AttPro has been notified by multiple insureds recently that their trust fund accounts were targeted by fake “clients.” These scams are resulting in the loss of hundreds of thousands of dollars, and depend upon banks making funds available after deposit, but before the bank determines that the check is counterfeit. This is a surprisingly common practice at banks – funds are made “available” to the customer and show up in bank balances several days before the bank actually receives the funds from the payee bank. Unfortunately for the lawyer, depository contracts and UCC protections allow the bank to recoup funds from the depositor’s accounts if the check is later determined to be counterfeit or NSF.
BOTTOM LINE: DON’T TRANSFER FUNDS YOU’VE RECEIVED ON BEHALF OF A CLIENT BY WIRE TRANSFER WITHOUT CALLING YOUR BANK DIRECTLY AND CONFIRMING NOT ONLY THAT THE FUNDS ARE AVAILABLE, BUT ALSO THAT THE PAYEE BANK HAS ACTUALLY CLEARED AND PAID THE SETTLEMENT CHECK IN FULL!
To provide a bit of background, the scams we’ve seen all involve a scammer client who works with a second scammer. The client contacts the insured seeking representation regarding closing out a settlement or collecting a debt. The client provides the lawyer with contact information for the third party who is “settling” their claim with the client. The settling party can be an alleged former employer, insurance adjuster, debtor or any other party who might negotiate a settlement. The lawyer contacts that person, arranges the settlement, and then receives a counterfeit check from the third party, which is then deposited into the lawyer’s trust account. The client often calls and/or emails the lawyer urging that the wire transfer be sent as soon as the funds are credited, alleging circumstances regarding an immediate need for the funds. Once the lawyer’s bank makes the funds available in the account, the lawyer then wires the funds to an account set up for the fraud.
The money is removed immediately, the account is closed, and the “client” disappears. After the lawyer’s bank determines that the check is counterfeit, the bank then sweeps the trust account for the funds, which are now gone. If the account has remaining funds that are being held for other clients, the bank will take those funds, thus depleting the account of monies the lawyer owes to others. If the account doesn’t have sufficient funds, the bank then makes a demand on the lawyer for repayment of the amount of the counterfeit check, which is usually a substantial amount of money. If clients are notified (which is often required if the funds cannot be replaced immediately), clients usually demand that trust fund amounts be replenished, and under the professional responsibility rules of most (if not all) states, the lawyer is required to do so. If the lawyer is unable to reimburse the funds, the bank and/or the clients file suit and/or lodge a grievance.
Making matters worse, lawyer’s professional liability insurance is not designed to protect against crimes and fraud perpetrated against a lawyer which results in a loss of amounts held in a trust account. Crime policies do provide such insurance, and lawyers should report such claims to their crime insurer immediately.
To avoid being a victim to one of these scams, attorneys should exercise a healthy dose of skepticism before representing a new client in debt negotiations or collections, and follow these guidelines:
- Be suspicious of matters involving a hassle-free collection job especially when there seems to be no need for attorney involvement or for funds to be routed through a trust account
- Be suspicious of new clients who contact you only through emails and by phone
- Do not disburse funds until the bank has confirmed that the check has been cleared by the payee bank and finally deposited into your trust account – when the bank shows that the funds are “available,” that does not mean that the check has cleared
- Avoid wire transfers, except with respect to existing clients
- Advise clients at the start of the representation that they will not receive any payment until the check has cleared and that this will take time
- Be suspicious if a new client presses urgently for a wire transfer
- Keep in mind that there is a difference between funds from a check being “available” and the check having “cleared”!
- Talk to your agent or broker about purchasing crime insurance to protect your firm’s trust account from fraud, embezzlement and client scams
For more AttPro Alerts and additional risk management resources, including our best practices database, please visit Attorney Protective Risk Management.