The Solicitors Regulation Authority (SRA) issued new guidance on sham litigation in January. Sham litigation is an often-overlooked risk that could expose law firms to money laundering, fraud, and reputational damage. Law firm leaders must stay vigilant, recognise red flags, and implement safeguards to prevent criminal exploitation of legal processes.
What is Sham Litigation?
Sham litigation occurs when criminals orchestrate fake legal disputes to move illicit funds through the legal system, disguising them as settlements or judgments. While litigation falls outside the scope of the Money Laundering Regulations 2017 (MLRs), firms are still subject to the Proceeds of Crime Act 2002 (PoCA) and must identify suspicious activity.
Ten examples and a real case study
Sham litigation can take many forms, with criminals exploiting legal processes to launder money, disguise illegal activity, or manipulate court decisions. Below are some examples of how sham litigation might show up in law firms:
1. Fraudulent Personal Injury Claims
A client fabricates an injury claim against an accomplice who willingly accepts liability. The case results in a staged settlement, allowing criminal funds to be transferred as “compensation” under legal cover.
2. Fake Debt Recovery Actions
A company claims it is owed a large unpaid debt by another business, both of which are controlled by the same criminal network. The “debtor” agrees to settle in court, using illicit funds to make payments that now appear legitimate.
3. Divorce or Family Law Settlements to Move Assets
A divorcing couple stages a high-value settlement where one spouse agrees to transfer significant assets to the other. This serves as a mechanism for moving illicit funds while making the transfer appear court-approved.
4. Business Disputes Used to Launder Money
Two companies file a fake commercial dispute, agreeing to a large settlement to justify the movement of illicit funds. A law firm handling the case unknowingly facilitates money laundering through its client account.
5. Intellectual Property Infringement Claims
A fraudster claims that a rival company has stolen their copyrighted work and demands a settlement. The opposing company (controlled by the same criminal group) agrees, laundering money under the guise of an IP dispute.
6. Fake Property Disputes
A property owner claims their title is being contested by another party, who then “loses” the case in court. The resulting property transaction legitimises the movement of illicit assets, allowing criminals to integrate funds into real estate.
7. Employment Discrimination or Unfair Dismissal Claims
A company pays a former “employee” a large settlement for unfair dismissal, but the employee was never actually employed. This settlement serves as a front for money laundering.
8. Contractual Disputes as a Front for Fraud
Two companies create a bogus breach of contract dispute, with one suing the other for damages. A law firm unknowingly processes a settlement that enables criminals to launder illicit funds through the legal system.
9. Insurance Disputes Covering Up Illicit Payouts
A fraudster falsely claims that an insurance company has wrongfully denied a claim. The case settles out of court, allowing criminals to extract and legitimise illicit funds under the guise of an insurance payout.
10. Probate and Inheritance Fraud
A person falsely claims to be the rightful heir to an estate, using fabricated wills or documents. A legal battle ensues, resulting in a “settlement” that transfers illegitimate assets in a seemingly lawful manner.
SRA’s Case Study: A Real-Life Example
The following case study is covered in the SRA’s updated guidance. Narinder Kaur used a fake debt claim involving her brother to launder money through multiple law firms.
• She used real legal documents to make her claims look legitimate.
• A fraudulent credit card payment raised suspicions, leading to investigations.
• Some firms reported her to the NCA, ultimately exposing the fraud.
• She was convicted and sentenced to 10 years in prison in 2024.
Ms Kaur was convicted at Gloucester Crown Court on 10 March 2023 on multiple counts of fraud. She was sentenced on 30 July 2024 at Gloucester Crown Court to ten years in prison.
Read the full detail in the SRA’s guidance case highlighting why solicitors must verify claims, even if documentation appears genuine.
Key Takeaways
These scenarios illustrate how sham litigation can disguise financial crimes within seemingly legitimate legal disputes. Law firms must be alert to unusual client behaviour, fabricated disputes, and irregular payment structures to prevent unwitting involvement in money laundering schemes.
Sham litigation is a serious financial crime risk. Law firms must ensure robust compliance, train staff, and report concerns before becoming unwitting participants in money laundering schemes.
Next Steps
✔ Read the full SRA guidance: www.sra.org.uk/sham-litigation
✔ Review your firm’s risk policies to ensure robust anti-fraud measures to ensure a tailored approach to the risks facing your firm.
✔ Provide regular staff training on identifying sham litigation risks.