Assume that you are a non-signatory to the bank account.
Method 1: Your law firm needs to buy a bank cheque. Perhaps it needs to move money between a general trust account and a special investment account. Let’s say that the general trust account is kept at the ANZ Bank. You make out a trust cheque with the payee stated as “ANZ Bank” and take it to a partner for signing. Once properly signed, you walk into a branch of the ANZ Bank, hand over the trust cheque and ask the teller to give you a bank cheque in return made out to a name of a bank account that YOU control.
Method 2: A trust cheque is made out to any bank where you also hold an account. For example, say you hold an account with Bank SA. If the properly signed trust cheque is made out to Bank SA, you later add the name of one of your bank accounts after the words “Bank SA”. For example, the payee becomes “Bank SA – Acc J B Smith”. You have added “- Acc J B Smith” and you then deposit the cheque into your account at Bank SA.
If you are thinking there’s no way that a bank would let this happen, then you are wrong. How can I be so sure? These were the methods used by William Brenton Willoughby to steal $4.5 million from the ANZ trust bank account of law firm Magarey Farlam in Adelaide, South Australia. The methods were described in the South Australian supreme court case RE MAGAREY FARLAM LAWYERS TRUST ACCOUNTS (No 3)  SASC 9 (18 January 2007).
$4.5 million was misappropriated over a period of 13 years by means of 204 separate false transactions that included using the methods outlined above.
How is it that he was not found out sooner? The Judgment of The Honourable Justice Debelle states “The bookkeeping was meticulously carried out in the sense that the details of the withdrawal were correctly entered in the ledger consistently with what had been stated on the requisition. No doubt, that was one means by which Willoughby hoped to conceal his fraudulent dealings. It certainly assisted in concealing them for some thirteen years. It is a curious paradox that Willoughby’s compliance with the Legal Practitioners Act and the Regulations assisted him to conceal his fraudulent activities.”
When I read the facts I was stunned. I have been managing law firm trust accounts for more than a decade. Whenever I obtain a bank cheque using a trust cheque I make out the payee section of the trust cheque as follows: “Bank Cheque in favour of ‘XYZ’”. Often I accompany the trust cheque with a letter from a partner.
I would never expect a bank to supply me with a bank cheque made out to anyone other than the party that was unambiguously stated on the trust cheque.
Were the ANZ Bank’s procedures inadequate or were their proper procedures not being followed? The management of a trust account is a joint undertaking between a law firm and a bank. Law firms rely on banks’ strict controls to provide a barrier against fraud.
I am not implying that it is a foregone conclusion that the ANZ Bank was negligent and I do not wish to take the role of judge and jury. My concerns are being raised as a result of reading the facts in the case cited above and assessing them against my own personal experience. I am open to the possibility that there may be other relevant facts of which I am not aware and that there may be other valid perspectives.
Once the fraud was discovered it was thoroughly investigated by experts but then an incomprehensible series of events took place. Instead of focusing on the possible liability of the bank, almost all of the negative attention was placed on the law firm, The Law Society of South Australia and the legal profession as a whole. It is important to note that the partners of the law firm were not found guilty of any wrongdoing.
The case led to numerous articles and debates about whether lawyers were capable of managing trust accounts and about the proper use of fidelity funds.
Worst of all, the victims of the theft had to spend years and hundreds of thousands of dollars of their own money in legal costs fighting to get their money back. The law firm was wound up, victims’ lives were destroyed and the legal profession became involved in arguments between politicians about what needed to be done.
Valid questions are still unanswered. Could the first method of fraud have been prevented if the ANZ Bank had refused to make out bank cheques in favour of anyone other than the payee stated on the trust cheques?
In the second method of fraud, altering a trust cheque by adding “- Acc W B Willoughby” after the words “Bank SA” makes the words “Bank SA – Acc” superfluous.
If you wish to pay Mr Smith for example, you only need to make a cheque out to “Mr Smith” and you do not need to include the name of the bank where Mr Smith holds an account. A cheque made out “Bank SA – Acc W B Willoughby” could have raised some suspicion, even more so if Mr Willoughby was personally known to the people in the branch.
What was the ANZ Bank thinking when court cases and arguments broke out amongst the victims, the legal profession and politicians? I will refrain from personally speculating on this.
Mr Willoughby was found out on 5 July 2005 when another employee of the law firm made enquiries about a suspect transaction. It took until 2010 for him to plead guilty. The victims are believed to have been compensated for the money that was stolen and a confidential settlement was negotiated for their legal costs. It is less clear whether the partners of the law firm recovered all of their losses.
What damage has not yet been compensated? Certainly there was the damage done to the reputation of the legal profession. However, without a doubt, the most serious damage was the anguish, stress and destruction inflicted on the lives of the victims who, over many years, were dragged through what may have been an unnecessary and misguided conflict.
6 September 2010
Note: The Australian Bankers Association has been made aware of this article so that more can be done to prevent these types of fraud in the future. It is hoped that The Law Societies / Institutes also make their members more aware of the possibility of these types of fraud.