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Protect Yourself From Fraud

July 2009
Technology continues to become more sophisticated, and unfortunately so too do the tools of fraudsters. Learn to protect yourself now and avoid headaches in the future.

Lawyers across North America and their clients are being specifically targeted and victimized by fraudulent schemes, especially ones perpetrated via the Internet. You and your trust account are a prime target, regardless of your practice area, your firm size, your location or the number of years that you have been at the bar. Many schemes are elaborate, with the fraudsters going to great lengths to make them seem legitimate. In many instances the lawyer never meets the client face to face. There are variations on these schemes, but ultimately, the lawyer’s trust account is used to facilitate the fraud. It is important that you and your staff remain vigilant and alert to the possibility of fraud when you receive a request to provide services, particularly when those services require the use of your trust account to receive and disburse funds.

In this article, I offer details about some of the schemes that have been reported across North America. As well, I provide some fraud prevention tips to help minimize your risk of being victimized.

What is Happening

A “bogus check scheme” seen across Canada and the United States has duped many unsuspecting lawyers. While each case has a slightly different fact scenario, there is a common theme. In these schemes, a lawyer is retained by a bogus client and receives funds into his or her trust account by way of a check or bank draft that appears legitimate.

Within days of receiving the funds and depositing them to the trust account, the lawyer pays out funds from the account before learning (sometimes many weeks later) that the funds were bogus, the check returned and his or her trust account debited.

United States

In the past year, both the California Bar Journal and the ABA Journal Law News Now reported of lawyers in California and Georgia who were victimized by clients who had retained them via the internet.

Both lawyers were targeted in a debt collection scheme. Each received funds into his trust account by way of a check that appeared legitimate. Within days of receipt and deposit, the lawyers, as directed by the clients, wired funds from their trust accounts to their client’s bank account, before learning that the checks they had received for deposit to their trust accounts were bogus.

In these cases, the fraudsters delayed confirmation that the check was bogus long enough to get the lawyer’s trust account money and abscond with it. They did it by changing the nine-digit MICR (magnetic ink character recognition) lines at the bottom of the check. This resulted in the check indicating that it was drawn on one particular bank, while the code recognized the check as being from another bank, thus creating a delay in the clearing process.

The California lawyer’s bank was able to stop the wire transfer before his client could access the funds. The Georgia lawyer was not so fortunate. He had wired most of the $200,000.00 he received to a South Korean bank account, before learning that the check he had received and deposited was bogus. His bank debited his trust account, resulting in a significant shortfall in his trust account.

More particulars of these two cases can be found at

The California Bar Journal, (July, 2008)

http://www.calbar.ca.gov/state/calbar/calbar_cbj.jsp?sCategoryPath=/Home/Attorney%20Resources/California%20Bar%20Journal/July2008&sCatHtmlPath=cbj/2008-07_TH_01_Internet-Scam.html&sCatHtmlTitle=Top%20Headlines

ABA Journal Law News Now (September, 2008) (http://abajournal.com/news/e_mail_scam_targeting_law_firms_ensnares_a_lawyer_in_atlanta)

Canada

Nova Scotia

My paper, titled Remaining Vigilant to Fraud, posted to the Lawyers' Insurance Association of Nova Scotia website at www.lians.ca/lossprevention/RemainingVigilantRELANS_Oct6-08.pdf, details two “bogus check” schemes attempted in Nova Scotia, involving checks totalling $194,030. The paper also details how lawyers in other jurisdictions were victimized in similar fraudulent schemes.

Neither of the targeted Nova Scotia lawyers was victimized. They were alert to fraudulent schemes that had been reported to lawyers in this jurisdiction and therefore took steps to verify the authenticity of the funds received, before they deposited into or paid out any monies from their trust accounts.

As with the American scams, the checks provided to the Nova Scotia lawyers or their client appeared legitimate. In both instances, the addresses and phone numbers for the payer and the bank as printed on the check rang through to the fraudsters who received and responded to calls on behalf of the “bank” and “payer”. The persons answering the calls confirmed the payer to be legitimate and advised that there were sufficient funds on account at the bank for the check to clear.

Because a number of red flags were raised, the lawyer in one of the cases decided to process the check he received (in a debt collection matter) by taking it himself to his branch manager, instead of simply having it deposited through a teller. The bank manager was able to confirm that the check was bogus. The manager advised the lawyer that, had the check just been processed through the teller, it probably would have initially been processed and deposited into the lawyer’s trust account without much, if any, scrutiny. It could have been a significant amount of time before the counterfeit check was returned and the law firm’s trust account debited.

In trying to verify the authenticity of the check, the local branch manager contacted the bank whose transit number was shown on the check. He did not rely on the bank phone number that was printed on the check, instead searching for the branch phone number independently. He learned that the transit number was for an actual branch, but it was not at the address noted on the check. This would have created the same delay in the clearing process that was seen in the California and Georgia cases. The branch contacted by the local bank manager confirmed to him this was the sixth call it had received that day relating to this type of fraudulent scheme. As a followup, and out of curiosity, the local branch manager called the phone number for the bank printed on the check. He was told by the fraudster answering the phone that the check was good and the company legitimate.

