Introduction

Law firms routinely handle client money, transaction proceeds, consideration payments, litigation settlements, retention sums, and other funds connected with legal transactions. While holding client funds has traditionally been part of the legal profession, the regulatory environment surrounding the management of client money has become increasingly complex. Increased scrutiny from the SRA, stricter anti-money laundering (AML) obligations, enhanced know your customer (KYC) requirements, and growing concerns regarding fraud and financial crime have significantly increased the compliance burden placed upon law firms.

One solution that has gained increasing attention is the use of a Third-Party Managed Account (TPMA) offered by a regulated escrow service. Rather than receiving and holding funds within a law firm’s client account, monies are held by an independent, regulated escrow provider on behalf of the law firm and their clients. This approach can help reduce operational, regulatory, and compliance risks while still enabling law firms to facilitate transactions efficiently.

This article explores how the use of an escrow service operating as a TPMA can help law firms reduce regulatory exposure, strengthen compliance frameworks, and improve risk management.

 

Understanding TPMA and escrow arrangements

A Third-Party Managed Account is a regulated financial service whereby a specialist provider receives, holds, and distributes funds according to agreed terms. The TPMA provider acts as an independent service provider, holding money separately from the law firm’s own funds.

The law firm continues to provide legal advice and coordinate the transaction, while the escrow provider takes responsibility for the receipt, holding, and distribution of funds.

Examples of transactions where TPMAs are commonly used include:

• Corporate acquisitions
• Property transactions
• Litigation settlements
• Intellectual property agreements
• Cross-border transactions
• Commercial contract arrangements
• Retention and warranty claims
• Insolvency distributions

The model creates a clear separation between legal services and fund administration, reducing the risks associated with managing client money directly.

 

Reducing client money regulatory risk

A key benefit of using a TPMA is that it may help reduce client money risk.

Regulators place substantial obligations on firms that hold client funds. These obligations typically include requirements relating to:

• Segregation of funds
• Record keeping
• Reconciliations
• Reporting
• Governance controls
• Internal audits

Any shortcomings in these controls can expose a firm to regulatory investigations, financial penalties, reputational damage, and professional negligence claims.

By utilising a TPMA, it can help law firms mitigate the operational burdens associated with holding client money directly. Funds are maintained within accounts administered by the escrow provider, reducing the firm’s direct operational accountability.

As regulatory expectations continue to evolve, removing client money from a firm’s operational environment can help reduce operational and compliance complexity.

 

Enhanced anti-money laundering protection

Money laundering remains one of the most serious risks facing law firms. Legal services can be attractive to criminals seeking legitimacy for illicit funds, particularly during high-value or cross-border transactions.

Where a law firm holds client funds, it must undertake extensive AML controls, including:

• Customer due diligence
• Enhanced due diligence where appropriate
• Source of funds verification
• Source of wealth assessments
• Ongoing monitoring
• Suspicious activity reporting

At Riverside Escrow, we conduct our own independent AML and KYC procedures. This introduces an additional layer of scrutiny into the transaction.

Rather than relying solely upon the controls of one organisation, there are effectively two regulated entities assessing risks and reviewing parties involved in the transaction. This dual-review process can increase transparency and improve the likelihood of identifying unusual activity before funds are transferred.

While the law firm’s legal obligations do not disappear, the additional oversight provided by an escrow provider strengthens the overall compliance framework surrounding the transaction.

 

Mitigating fraud risk

Fraud within legal transactions has become increasingly sophisticated. Payment diversion fraud, business email compromise, identity theft, and authorised push payment fraud represent significant concerns for both law firms and clients.

Traditional client account arrangements may leave firms exposed where fraudulent instructions are received or where cyber criminals gain access to transaction communications.

An independent escrow service such as Riverside Escrow, can help to reduce these risks by implementing:

• Multi-factor authentication
• Independent payment verification procedures
• Dual authorisation controls
• Beneficiary validation processes
• Segregated account structures
• Audit trails for all instructions

Because the escrow provider operates independently of the transaction parties, payments are only released once agreed procedures have been satisfied. These controls are designed to reduce the risk of unauthorised payments and provides greater protection against fraud.

 

Strengthening governance and risk management

Modern legal practice increasingly requires demonstrable governance and risk management controls. Regulators, insurers, lenders, and clients all expect firms to implement robust systems to identify and mitigate financial crime risks.

