Introduction
On 13 January 2025, the Solicitors Regulation Authority (SRA) issued a new Sham Litigation Warning Notice highlighting concerns around “sham litigation.” This notice underscores the SRA’s growing apprehension that some solicitors may be inadvertently (or knowingly) assisting clients in legal proceedings that lack genuine legal purpose or substance. In doing so, firms risk breaching professional obligations, facilitating financial wrongdoing, and undermining public trust in the legal profession.
Definition and Scope of Sham Litigation
Sham litigation typically involves the use of legal proceedings for ulterior purposes rather than pursuing a legitimate legal remedy. Although not a new phenomenon, the SRA’s Warning Notice indicates that there is a growing trend of cases where litigation appears to be contrived or manipulated to:
- Conceal assets or transfer them out of reach of creditors or authorities.
- Produce a false legal dispute that enables criminals to move funds through a law firm’s client account.
- Create the illusion of active proceedings for blackmail, harassment, or coercive purposes.
It is vital that solicitors distinguish between genuine, bona fide disputes and those initiated solely to further unscrupulous objectives.
Money Laundering Risks
One of the SRA’s most pressing concerns is the potential for sham litigation to facilitate money laundering. Criminals may set up fictitious claims or out-of-court settlements to channel illicit funds into a client account or make them appear legitimate. By doing so, the perpetrators exploit the perception that solicitors’ client accounts are “safe” or “regulated,” thus masking suspicious transactions.
The Warning Notice reminds solicitors of their obligations under the Money Laundering Regulations 2017 and the Proceeds of Crime Act 2002 (POCA). If a solicitor suspects that litigation is being used to launder funds, they must lodge a Suspicious Activity Report (SAR) with the National Crime Agency (NCA). Failing to do so places both the individual solicitor and their firm at significant legal and regulatory risk.
Ethical and Professional Obligations
The SRA’s Codes of Conduct for both firms and solicitors emphasise the importance of acting with honesty, integrity, and in the best interests of clients—so long as it does not involve a breach of the law or professional regulations. When it comes to potential sham litigation:
- Acting in good faith: Solicitors must not draft pleadings or file claims that lack merit or are designed to disguise illegal activity.
- Proper standards of service: By investing time and resources in pointless or dishonest litigation, a solicitor may fail to meet appropriate service standards and risk disciplinary action.
- Public trust: Engaging in or ignoring indications of sham litigation can erode confidence in the legal system, as it suggests complicity in an unethical or illegal scheme.
The Warning Notice signals that the SRA will treat breaches of these ethical standards severely, particularly where evidence shows a solicitor wilfully disregarded red flags that suggested the litigation was neither genuine nor necessary.
Identifying Red Flags
To help solicitors navigate potential pitfalls, the Warning Notice offers common indicators of sham litigation. While each case demands individual assessment, red flags may include:
- Inconsistent or vague instructions about the nature of the dispute.
- Unusually large and unexplained funds arriving in the firm’s client account in relation to the dispute.
- Abrupt settlement proposals with opaque terms, especially if sums change hands for no clear commercial reason.
- Parties connected through familial or business relationships who purport to be adversaries but show no genuine dispute history.
- Pressure to expedite payments or demand secrecy around transaction details.
Solicitors should be prepared to conduct additional enquiries if any of these signs emerge, documenting their due diligence efforts and, where necessary, seeking compliance or Money Laundering Reporting Officer (MLRO) input.
Practical Steps for Law Firms
The SRA encourages firms to review policies and procedures to ensure robust detection and prevention mechanisms are in place. Practical steps include:
- Enhanced Due Diligence: Implement a clear protocol for scrutinising the nature of a dispute at the inception of a case. This could involve checking for external evidence supporting the dispute’s legitimacy, such as contemporaneous correspondence or third-party confirmations.
- Staff Training: Provide ongoing training so all employees, including junior staff, can spot red flags related to sham litigation or suspicious financial activity.
- MLRO Collaboration: Encourage open communication with the firm’s MLRO or compliance officer. If any concerns arise, a quick consultation can avert serious regulatory breaches.
- Documenting Decisions: Maintain detailed records of client instructions, risk assessments, and any queries raised during the case. This documentation not only supports internal audits but can demonstrate compliance if the SRA investigates.
Consequences for Non-Compliance
The Warning Notice makes it clear that solicitors who fail to act on obvious indications of sham litigation face disciplinary sanctions. This can include fines, practising certificate conditions, or – in severe cases – striking off. Regulators may also report egregious conduct to law enforcement agencies, exposing the firm to potential criminal charges.
In short, the SRA has signalled zero tolerance for “turning a blind eye” to unlawful or unethical practices disguised as bona fide litigation. Firms that ignore these risks do so at their own peril.
Conclusion
The SRA’s Sham Litigation Warning Notice of 13 January 2025 is a timely reminder that solicitors must remain vigilant to the possibility that proceedings can be weaponised for illicit purposes. By staying alert to red flags, upholding ethical standards, and fulfilling anti-money laundering duties, law firms can protect themselves and the wider public interest. The message is clear: legitimate litigation serves justice, but any hint of sham proceedings warrants immediate scrutiny and decisive action.