PREVENTING CHECK FRAUD – WHY THE CHECK IS IN THE MAIL ISNT ALWAYS A GOOD THING
How would you like to arrive at work and hear that instead of making the $15,000 you thought you made last week handling a simple transaction you’ve actually lost $200,000? Too many lawyers are hearing this message after falling victim to bad check scams.
The deluge of bad check scams targeting lawyers continues unabated, despite widespread coverage of this problem in the legal press. These frauds now come in many forms, but generally here is how they begin.
A new client e-mails or calls seeking assistance in a seemingly straightforward transaction. It could be about anything from payment of alimony or child support arrearages, to payment on a collection matter, or a real estate sale closing that cancels at the last minute. The lawyer is asked to be the intermediary and encouraged to keep a generous percentage of the funds for attorney’s fees, or for the trouble of refunding or otherwise disbursing the funds. The lawyers who take the bait then fall victim to forged cashier’s checks received as settlements or other funds.
Spotting this scam becomes easier if you’re aware of three common elements, as outlined by attorney Robert T. Luttrell III (in an article on the Oklahoma Bar Association’s Web site, www.okbar.org/scams)—here’s the basic theme:
1. An apparently legitimate transaction.
2. Arrival of the large bank or cashier’s check in satisfaction of the transaction.
3. Immediate and repeated requests by the “client” to wire out the funds. Once the money has been wired out from the firm’s bank account or an attorney trust account, it will be quickly transferred to another (often offshore) account and generally cannot be retrieved.
To fill out the scenario on what allows these scams to continue, let’s look at what happens between the time the check is deposited and the forgery is uncovered.
Available versus Cleared Funds
Lawyers who do not practice commercial law may wrongly assume that after several days the check they deposited must be good, absent hearing otherwise from the bank. They may even contact the bank and hear the phrase “the funds are available” and interpret that to mean the check has cleared as good.
However, this statement from the bank merely means that funds are available, not that the check is good. The Expedited Funds Availability Act (12 U.S.C. Section 4001-4010) requires that deposits of various funds must be made available to a bank’s customers even before the funds have technically been cleared.
Add to that the fact that modern technology allows criminals to create forged cashier’s checks that are virtually indistinguishable from legitimate cashier’s checks. As a result, it may take a surprisingly long number of days, even weeks, to catch the forgery. But even when it is uncovered, the victim will still be in the same pickle, since financial institutions will take the position that the person who deposited the check with them is responsible and will charge it back against the depositor’s bank account. This can be devastating, particularly if the account is a law firm trust account.
Steps to Avoid Becoming a Victim
To help make sure that you or others in your law firm do not fall prey to such devastating consequences, here are pointers that every lawyer should heed.
• Make certain everyone in your office—meaning all lawyers and staff—is aware that it is possible a cashier’s check may be forged and that it will be difficult to discern the forgery.
• When handling a cashier’s check, do not be hesitant about contacting the issuer of the check just to verify that the check is legitimate. However, calling phone numbers on the check for verification may be connecting you with the scammer. Locate the issuer’s phone number from another source.
• Pay attention to your gut feelings. If you have a bad feeling about a transaction, then heed that feeling. If the transaction sounds just too good to be true—like receiving 25 percent of a $300,000 payment as a contingency fee for writing one letter—it probably is.
• Never be in a rush to disperse funds by wire transfer, particularly from your trust account, and especially to an apparently unrelated third party offshore. If the client is promising similar deals in the future if you send the funds immediately, you can bet it is a scam.
• Ask your banker about the practice of sending a check “for collection.” Bob Luttrell reminds us that one can send a suspicious check through “for collection” versus the standard “through clearing” system. The bank charges a small fee for this, usually around $25. But then the collected funds will come to the bank, making it an ironclad transaction that will not come back to haunt you.
• And, among the most critical steps, know the client. This is not to say there’s an automatic risk factor if you’ve never met in person. In the Internet age, there may well be legitimate attorney-client relationships where one has only met with a client by e-mail or phone. But this is a warning sign that should be heeded when guarding against becoming a victim of fraud.
At the same time, fraudsters are becoming bolder and some will visit the lawyer’s office in person. In fact, in an organized series of frauds in Toronto, 18 people approached 18 different lawyers and paid them to incorporate a business. Having established themselves in this way, a few months later they returned with business financing or inventory purchase transactions intended to scam the lawyers with forged cashier’s checks.
The lesson is that we have reached the time when verifying clients’ identification is required in most situations. It may, therefore, be appropriate to routinely photocopy the client’s driver’s license or other photo ID to include in the files for new clients.
A Cautionary Word for Your ClientsFinally, be aware that the proliferation of check scams extends beyond lawyers and law firms and is expanding to other businesses, which can include the ones your clients own or work in. Accordingly, lawyers will do their clients a great service by including a brief explanation and warning about these scams in the firm’s e-mail newsletter or even as an “alert” on the firm’s Web site.
About the Author
Jim Calloway is Director of the Oklahoma Bar’s Practice Management Assistance Program. He is a member of the ABA Law Practice Management Section Council. For more information about check scams and how to avoid them, visit the Oklahoma Bar Association’s site at www.okbar.org/scams and the Lawyer’s Professional Indemnity Company Fact Sheet at www.practicepro.ca/frauds.