payees (not ‘cash’) and ATM withdrawals are not permitted. If a paralegal executes checks from a client trust account, the attorney must supervise such activity and remains completely responsible for any misuse of funds.
Lawyers, as fiduciaries, should endeavor to make client funds productive for their clients. This often means placing deposits in an interest-bearing account. Lawyers may use pooled interest-bearing accounts and then allocate interest to individual clients. When there are nominal and short-term client deposits which would not generate income for the client, lawyers may place such funds in an IOLA account.
A bounced check on an attorney trust account will be reported to the Lawyer’s Fund for Client Protection. Such an incidence will generally give rise to an audit of the trust account.
An escrow ledger should reflect (at a minimum) the date, source and description of each transaction. It should reflect interest earned on the account and allocated among clients. Bookkeeping records must be maintained for seven years.
As an attorney, what can you do to ensure that your escrow accounts are maintained properly? And how can you protect yourself from fraudulent activity?
According to the American Bar Association, most trust account lawyers involve non-lawyer malfeasance. State bar disciplinary authorities hold lawyers accountable for mismanagement of trust accounts and expect lawyers to adequately train and supervise subordinate personnel involved in handling client funds. Lawyers must implement procedures to monitor the work of all personnel involved in handling client funds, including the periodic review of bank statements.
Also, in recent years, attorney trust accounts have attracted the attention of scam artists. In one scam, they have been known to pressure attorneys to release funds from such an account before a related deposit has cleared the bank. In another scam, the scammer obtains information regarding an impending real estate transaction and, assuming the identity of a party to the transaction, emails wire instructions for funds to be transferred to his own account. The dangers of these scams are real and the consequences are serious. So what can you do to protect yourself?
A solid system of internal controls, such as positive pay and timely reconciliations, will serve to keep your accounts in compliance with the Rules of Professional Conduct, and an accounting professional can assist you with the design and implementation of such a system.
As a CPA who has spent years working in the title insurance industry, Nicole Rosenberg has a wealth of experience with escrow accounting. For a review of your escrow accounts and additional accounting consultation, contact Nicole today.