Therefore, do not rely on the numbers noted on the check if attempting any verification calls. Determine the phone numbers from an independent source such as 411.com or Canada 411.

Also, if any red flags have been raised and you are concerned as to a check’s authenticity, do not process it as a regular teller deposit. Go to the bank and have your bank manager specifically verify the authenticity of the check. Get written confirmation from the bank that funds have cleared and that it is safe to pay out funds from your trust account before doing so. Don’t be pressured into paying out funds too quickly.

A newly admitted lawyer reported to me recently that he received an email request for debt collection services from an offshore company. The company requesting the lawyer’s services advised him that they obtained his contact information from an Online Lawyers Directory. He was told that after a careful review of his profile, qualifications and experience, it was logical to believe that he was capable and qualified to provide the legal services they requested. This surprised the lawyer. Being a new lawyer he did not believe that his profile or qualifications were listed anywhere that the company could access. They hadn’t even yet been posted to his law firm’s website. Wisely, he chose not to respond to the request for services.

Ontario

The Lawyers’ Professional Indemnity Company, in an article that appeared in Law Pro Magazine (Summer 2008 vol.7 no, 2) http://www.practicepro.ca/LAWPROMag/Wishart_Fraud_Growing.pdf described the following type of business loan fraud seen recently in Ontario.

A new client introduced to the lawyer by a broker or a former client is looking to set up a business and is borrowing money to buy inventory or materials. The loan documentation looks legitimate and the deal is processed. A certified check is deposited into the lawyer’s trust account. The lawyer draws a certified check on the trust account as directed. Several days after that check is cashed, the lawyer is advised that the deposited check is counterfeit and there is a shortfall in his trust account.

Using this type of scheme, fraudsters successfully duped 10 lawyers in Ontario over the Christmas 2007 and New Year 2008 holiday time. They struck again just before the May 2008 long weekend when four more Ontario lawyers were left with shortfalls in their trust accounts.

How to Protect Yourself

Similar and new scams are attempted daily. No area of practice is immune. To minimize the chance of being victimized you should be alert to:

  • Situations where little or no legal work is required, but a large sum of money is expected to flow into and out of your trust account;
  • A client who is prepared to pay higher than normal legal fees for what seems to be very little work;
  • Typos on bank drafts/checks;
  • Bank drafts/checks drawn on poor quality paper;
  • Spelling and/or grammar mistakes in emails sent to you by the company or individual asking for representation;
  • Evasive or inconsistent answers from prospective clients when they are asked to provide more information;
  • A client with no apparent connection to you, who compliments you on your “special expertise or qualifications.” Ask yourself why this client would want you to act for them; is it you, or your trust account they want? Don’t let flatteries from the client go to your head;
  • Rushed closings or transactions and a client who is pressuring you to do something that just doesn’t feel right. Don’t pay out funds too quickly and without doing all necessary investigations on your client and on the authenticity of funds provided to you;
  • Periods of time when there are banking holidays and when you are short staffed, e.g., between Christmas and New Years or before a long weekend. These are times when details may not be checked as closely, and also times when banks are closed; resulting in delays in the return of counterfeit checks and bank drafts
  • Check and keep envelopes when bank drafts and checks are received; in one British Columbia case a bank draft received by a law firm from what was purported to be a Canadian company came in an envelope from Romania;

Also:

  • Use 411.com, Canada 411 or a similar directory to do independent verification of phone numbers, company name and address, as well as bank address and phone numbers shown on checks or bank drafts. Do not rely on contact information indicated on a check or bank draft as these numbers could, in fact, be ringing through to the fraudster;
  • For each client, consider verifying the client's identity (including address and occupation) at the intake level and maintaining a copy of this verification for your file. For an individual client and/or those persons giving instructions on behalf of a client, look for at least two pieces of ID such as a driver’s licence or passport. If the client is an organization, consider asking for and verifying a certificate of corporate status issued by a public body.

Team Approach

Protect yourself against fraudulent schemes by establishing a team approach to fraud prevention. Make sure that everyone in your office is aware of the types of scams that are being attempted. Educate everyone to be alert to situations that just don’t add up. Encourage communication. It may be that someone in the next office is receiving a similar request for services. Don’t rely solely on your accounting department to detect a possible fraud. By then, it may be too late.

In any fraud, there isn’t usually one red flag or indicator. It’s a combination of things – when you add it all up, it just doesn’t fit.

Remember, if something seems too good to be true, it usually is. Listen to your gut instinct and say no when something just doesn’t feel right. As the old saying goes, “it’s better to be safe than sorry.”

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About the Author

Deborah E. Gillis, Q.C., is the Risk and Practice Management Advisor for the Lawyers' Insurance Association of Nova Scotia. She writes and speaks regularly on various risk and practice management topics She is also a member of the LPM section of the ABA and of Practice Management Advisors of North America. She can be reached at DGILLIS@lians.ca.

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