Fine: Reduced to zero due to exceptional circumstances
The Solicitors Regulation Authority (SRA) has waived a £120,000 fine it intended to levy on a law firm because it has now gone into administration – raising questions about whether it could have acted more quickly.
The use of client account as a banking facility at Kerman Legal Services continued after it was acquired and renamed by US firm Armstrong Teasdale in February 2021 to be its London office, according to a notice published last week.
Armstrong Teasdale UK went into administration last September, with the administrators blaming “significant departures of staff” in the previous year as the cause.
The SRA investigation began in June 2021 and reported in July 2022. The notice does not explain why the fine was not levied sooner, before the administration.
The SRA said the firm “caused or allowed its client account to be used as a banking facility by making 20 separate payments on two related files to third parties between 1 April 2020 and 7 May 2021”. The firm was not acting on any underlying legal transaction.
“The relevant payments had primarily been requested by a director and owner at Kermans. They had however been authorised by several different managers at the firm over a period of more than a year and had continued even after the firm acquired the shares in Kermans.”
The SRA decided that a fine of £120,617 was an “appropriate and proportionate” sanction, reflecting the failure in systems and processes at the firm, the risk of harm, and the need to provide a “credible deterrent”.
In mitigation, “there was no evidence of lasting harm to consumers or third parties and there was no allegation that the firm or any of its members had acted dishonestly or without integrity. The firm had also taken remedial action”.
The figure reflected 1.6% of Kermans’ annual domestic turnover, with a 30% reduction to reflect its co-operation and remedial action.
The SRA said: “The administrators’ proposals suggest that it will no longer trade and will cease to exist, with no distribution to unsecured creditors. The firm will not therefore pay the financial penalty.
“However, any financial penalty levied would be taken into account in the firm’s administration and reduce the amount of money available to the firm’s general creditors.
On the facts of this matter there are exceptional circumstances in the public interest to reduce the level of the financial penalty to zero.”
The decision follows fines issued to two senior partners of the firm last year too.
Anthony David Kerman, who qualified in 1971, was fined £35,280 mainly for use of client account as a banking facility – it is not clear if these are the same matters as the firm was fined for.
It explained that Mr Kerman was acting for two companies and ‘Establishment C’, which were all owned by the same ultimate beneficial owner.
In April 2020, he authorised seven payments totalling £1.1m from client account to third parties on behalf of the two companies. These included paying credit card bills and paying for jewellery.
“The payments were requested by the client but were not connected to the legal transaction in respect of which Mr Kerman was instructed.”
Then, between May 2020 and March 2021, with Mr Kerman acting for a third company, he authorised 16 payments totalling £12.7m on behalf of Establishment C. The payments were requested by the client, but were for investments and business expenses and did not relate to the transaction on which Mr Kerman was instructed.”
On each matter, Mr Kerman also failed to ensure the firm conducted adequate source of funds checks.
The SRA acknowledged that Mr Kerman’s conduct “was not intentional or arose as a result of recklessness or gross negligence”, while the potential for harm was not in fact realised.
“Mr Kerman proceeded on a misunderstanding of the interpretation of the banking facility rule, and that he did not regard his client as high risk.”
In further mitigation, he had co-operated with the investigation, “made admissions and demonstrated genuine insight”, and had undertaken annual anti-money laundering (AML) training since 2019.
This was “balanced against Mr Kerman’s level of experience and seniority, and that he should have had better knowledge and awareness of his regulatory obligations”.
The SRA’s fining guidance led to a basic penalty of £50,400 – based on a percentage at the “lower end” of the bracket of fines worth 16-49% of annual income – which was reduced by 30% to reflect the mitigation.
Meanwhile, Janice Martin, who had been a partner and head of real estate at Kermans and then Armstrong Teasdale, was fined £19,644 for failing to ensure the firm had in place a firm-wide risk assessment and AML policies, controls and procedures.
Ms Martin was the head of legal practice and money laundering compliance officer; the breaches ran for five years to July 2022, while in 2020 she had made a declaration to the SRA that the firm had a compliant firm-wide risk assessment in place. The SRA said this latter conduct was reckless, especially given her experience.
In mitigation, which led to a 30% reduction in the fine, the SRA recorded that Ms Martin co-operated with the investigation and “made an early admission and showed frank insight into her misconduct”.
There was also no evidence that actual harm had materialised and the solicitor “took some steps to try to bring the firm into compliance”.
Mr Kerman and Ms Martin were also ordered to pay the SRA costs of £,1350 each.
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