The Practice Resource Institute continues to receive reports of frauds targeting attorney trust accounts. The three most prevalent types of frauds are 1) Counterfeit bank checks 2) Compromised wire instructions, and 3) Forged trust account checks. The following is a summary of each fraud.
Counterfeit Bank Check
In this scenario, criminals use 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 into the trust account. Almost immediately, the client begins demanding their 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. A few 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.
Compromised Wire Instructions
In this scenario, a criminal gains access to the email account of a party to a real estate, or other, transaction and initiates a fraudulent wire transfer. Once an email account has been hacked, the criminal can learn 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. 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.
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 must 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.