Frauds and Scams that Target Lawyer Trust Accounts
The State Bar continues to receive reports of frauds and scams on lawyer trust accounts resulting in six-figure losses. The three major types of scams are 1) Email initiated counterfeit bank checks 2) Forged trust account checks, and 3) Compromised wire instructions. The following is a brief summary of each scam.
Counterfeit Check Scam
By now, all lawyers should know that criminals are using email to act like potential clients requesting representation (typically commercial debt collection or divorce settlement collection). Once the lawyer responds with a request for more information, the “client” provides the lawyer with documentation of the “debt”, often including warehouse receipts, contracts, bills of lading, etc. Shortly after agreeing to pursue the claim and often before a demand letter is even drafted, the lawyer receives a letter and certified bank check from the supposed debtor who is paying because they “don’t want to deal with the law.” The lawyer then deposits the certified bank check (often from a bank up north like Chase so the tellers are less familiar with it) into the trust account. Almost immediately, the client begins demanding his payment via wire. Since the funds are available via provisional credit, the lawyer wires out the money to the client minus the lawyer’s share. The client is never heard from again. Three days later, the bank tells the lawyer that the check was counterfeit and removes the already wired amount from the trust account. Since the lawyer disbursed on provisional credit, the lawyer is responsible for replenishing any trust account deficit. This type of scam has cost lawyers hundreds of thousands of dollars and at least one law license. For tips on detecting and avoiding this scam, view this fact sheet created by Canadian indemnity company, LawPro: http://practicepro.ca/practice/pdf/FraudInfoSheet.pdf
Forged Trust Account Checks
The Bar is receiving an increased number of reported thefts via forged trust account checks. In this scenario, a criminal obtains the lawyer’s account information (account number/routing number) and creates a fake check payable to cash. The criminal then negotiates that check at a check cashing company with a forged signature. While the lawyer may have recourse to recover the stolen funds from the bank if it honored the checks, in the interim the lawyer has to deal with a shortage in the trust account and outstanding checks that may bounce. The lawyer may also need to open a new trust account since the old account was compromised. One way to prevent this potential scenario is to enroll in a bank’s positive pay program so only law firm approved checks are honored. Lawyers should review their trust accounts regularly to look for unapproved or unidentified transactions.
Compromised Wire Instructions
The most recent and most alarming type of scam is one where the criminal gains access to the email account of a party to a real estate transaction and initiates a fraudulent wire transfer. Once an account has been hacked, the criminal learns the details of the real estate transaction and, acting like the seller, emails the lawyer with wiring instructions for the seller’s funds. Even law firms with two-level confirmation procedures for wire instructions have been defrauded because the criminal calls the firm as the seller and confirms the wiring instructions. The firm wires the money to the criminal’s account and it is never seen again. Further, the bank denies any liability because it merely followed the lawyer’s instructions. This scheme has caused hundreds of thousands of dollars of losses in the last week alone. One firm noticed after the fact that the email sent from the “seller” was one letter different than the real seller’s actual email address. To prevent this type of theft, law firms should initiate the phone call to confirm the emailed wire instructions, calling only the number listed in the client file regardless of whether a different number is provided in the email.
While these three types of scams vary in sophistication, all three have the potential to cause significant harm and lawyers must remain vigilant for any fraudulent trust account activity. If you or your firm has been subject to any attempted scams, or if you have any questions regarding these scams, please contact me at firstname.lastname@example.org or (919) 828-4620.
About the Author
Peter Bolac joined the State Bar in 2011 as Trust Account Compliance Counsel and District Bar Liaison. As Trust Account Counsel, he oversees the new trust account compliance program, which helps lawyers improve trust account practices and mitigate disciplinary action.