Fraud Alert: March 11, 2005

New rules require lawyers to guard against scamsters

March 11, 2005

The Benchers have amended Chapter 4, Rule 6 of the Professional Conduct Handbook to reinforce a lawyer's duty to be on guard against becoming the tool or dupe of an unscrupulous client.

In recent years, the Law Society has learned of unscrupulous investment promoters who have asked lawyers to allow them to deposit funds in lawyers' trust accounts. Those funds have come from investors who have been promised spectacular profits. Perpetrators of these scams use a lawyer's trust account and insurance coverage to add credibility to a fraudulent enterprise.

Although lawyers have always been under an ethical obligation to refrain from dishonest or fraudulent activities, the amendments to the Professional Conduct Handbook expressly highlight a lawyer's duty to refrain from any activity the lawyer "knows or ought to know" assists a fraudulent enterprise. In addition, a new footnote to Chapter 4, Rule 6 explicitly warns a lawyer to be wary of clients who promise third parties unrealistic returns on investments placed in trust with the lawyer.

The Law Society also urges the profession to be wary of unfamiliar clients or investors who ask a lawyer to make representations about protection for potential claimants under the lawyer's insurance coverage.

For immediate reference, the amended provisions are set out below.

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Chapter 4, Rule 6 of the Professional Conduct Handbook, as amended on March 4, 2005:

Dishonesty, crime or fraud

6. A lawyer must not engage in any activity that the lawyer knows or ought to know assists in or encourages any dishonesty, crime or fraud, including a fraudulent conveyance, preference or settlement.3


3. A lawyer has a duty to be on guard against becoming the tool or dupe of an unscrupulous client or of persons associated with such a client and, in some circumstances, may have a duty to make inquiries. For example, a lawyer should be wary of a client who:

a) seeks the use of the lawyer's trust account without requiring any substantial legal services from the lawyer in connection with the trust matters, or
b) promises unrealistic returns on their investment to third parties who have placed money in trust with the lawyer or have been invited to do so.