The control system must respond before a single exception becomes a larger failure.
Washington’s official guidance states that banks report trust-account overdrafts and checks presented against insufficient funds, whether or not the item is paid. Lawyers are also required to report an overdraft and provide a full explanation of its cause.
That structure means the firm may not control when the regulator first learns of the event. The firm does control how quickly it identifies the cause, protects client funds, preserves evidence, and produces a complete and accurate response.
An apparently isolated bank event may expose a broader process weakness.
An overdraft may arise from a posting error, bank timing, reliance on uncollected funds, incorrect matter allocation, or a deeper shortage. Determining which explanation is correct requires more than the current bank balance; it requires a traceable journal, client ledgers, source documents, and reconciliations.
Washington also authorizes random examinations of lawyer and law-firm records for trust-account compliance. Firms therefore need a control environment that supports both event-driven response and routine readiness.
Exception response should be designed before an exception occurs.
A written escalation protocol should identify who receives bank alerts, who freezes or reviews activity, who reconstructs the transaction path, who coordinates with counsel, and who owns the final explanation. The response must move quickly without sacrificing accuracy or confidentiality.
When the bank notice may reach the regulator, speed matters—but a fast answer must still be supported by complete records.
What an overdraft-response protocol should cover.
- Centralize bank alerts.Route notices to responsible lawyers and financial personnel who can act immediately.
- Protect funds first.Assess the current exposure and take appropriate steps under counsel’s direction.
- Trace the event.Reconstruct the affected transaction through the bank, journal, client ledger, and supporting documents.
- Measure the full impact.Test whether the event affected other clients, periods, accounts, or unresolved exceptions.
- Preserve the response record.Document the cause, analysis, communications, corrections, approval, and process changes.