Solicitor jailed for Trust Account Fraud
In March 2021 Sydney-based solicitor Mark Lee O’Brien was jailed for 10 years after being found guilty of misappropriating more than $6 million from the firm’s trust account. The monies were used to buy a Bondi home, bolster superannuation for himself and his wife, and gifts for his children.
How was he able to defraud the Law Firms trust account?
O’Brien’s firm looked after the estates of many wealthy elderly people in Sydney’s northern beaches. In 2015, a client passed away whose will left more than $1.5 million to several charitable organisations. Her nephew, the executor of her will, retained Mr O'Brien to assist in administering and settling the estate.
In the course of purportedly giving effect to his client instructions, O’Brien misappropriated the funds. Mr O'Brien employed a number of fraudulent methods for covering up his behaviour, including:
Cheques were withdrawn using a name other than his own to reduce suspicion.
Making smaller donations to charities to obtain a receipt and using letterheads from the organisations to create fake letters appearing from the chief executives.
Opening a separate bank account for the sole purpose of receiving these funds.
False entries into the solicitor’s firm trust ledger that recorded the monies went to the intended beneficiaries.
The 2015 theft went undiscovered, leading to O’Brien feeling confident enough to try again in 2017 with a wealthy elderly client he had power of attorney over.
At first, he transferred smaller amounts while the woman was still alive. However, when she died in early 2018, he proceeded to steal from her estate which had been left to charity, as well as a $1.7 million deposit that had been refunded from the aged care home where she lived.
O'Brien drew a trust account cheque for the full amount of the refund from the aged care home and made it out to his wife. A separate trust account ledger was opened in her name and the entry was made as “proceeds of estate”.
He used the same method he had employed previously to create a false trust account entry and forged a letter purportedly from the charitable organisation’s CEO to misappropriate $2.7 million owed to St Vincent de Paul Society.
How was the fraud subsequently discovered?
“The matter came to light, as these things often do, in a most unlikely way when facts incidentally came to the attention of the solicitor’s law partner who, knowing intimately the profitability of the practice, was set to wondering about how his law partner had been able to afford an expensive new house at Bondi,” Justice Stephen Campbell said. AustLII: R v Mark Lee O'Brien; R v Therese O'Brien  NSWDC 67 (16 March 2021)
Tips to detect and prevent fraud
Undoubtedly this fraud had a level of sophistication which made it difficult to detect. Although there is no sure way to prevent fraud, here are some quick and easy measures you can implement today to reduce the risk:
Segregation of Duties: More than one person should be responsible for completing key trust account tasks. In this example the Solicitor shouldn’t have been able to set up client matters, receive payments and make disbursements. When considering segregation of duties ensure that this is replicated within your software through user profiles, in particular providing staff with limited access to bank accounts.
Understand your risks. Knowing the most common methods fraud perpetrators use to conceal their schemes helps to increase detection and prevention. The 2020 ACFE Global Study on Occupational Fraud showed that the top concealment methods are (1) creating fraudulent physical documents, (2) altering physical documents, (3) altering electronic documents or files, and 4) creating fraudulent electronic documents or files. By conducting regular audits on your trust account, you have the opportunity to confirm payments as legitimate.
In addition, know your industry risks. The Queensland Law Society in their External Examiner’s Program has stated that “Deceased Estate files present the greatest opportunity for fraudulent misappropriation”. Therefore, firms should ensure that there are appropriately designed controls for those transactions, such as deceased estate payments being required to be signed by two Principals of the firm.
Be aware of employee behaviour. As was the case in this example, in the process of committing fraud, perpetrators often exhibit certain behaviours. These red flags are almost always identified by someone within the organisation before the frauds themselves are detected. The most common red flags are:
Living beyond means
Unusually close association with a vendor or customer
Excessive control issues or unwillingness to share duties
Unusual irritability, suspiciousness, or defensiveness
Recent divorce or family problems
Law Firms in Queensland are required to undertake an external examination annually. To get the most out of your audit there is an opportunity to discuss industry risks and internal controls with your auditor so as to prevent problems from occurring down the track, avoiding financial loss and potential litigation. If you would like to discuss your firm’s external examination please contact Audit Me on 0437 251 400.
Does anyone remember this scene from Superman III. A classic example of a red flag!