Canada is the New Nigeria

Bad check schemes continue to target lawyers

If you have an email account, you have likely received a message trying to lure you into a counterfeit check scam. While Lawyers Mutual and other sources have warned about these scams for years, we continue to receive reports from attorneys who have been targeted. In contrast with the impersonal and poorly written emails associated with past scams, these schemes may look legitimate at the outset. Scams are becoming increasingly sophisticated, with detailed communications and the involvement of multiple parties over a longer time period.

The basic bad check scam attempts to trick a lawyer into depositing a counterfeit check (often a certified or cashier's check) into his or her trust account, then wiring funds to the client. The scam is successful if funds are disbursed from the trust account before the counterfeit is discovered, so that the loss falls to the lawyers.

We have repeatedly encountered versions of this scheme, including one targeting real estate lawyers and another involving debt collection.

The Real Estate Check Scam

This scam begins with an inquiry from a prospective client, who frequently lives overseas and wishes to purchase property. In some cases, the matter will be referred to the lawyer by a local realtor (the initial target), which creates a sense of legitimacy.

The potential buyer will mail the lawyer a check for the earnest money or the full purchase price, and request that the funds be immediately deposited in the attorney's trust account. Soon thereafter, the buyer will have a personal emergency or give some other reason for backing out of the deal. At that time, he will request that the funds be returned.

The following is the text of a letter one of our Insureds received from a Canadian corporation in connection with a real estate check scam:

Buyer: Eiji Suzuki

Dear Sir,

Enclose is a Check/Draft for $155,000.00USD according to the contract $5,000 is for earnest Money and the remaining $150,000.00 will be applied toward the closing balance and should be kept in your trust account untill buyer complete the closing balance.

Please send notification to ___ once the check is receive and deposited failure to send notification via email, will render the check void.

The Debt Collection Scam

In this scam, the attorney is contacted by a creditor, generally a foreign corporation, requesting assistance in collecting a debt. The debtor quickly pays up, after a single communication or sometimes without any effort at all on the part of the lawyer. The attorney is instructed to deposit the check, deduct his fees, and wire the rest of the funds to the client. Again, the hope is that the attorney will disburse before the counterfeit is discovered.

One of our Insureds reported that, after he agreed to handle one of these matters, the creditor-client offered to notify the debtor that counsel had been retained and suit would be filed shortly. The debtor then called the attorney within a few days, apologizing for the default and promising payment. A day or two later, a certified check arrived. Although the supposed debtor was located in Brunswick County, the check was drawn on a California bank and the package originated in Canada.

There are also family-law variations on this collection scam. For example, an attorney may be asked to help to collect money owed by the client's ex-husband under the divorce settlement.

More sophisticated variations

A firm recently notified Lawyers Mutual that it had been the victim of a scam in which they received a large certified check for a worker's compensation settlement. The client contacts in this case were not limited to a few emails. Rather, the firm communicated with a fake injury victim and fake insurance adjuster over the course of several weeks and even had an in-person meeting with the client. The funds were ultimately disbursed by several wires, including one to Tokyo. The firm is now facing a significant shortfall.

There have also been reports of fraudsters cloning law firm websites, with altered contact details or a very slight change in name, to lend credibility to the fraud. Some check scams reported this year have involved an entirely fictitious Canadian law firm contacting attorneys on behalf of a prospective real estate client.

RED FLAGS

• An unsolicited email from an overseas company you know nothing about
• A request to handle a matter outside of your normal area of practice
• The client signs and returns the fee agreement without the requested retainer, stating that the fees will be taken from the funds collected
• Fees offered are disproportionate to the work being performed
• The matter involves a hassle-free collection job; there seems to be no need for attorney involvement or for funds to be routed through a trust account
• A package containing funds arrives from an address that does not bear any connection to the parties or places involved in the transaction. Be especially cautious when receiving a package from a Canadian address.
• Discrepancies in contact information - Phone numbers in email or on letterhead do not match website; email domain does not match web domain

TIPS

• Establish and follow good risk management practices for check clearing. It is important to understand the difference between funds from a check being available and the check having cleared. When a bank confirms that funds are available, it means that the bank is providing provisional credit so that the funds may be withdrawn. However, the bank can still reverse the transaction if the issuing bank does not honor the check. Do not disburse until the funds have been irrevocably deposited into your trust account, regardless of the apparent validity of the check or the bank showing the funds as available. Advise clients at the start of the representation that they will not receive any payment until the check has cleared and that this will take time.
• Research and confirm client information. Use Google to check company names, addresses, email addresses, and telephone numbers. Do a reverse phone number search. Make calls beyond the single point of contact provided, particularly when confirming instructions with a bank.
• Make sure that all lawyers and staff are aware of common check scams and understand that forged cashier's checks or certified checks may be difficult to identify.
• Look carefully at the labeling and sender information on the package or envelope in which the check is delivered to identify discrepancies.
• If something seems suspicious, trust your instincts.
• Report fake check scams to the proper authorities.

• Rule 1.6(b)(2) of the North Carolina Rules of Professional Conduct allow a lawyer to reveal information protected from disclosure to the extent the lawyer reasonably believes necessary to prevent the commission of a crime by the client, even where the lawyer is the target of the crime.
• Contact the Attorney General's Consumer Protection Division by calling — 1-877-5-NO-SCAM — or filing a consumer complaint online at www.ncdoj.gov
• You can also contact the SBI or the federal Internet Crime Complaint Center (www.ic3.gov.)

Smartphone Check Image Scam

Disaster Planning Resources:

Reports have recently circulated about a new scam involving the use of Smartphones to deposit checks. According to the Florida Land Title Association, a Florida title agent issued a check for the seller proceeds at a real estate closing. The sellers left the office with the check but returned a short time later saying they preferred a wire instead of the check. The agent took the check back, voided it, and wired the proceeds to the sellers' account. He later learned that the sellers had already deposited the check using a Smartphone (which left no marking on the check to indicate that it had been processed).

This scam shows how quickly new technology can be put to use by fraudsters and is a good reminder to be on guard when dealing with checks. However, this particular scheme should not succeed in North Carolina because the rules governing attorney trust accounts do not allow the conversion of a trust account check to ACH (Automated Clearing House). The Lawyer's Trust Account Handbook states:

C. Rule 1.15-3: Records and Accountings

(a) Check Format. All general trust accounts, dedicated trust accounts, and fiduciary accounts must use business-size checks that contain an Auxiliary On-Us field in the MICR line of the check.

Comment [18] to this Rule explains that:

To prevent conversion of a check to ACH without authorization, a lawyer is required to use checks with an Auxiliary On-Us field. A check will not be eligible for conversion to ACH if it contains an Auxiliary On-Us field, which is an additional field that appears in the left-most position of the MICR (magnetic ink character recognition) line on a business size check. The lawyer should confirm with the lawyer's financial institution that the Auxiliary On-Us field is included on the lawyer's trust account checks. Including an Auxiliary On-Us field on the check will require using checks that are longer than six inches. As with the other information in the MICR line of a check, the routing, account and payment numbers, the financial institution issuing the check determines the content of the Auxiliary On-Us field.

See Lawyer's Trust Account Handbook.

 Attorneys should review their checks and contact their financial institution to confirm that this safeguard is in place.