The threats facing the law profession continue to evolve. Most recently, some lawyers and law firms have faced fake client and counterfeit check scams.
The scheme has resulted in the loss of hundreds of thousands of dollars from the trust fund accounts of law practices, and some lawyers have faced claims, lawsuits and fines from banks, clients and regulators.
Worst of all, not all insurance covers such scams, meaning some lawyers and law firms face these risks alone.
As a lawyer, it is important to understand the emerging threat of fake clients and counterfeit checks. You can protect yourself by knowing what to do when asked to represent client interests for a settlement or debt collection, what red flags to pay attention to, and what insurance coverage you need to protect your practice from criminal fraud.
What to Know About Bank Transfers
Many financial institutions now offer the benefit of making funds “available” to customers after the transaction has been credited to the account, but before the bank has received the funds from the payee bank.
The difference between these two events can amount to several days. It’s a window of opportunity now being exploited by criminals.
For lawyers and law firms moving funds on behalf of clients, the risks are considerable when you do not verify that the check has fully cleared.
If the money appearing as an “available” balance in your trust fund account is later determined to be a counterfeit transaction or non-sufficient funds, depository contracts and uniform commercial code protections allow a bank to recoup those funds from a depositor’s account.
How a Fake Client Exploits Banking Procedures
In recent fake client and counterfeit check scams, criminals work in pairs. The usual scam goes as follows:
- The first scammer seeks legal representation regarding a settlement or collecting a debt.
- The client provides contact information for a second scammer, the third party who is settling the claim, representing themselves as a former employer, insurance adjuster, debtor or any other party who might negotiate a settlement.
- The lawyer contacts the second scammer on behalf of the first, believing they are arranging a settlement.
- The lawyer receives a counterfeit check from the third party and deposits it into their trust account.
- The fake client contacts the lawyer by phone or email, alleging an immediate need for the funds, often with a compelling story. This scammer asks that the wire transfer be sent as soon as the funds are credited.
- Not realizing the danger, the lawyer wires the funds to the designated account once the lawyer’s bank makes the funds “available” in the account.
- The scammers will have set up a receiving account specifically for the purpose of the fraud. The money is removed immediately, the account is closed and the client and third party scammers disappear.
How Counterfeit Check Scams Impact Lawyers
Because the original check was counterfeit, funding will be insufficient and the lawyer’s bank will sweep the firm’s trust account to recoup the money. Funds being held for other clients may be taken by the bank, depleting money the lawyer owes to others.
If the amount of the counterfeit check exceeds the trust account’s remaining balance, the bank may make a demand for full repayment. Clients can also make a demand for their lost money held in trust to be replenished.
Because the scam often involves substantial sums, many lawyers and firms are unable to immediately replace the money stolen by scammers. The bank and clients may file suit and lodge a grievance.
In such cases, lawyers may look to their legal professional liability insurance for protection. However, most liability policies are not designed to protect against crime and fraud involving legal trust accounts.
This can leave many lawyers exposed to lawsuits, fees and judgements without the additional protection of coverage designed to protect against crime and fraud.
What Lawyers Can Do to Protect Against Fake Clients
You can avoid being a victim of fake clients and counterfeit check scams by exercising a healthy dose of skepticism before representing a new client in debt negotiations or collections.
Remember these tips:
- Remember that it is not safe to transfer funds listed under an “available” balance.
- Only initiate transfers after confirming that a check has “cleared” the bank.
- Call your bank directly to confirm a check has cleared and that the settlement check is paid in full.
- Advise clients at the start of representation that they will only receive payment of their funds after the check has cleared and that this process will take time.
- Avoid conducting wire transfers except with respect to your existing clients.
Pay attention to these red flags:
- Be wary of hassle-free collection jobs that seem too easy.
- Be suspicious of matters where a lawyer’s involvement seems unnecessary.
- Be cautious when dealing with new clients who can only be reached through phone or email.
- Be suspicious if a new client presses urgently for a rushed wire transfer.
Even when you follow these proper procedures, there’s still risk that you or your law firm could become a victim of financial crime or fraud. It’s important to make sure your insurance policies will protect you from all the dangers you face in your practice.
Contact your Lockton Affinity insurance representative about crime insurance protection that can help protect your firm’s trust account from fraud, embezzlement and client scams.