Trust Accounting

Bruno’s Top Tips: Protect Yourself from Financial Con-Artists

By Bruno DeMolli
From the 16,3 edition of the Journal

“Dear Sir, I am contacting you to seek your assistance and cooperation in the actualization of this rare business opportunity…”

Many, if not all, of us have received an email over the past few years from someone who appears to be a barely literate Nigerian or Saudi prince begging us for assistance with a financial matter and offering sizeable compensation for doing so. While many immediately recognized this email as a money scam, there are some who jump at the chance of a quick payoff and suffer major financial loss as a consequence. Apparently, when the siren song of a fast buck plays loud enough, it can drown out even the most obvious sounds of warning. In these difficult economic times, lawyers are not immune to falling prey to fraudulent money schemes in the pursuit of an easy and seemingly lucrative payday.

The upsurge of electronic communications over the past decade improved efficiency, saved costs, and allowed for faster information sharing. Unfortunately, the benefits of this new era are tempered by an alarming rise in attempts to defraud law firms. Scam artists have aggressively targeted law firms and lawyers across the country since 2008. Until recently, North Carolina was relatively insulated from this fraudulent activity. However, given the ever-increasing number of reports to the State Bar, it is clear that North Carolina lawyers are now major targets for Internet financial criminals. Lawyers and their trust accounts are consistently targeted by scam artists who pose as potential clients, counterfeit trust account checks, steal account numbers, and forge signatures. Failing to recognize a scam could not only cost a lawyer hundreds of thousands of dollars, it could also result in the use of funds belonging to the lawyer’s other clients to cover a counterfeit check—potentially violating the Rules of Professional Conduct.

The most common fraud scheme follows this pattern: Lawyer receives an email from a prospective client from out of the country but with “ties” to the jurisdiction in which the lawyer practices. Most of these schemes propose representation in either a simple debt collection or a divorce settlement. The “client” retains the lawyer to collect a debt from a local company, subtract attorney’s fees, and wire the remaining funds back to the “client’s” account. Amazingly, before a demand letter is even sent to the bogus debtor, a cashier’s check arrives at the lawyer’s office paying the debt in full. The lawyer deposits the check in the trust account, receives provisional credit from the firm’s bank, subtracts the attorney’s fees for a job well done, and, assuming that the cashier’s check represents good funds, wires the remaining funds to the “client.” By the time the cashier’s check is returned by the bank as counterfeit, the “client” has laundered the wired funds through multiple accounts and is long gone.

This scheme has cost lawyers across the country hundreds of thousands of dollars in losses and, in one case, a federal money laundering charge.1 The State Bar has received reports of this scheme from multiple lawyers and law firms across North Carolina. For example, a firm in Fayetteville was retained on a contingency fee basis by an out-of-state company to collect a debt from a local business. The firm received a bank check for $300,000 from the debtor and was told to deduct a 10% legal fee and issue a trust account check for the remainder to the client.2 Smartly, the firm examined the bank check and found it to be fraudulent before depositing the check or making any disbursements, saving the firm’s lawyers hundreds of thousands of dollars and a potential serious problem with the State Bar.

Another example: a lawyer in Durham was retained via email by a woman to aid in the collection of a divorce settlement from her ex-husband who allegedly lived out of the country. The lawyer had to do “very little haggling” with the ex-husband before he remitted a certified bank check in the amount of $297,500, because he did “not want this case to go further involving a lawyer.” The lawyer, rightly suspicious, opened a new IOLTA account to protect the lawyer’s other clients and deposited the check in the new account. The lawyer attempted to confirm the validity of the check but was only able to verify that the account number, not the actual check, was valid. Thankfully, before the lawyer wired any funds to the “client,” the check was returned as counterfeit and the lawyer shut down the IOLTA account without losing the money of his other clients.

Sometimes these schemes occur without the willing participation of the lawyer. The State Bar has received reports of persons printing fraudulent checks on law firm accounts and using them all over the country. For example, a firm in Charlotte was contacted by the fraud department of its depository bank because recently-cashed checks had check numbers that had been previously used. The criminals forged the signature of one of the firm’s lawyers on 12 different checks totaling over $7,000. The firm was reimbursed by the bank for the stolen funds and is working with the bank to prevent similar occurrences in the future.

No lawyer can be 100% protected from criminal activity, but these tips can help safeguard you and your firm against check scams and fraud:

• “Available funds” does not equal collected funds. Even if the bank makes a check’s funds available within two days, it does not guarantee that the actual check will be paid. Fake checks often take up to a week to get returned because scammers put fake routing numbers on the checks.

• Be sure to wire only “collected funds” from your trust account. Wired funds are very hard to recover if a check is returned as counterfeit.

• Closely examine cashier’s checks. Scammers are now counterfeiting certified bank checks from nearly every major and minor bank. For a complete list of counterfeit check alerts, go to the US Treasury Dept. website at www.occ.treas.gov/news-issuances/ alerts/2011/index-2011-alerts.html.

• Be wary of doing business with out-of-state clients via email. Look for suspicious generic terms in the emails like “your jurisdiction” and for poor grammar.

• Question how the client found you. If the client is requesting services from you which are out of your area of expertise that is a warning sign that something may be awry.

• MONITOR YOUR TRUST ACCOUNT REGULARLY! If someone is writing fraudulent checks on your trust account, you should be able to catch it during your monthly review. If you are suspicious of illicit activity, daily or weekly make reviews of your trust account. Keep your staff informed of these scams so they can spot the tell-tale signs of fraud.

• If something seems fishy, it probably is.

By following these tips, knowing your clients, and monitoring your trust account, you can protect your firm and yourself from attacks by Internet financial criminals.

If you believe that your firm has been subject to an attempted or successful fraud, contact the State Bar at (919) 828-4620 and the North Carolina Attorney General’s Office at (919) 716-6000.

Endnotes

1. Martha Neil, Lawyer Victimized in $300K Check Fraud is Charged with Money-Laundering, ABA Journal (Aug. 27, 2010).

2. The amount of the check was actually $298,750. Scam artists will often avoid round numbers in order to make the amount in question appear legitimate.

THE NORTH CAROLINA STATE BAR
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