Risks May Outweigh Rewards
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During recent months, we have been contacted by several law firms that have explored the possibility of becoming a "paymaster." Simply put, a paymaster acts as a third-party neutral who receives and then disburses funds among two or more separate people or entities. The transactions at issue may be quite large, and involve real estate or commodities including gold, steel, high value notes and oil, to name a few. The paymaster does not represent any of the parties and does not know when the transaction will close, relying on instructions as to when to transfer funds. With respect to compensation, the paymaster receives a commission for the services. Significantly, there is no requirement for a paymaster to be an attorney and no certification process to designate oneself a "paymaster."
While these paymaster services at first glance may seem innocuous, they can be fraught with peril. Specifically, lawyers who market themselves as attorney paymasters may become targets of unscrupulous scammers. In one reported case, a Rhode Island attorney agreed to serve as a paymaster for a purported commodities broker client who contacted him over the internet. After very cursory due diligence, the attorney received funds into his firm account and then followed instructions to transfer the funds to offshore accounts. In one month, over $3.4 million was disbursed, with the lawyer receiving $68,000 in commission for very limited work. It then came to light that a fraud had occurred.
In a disciplinary matter filed against the attorney, the Rhode Island Supreme Court held,
"Respondent provided unlimited access to an individual he had never met, other than via email contact, to deposit funds into his client account. He received deposits into that account from unknown sources, and he made no effort to determine whose funds he had received. He then blindly followed instructions to forward those funds to accounts around the world. A clearer breach of fiduciary duty would be difficult to imagine."
As a result, the attorney was censured for his lack of due diligence.
Be aware of the risks
Money laundering concerns may also be an issue for paymasters. Knowledge of and compliance with federal and international laws and regulations related to financial transactions is crucial. High transaction amounts and/or parties with ties to countries deficient in anti-money laundering laws must be exhaustively scrutinized. Paymasters who ignore red flags for money laundering, fraud or tax evasion may face criminal or disciplinary charges.
As some law firms have been impacted financially from the pandemic, attorneys are exploring new avenues to stay afloat and may be considering providing paymaster services. However, lawyers should be aware of the risks in such activities and ask whether the potential pitfalls outweigh the economic benefits. Further, insurance coverage for paymaster services may not be available. Many attorney professional liability policies – including those issued by Swiss Re Corporate Solutions – do not include paymaster services in the definition of professional services. While the promise of a big payout for relatively minimal work may be enticing, attorneys should think twice before marketing and acting as a paymaster.