Using a TPMA can enhance governance by introducing:

• Independent oversight of funds
• Formal transaction documentation
• Segregated responsibilities
• Comprehensive audit records
• Enhanced accountability

The separation of duties between legal advice and money handling creates a stronger control environment.

Clear risk segregation may assist firms when demonstrating their risk management framework to insurers as it helps reduce the likelihood of losses arising from internal errors, misappropriation, or control failures.

As a result, risk frameworks could appear more defensible which can be demonstrated to regulators, auditors, and clients alike.

Reducing breach exposure

Accidental breaches frequently arise from human error rather than deliberate misconduct.

Examples include: 

• Incorrect fund transfers
• Delayed reconciliations
• Inaccurate accounting records
• Misapplied payments
• Administrative errors
• Failure to identify suspicious transactions

Where a firm maintains significant client account activity, the volume of compliance obligations increases accordingly. TPMA arrangements can help reduce the number of fund-handling activities performed directly by the law firm. Consequently, there are fewer opportunities for operational errors that could trigger regulatory concerns.

This allows firms to focus more effectively on the provision of legal services while specialist providers manage payment administration and custody functions.

 

Improving audit transparency

Regulatory inspections and compliance audits increasingly require firms to demonstrate effective financial controls.

The availability of independently maintained records can simplify compliance reviews and assist in demonstrating that appropriate controls were followed.

This transparency can be particularly valuable where transactions involve multiple stakeholders, complex payment structures, or international counterparties.

 

Supporting cross-border compliance

There is an increasing number of transactions involving parties located in multiple jurisdictions.

Cross-border transactions often introduce additional compliance considerations including:

• International sanctions
• Politically exposed persons (PEPs)
• Foreign corruption risks
• Currency controls
• Tax reporting requirements
• Enhanced AML obligations

Having a dedicated compliance team, experienced in managing these risks as we do at Riverside Escrow plays a key role in supporting our ability to meet multi-jurisdictional compliance standards.

By leveraging a TPMA structure, firms can benefit from specialist compliance processes designed specifically for complex financial transactions.

This support can help reduce regulatory exposure while improving confidence among international clients and counterparties.

Riverside Escrow can facilitate transactions in multiple currencies through its dedicated GBP, EUR, USD and DKK account facilities, helping to streamline domestic and cross-border transactions. By holding and disbursing funds in the required currency, we can help reduce the need for unnecessary currency conversions, minimise associated costs, and support counterparties operating in different jurisdictions. This flexibility is beneficial where firms require funds to be held and released in their preferred currency while maintaining clear oversight and control throughout the transaction process.

 

Future-proofing your legal practice

The regulatory landscape continues to evolve as governments and regulators seek to combat financial crime and improve transparency.

Law firms face increasing obligations relating to:

• AML compliance
• Economic sanctions
• Beneficial ownership verification
• Source of funds enquiries
• Cybersecurity controls
• Consumer protection requirements

As these obligations expand, holding client money may become increasingly resource-intensive and costly. The use of a TPMA enables firms to adapt to this changing environment by outsourcing specialised fund administration functions to providers whose core business is compliance and escrow management.

This allows legal practices to concentrate on delivering legal services while benefiting from dedicated expertise in financial transaction management.

Where client funds are held in a TPMA with Riverside Escrow, depending on market conditions and account structures used, funds may generate interest. Any entitlement to interest and applicable rates will depend on the specific agreement terms but could lead to opportunities which benefit from rates higher than the Bank of England base rate.

 

Conclusion

Third-Party Managed Accounts provide law firms with a practical and effective mechanism for reducing regulatory and compliance risk. By transferring responsibility for the custody and administration of client funds to a regulated specialist, firms can reduce exposure to client money risks, strengthen AML controls, mitigate fraud threats, improve governance, and enhance audit transparency.

Importantly, a TPMA does not remove a firm’s legal and regulatory obligations. Law firms must still conduct their own due diligence, comply with AML regulations, and exercise professional judgement in every transaction. However, the independent oversight and specialist controls provided by an escrow service create an additional layer of protection that can materially improve the overall risk profile of a transaction.

With the increasing heightened regulatory scrutiny and increasing financial crime risk focus for law firms, the adoption of TPMA arrangements represents a forward-looking approach to client money management. For many law firms, the strategic use of escrow services is no longer simply an operational convenience but a valuable tool for protecting clients and maintaining regulatory confidence.