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5.1 Client Funds and Financial Scams

Red flags should go up whenever a prospective client – especially one from out of state – asks you to assist in transferring or collecting a large amount of money. It might be a scam. The internet, email and electronic funds transfers have made online scams easier to perpetrate and harder to detect. Avoid trouble by (a) using checklists, (b) scrutinizing every detail of the proposal, and (c) understanding how your bank holds and distributes funds.

Too Good to be True?

You’ve probably heard about a law firm getting snared in an online scam. Perhaps you learned about it from your state bar or malpractice carrier. These scams are making news because they are prevalent – and because the damage can be catastrophic. Unfortunately, they are also often successful.

Scammers are becoming more sophisticated. The old “Nigerian prince needs help transferring a fortune out of the country” ruse is a relic of the past. Today’s schemes assume the identities of actual people and add details that seem authentic.

Use the smell test. If a proposal smells fishy, steer clear.

Alta Pro Practice Pointers

  1. Recognize the pattern. In a typical scam, you’re contacted by a prospective client – usually from another state – who solicits you to collect a large settlement or debt. You send a demand letter and, to your amazement, a few days later receive what appears to be a bank check or other certified instrument in full payment of the requested sum. You deposit the check in your client trust account and, when it clears, deduct your fee and forward the balance to the client. The instrument turns out to be a fake. When the bank moves to recover the missing funds, your account is left with a significant shortfall.
  2. Understand the concept of “provisional credit.” Collection scams take advantage of the time between when a check clears and when the funds are “irrevocably credited” to your account. This can take anywhere from 10 business days to 3-4 weeks.
  3. Realize that you will be held responsible. Even if the check was initially accepted and the funds have been disbursed, the bank will seek to recover the missing money from your account. You will have wrongly disbursed funds that belonged to your clients or other innocent parties, who will look to you to make them whole—even though you are as much a victim as they are.
  4. Develop a good relationship with your bank. Know its policies regarding deposits and provisional credit. Work with a specific agent on sensitive matters. Ask for written confirmation when significant deposits have been irrevocably credited.
  5. Be suspicious of new clients who contact you by email. This is true even if they say they were referred by a known client or firm. Talk to them personally. Check their references. Sometimes the scammer will pose as a lawyer, usually from out of state. If you search online, you will find an actual lawyer with that name and address. Probe further. Pick up the phone. Better yet, ask to meet in person.
  6. Stay current on emerging scams. An excellent resource for tracking online scams and fraud schemes is Dan Pinnington’s website Avoid a Claim
  7. Look for warning signs. