Client Money in the Fiduciary's Omnibus Account
Palmetto Trust & Corporate Services holds client funds for 14 segregated trust structures and 60 corporate clients in a single pooled bank account titled 'Palmetto Client Account'. The account is at the same bank where Palmetto's own operating account sits, and the bank has a right of set-off across Palmetto's accounts. The pooled account is reconciled monthly, but a $310,000 shortfall has persisted for two months; the finance manager attributes it to 'timing of a property settlement'. One trust's funds were used for nine days to cover a corporate client's disbursement, and the shortfall was only discovered when that trust's beneficiary requested a statement. Palmetto's client-money policy is a two-page document that says funds are 'held in trust' but does not address segregation, set-off, or reconciliation frequency.
1. Evaluate the client-money arrangements against expected standards of segregation, reconciliation, and record-keeping, and explain the risk created by the set-off right.
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The arrangement fails on segregation. Client money for 74 distinct clients and 14 trusts is commingled in one account with no sub-ledger discipline visible. Pooling is permissible only where each client's entitlement is separately recorded and reconcilable at all times; here the reconciliation is monthly and already shows a $310,000 unexplained gap persisting for two months. 'Timing of a property settlement' is an assertion, not a reconciliation - the firm must be able to trace every dollar to a specific client ledger, and it currently cannot.
The cross-use of one trust's funds to cover a corporate client's disbursement is a misappropriation of client money, even if repaid within nine days. Client money is not a liquidity buffer for the firm or for other clients. The fact that the breach surfaced only because a beneficiary asked for a statement shows the monitoring is reactive, not preventive.
The set-off right is a serious structural risk: if the pooled account sits at the same bank as Palmetto's operating account and the bank can set off across them, client money is exposed to Palmetto's own credit or default. Client money must be held in a way that is bankruptcy-remote from the firm - typically a designated trust account at an institution that has acknowledged in writing that it has no set-off or lien over the funds, often at a separate bank.
The two-page policy is inadequate: it lacks segregation rules, daily or at least frequent reconciliation, dual authorisation for movements, break-escalation timelines, and a clear statement that client money cannot fund firm or other-client obligations.
2. Set out the corrective actions, including how the shortfall and the nine-day cross-use should be resolved and reported.
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Containment: immediately move client money to a designated account at a separate institution, or obtain a written waiver of set-off and acknowledgment of trust status from the current bank. Freeze discretionary movements from the pooled account until the ledger is rebuilt.
Reconstruction: perform a full client-by-client reconciliation back to the last known clean date, not just the current month. Identify the $310,000 shortfall's true cause and whether other client money was used. Document every movement with dual authorisation.
Make good: the firm must top up the account from its own funds so that every client entitlement is fully covered before any further business. The nine-day cross-use must be reversed in the ledger, and the affected trust made whole including any lost interest. The corporate client whose disbursement was funded improperly should be notified and its position regularised.
Reporting: assess whether the misappropriation and the shortfall are reportable to the Financial Services Commission and, given the trust context, to the relevant trust beneficiaries and possibly the court or trustee. Consider whether the conduct triggers a suspicious-activity report if there is any indication of dishonesty. Notify the professional indemnity insurer.
Governance: replace the two-page policy with a full client-money framework - daily reconciliation, three-way matching to bank statements and client ledgers, break escalation within 24 hours, segregation at institution level, prohibition on cross-client funding, and annual independent assurance. Report the incident and remediation to the Board, and consider disciplinary action against the finance manager who mischaracterised the shortfall.