The obligations of a solicitor to conduct due diligence on their clients to satisfy the Money Laundering Regulations 2007 are onerous, with potential criminal sanctions awaiting the unwary. However, the recent English High Court decision of Lennon & Ors v Englefield & Ors [2021] EWHC 1473 has held that these obligations cannot form the basis of a professional negligence claim by the solicitor's client.
Background
The claimants were the owners of a property in London which they had agreed to sell for £1.25m. The defendants were the solicitors they instructed to handle the conveyancing.
The claimants instructed the defendants through their long-time family solicitor, Mr Englefield. Or at least they thought Mr Englefield was a solicitor. In actual fact he had been struck off the Roll in 1991 for stealing £900,000 from his firm's client account.
All instructions were given to the defendant solicitors by Mr Englefield on behalf of the claimants. The claimants signed a letter of engagement, but appear not to have provided the required proof of ID. Nevertheless, the transaction proceeded.
When it came time to account for the proceeds of sale, Mr Englefield provided the defendants with a letter, signed by the required claimant, instructing the defendants to pay the money into his client account. The defendants duly obliged.
In 2017 it transpired that the funds had, according to Mr Englefield, been invested in a joint venture involving the construction of a dam in Guatamala. The claimants successfully sued Mr Englefield for recovery of their funds but have not received any payment.
The allegations
The claimants alleged that the defendants failed to comply with various provisions of the SRA Code of Conduct and other guidance and regulations introduced pursuant to the Money Laundering Regulations 2007. The defendants accepted that they had not undertaken all the identity checks on their clients required of them by these Regulations.
It was also alleged that the defendants should have investigated the background of Mr Englefield and advised the claimants that he was not a solicitor.
Identity Checks
It is fair to say the claim failed in almost every respect. Firstly, HHJ Gosnell agreed with the defendants' submissions in finding that the identity checks undertaken by a solicitor on their clients as required by the Money Laundering Regulations 2007 are intended to protect the general public, not the clients of solicitors. The claimants could not found a cause of action in negligence against their solicitors on an alleged failure to properly carry out those identity checks.
In any event, if the defendants had carried out the required identity checks on the claimants, it would have made no difference to the outcome: the claimants would have simply provided the required documents and the sale would have proceeded in the same manner.
Investigations into Mr Englefield
It is well established that the duties of a solicitor, or indeed any professional, are defined by the terms of the work they agree to undertake under the retainer with their client. It is also implicit that the solicitor will offer advice which is reasonably incidental to that work.
In this case, the defendants were retained to undertake the normal procedures required to sell the property. That did not include undertaking investigations into Mr Englefield and such investigations were not reasonably incidental to the work. It also did not include offering advice about the commercial wisdom of transferring the sale proceeds to Mr Englefield who, as far as the defendants were aware, was appropriately authorised to act as the claimants' agent.
Scope of the solicitor's duties
The judgment also contains another interesting application of the SAAMCo principle which limits a professional's liability, where they are providing information rather than advising on the merits of a course of action, to the consequences of the information itself being wrong.
HHJ Gosnell found that the defendants were not giving advice on the decision to sell the property, or even on the decision to transfer the sale proceeds into Mr Englefield's account.
If the claimants had succeeded in establishing a breach of duty based on the defendants' failure to investigate Mr Englefield's background, the measure of damages would have been the difference between the loss actually incurred on the transaction and the loss which would have been sustained if the facts had been as the defendant represented them to be, i.e. if Mr Englefield had been a solicitor. In that hypothetical scenario, the claimants' loss would have been the same.
Accordingly, despite the likelihood that the claimants' loss would have been averted if Mr Englefield's unsavoury history been exposed, the defendants would not have been liable for any loss even if they had been negligent in failing to investigate his background.
It should be noted that this judgment was handed down before Supreme Court's wholesale review of the application of the SAAMCo principle in Manchester Building Society v Grant Thornton was reported. That new Supreme Court authority might not have changed the HHJ Gosnell's conclusions, but it would almost certainly have affected the manner in which he analysed this element of the case.
Conclusion
A solicitor's duties to undertake identity checks required by the SRA Code of Conduct (or its equivalents in Scotland and Northern Ireland) to satisfy the Money Laundering Regulations 2007 are incredibly important for all manner of reasons. However, this decision demonstrates that failure to comply with those duties does not necessarily open a solicitor up to a professional negligence claim by their client.
The judgement further demonstrates the importance to any professional of defining the scope of their services accurately and clearly from the outset of an instruction.
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