You’re not naïve enough to fall for the infamous Nigerian oil Internet fraud, are you? Of course not! But the realities of modern law practice are such that even careful lawyers can get scammed. The late President Ronald Reagan gave good guidance: “Trust, but verify.” Follow along with this scary scenario:
A Great New Client
A high level representative of a Chinese company contacts you by e-mail. He states that the company has a number of collection matters in the United States and would like your firm to handle them. The client will pay a reasonable hourly rate for the work and is provide a substantial retainer to be drawn on for your fees, to be replenished each month. After determining that the Chinese company is a well-known, bona fide business, you write up a fee agreement and deliver it to the client by e-mail. It is promptly executed, scanned and returned by e-mail.
Out of an excess of caution, you agree to initially handle one matter. If it goes well, you will consider further work. If not, you will have no further obligation.
Soon thereafter, the representative places a collection matter with your firm. It is for a substantial amount of money owed to it by a business in another state. You receive a courtesy copy of a letter from the client company directing the delinquent debtor that payments on the debt should be made by certified funds only through its U.S. collection agent—your firm.
The representative advises you that he will soon be in the United States and will supply his travel itinerary so he can meet you in person. He expresses delight at how smoothly your relationship has commenced.
Too Easy Pickin’s
In short order, the debtor sends a letter to your firm with a certified check drawn on a legitimate financial institution. The check is made payable to your firm for a substantial portion of the amount to be collected—almost a million dollars, in fact—promising the balance as circumstances allow. You promptly deposit the funds in your trust account and notify your client that you received the funds. A quick turnaround like this probably didn’t net much of a fee, but it is reassuring that the anticipated collection process is working.
The representative advises you to deduct your firm’s retainer from this collected amount, remit a portion of it—several hundred thousand dollars—by wire transfer to a Bank of Tokyo account belonging to one of the client company’s Japanese suppliers, together with a purchase order documenting the client company’s obligation to the supplier. You are to retain the balance of the funds in trust awaiting further client instruction. You arrange with your bank to wire transfer the funds to the account in Tokyo.
The End of Life As You Knew It?
The next day you arrive at work. A vice-president from your bank calls with the news that the certified check from the debtor was fraudulent. That item has been charged back against your trust account. You now have a negative $550,000 balance. You can’t remember how to breath, speak or blink.
You, my friend, have been scammed. These facts are an amalgam of similar situations Indiana lawyers have recounted to me in recent weeks. Perhaps the client company is Korean or Taiwanese, not Chinese. And the bank to which funds are to be wired is in Japan, but in some other country. The scheme, though, is the same.
Dodging a Bullet
In one case, the lawyer’s bank worked quickly through the Bank of Tokyo to block the wire-transferred funds before they reached the destination account from which they would have been immediately removed—gone forever. [Insert huge sigh of relief here.] In another case, a law firm employee had previously worked in the banking industry and detected that the certified check was fraudulent before it was deposited into trust. The scam was nipped in the bud.
They’re All In It Together
The scam is alluring, but the method is devious. The scammers try to induce you to wire good funds to a foreign bank account before you discover that the certified check is bogus. Everyone but you is in on it. The client company may be legitimate, but the representative and his association with the company is a fraud. The debtor who agrees to pay funds so quickly is also part of the scam. And the client’s creditor, to whose account funds are to be wired, is as phony as a three-dollar bill.
A Wells Fargo banker recently said that the scammers often place a nine-digit bank routing number at the bottom of the counterfeit check that does not correspond to the bank on which the check is purportedly drawn. When deposited, the certified check is initially misdirected to another bank for collection. This causes enough delay that the fraud is not discovered until after the deposited funds are wired from the victim lawyer’s trust account based on the bank’s willingness to make funds available, even though the deposited item has not yet been collected.
Not So Lucky
The lawyers described above were very lucky. Some have not been as fortunate. On August 26, 2008, Georgia’s Fulton County Daily Report reported that an Atlanta firm was stung—only the lawyer wasn’t so lucky. Gary Bartko, an Atlanta lawyer, received a certified check for $200,000 on behalf of his client, a Hong Kong company, and deposited it into trust. He wired substantial to a South Korean Bank after his own bank told him enough time had lapsed for the check to be good. When it was determined that the certified check was a fraud, it was too late. Now the lawyer and his bank are in a fight over who should bear the loss.
The July 2008 California Bar Journal reported that several California lawyers have been stung in a similar scam. One lawyer (like the Indiana law firm described in my scenario) was able to undo the transaction. He described the twenty-nine hours between discovering the $193,000 fraud and getting it fixed as “the darkest days of my life.”
As if being personally on the hook for hundreds of thousands of dollars were not enough, remember, these are trust transactions. If the scam causes the trust account balance to go negative, it wipes out every penny of other clients’ funds in the account.
There are several lessons here. First, it is flattering to have a matter entrusted to you by a new client, especially one who promises recurring business. But lawyers must exercise due diligence to verify the bona fides of prospective clients. As the circumstances of acquiring the new client become more unusual, more care must be taken. The highest care must be taken when your contact with a prospective client is limited to e-mail transmissions.
Second, receipt of funds by certified check is not always an assurance that the funds are good. At a minimum, the bank routing number in magnetic ink on the face of the check should correspond to the name of the bank on the check. This can be easily verified by looking up the bank’s ABA number via one of the many free services on-line. Google “bank routing number lookup” and you’ll find them. This isn’t always a guarantee. In fact, my office looked at one of these bogus checks and the routing number correctly corresponded to the financial institution. Contact the issuing bank to verify that the check is legitimate before you deposit it, and for sure before you disburse funds believing that it is good.
Third, there is a difference between your bank telling you that funds are available versus the funds have been collected. Availability suggests sufficient confidence by the bank in the transaction and the law firm’s integrity that it is willing to extend provisional credit by making the funds available for disbursement before the deposited item has been collected. If the transaction fails, the loss will fall on the lawyer, or, at a minimum, the bank will try to push the loss there. Like Mr. Bartko, you might find yourself in litigation with your bank over who bears the loss. Do not issue funds from trust until deposited funds have been collected, rather than merely made available by your bank.
What if this happens to you? If you are stung, immediately contact your local FBI office. On top of that, put your malpractice carrier on notice. Your losses won’t be covered, but losses to other clients with funds in trust might be. If you luck out and avoid an actual loss, you should still report it. The best place to report is to the Internet Crime Complaint Center, whose website is http://www.ic3.gov/.
Exercising caution, no lawyer should be stung in this scam. Clients should be able to trust their lawyers, and vice-versa. We should be able to trust our clients, but only after we verify.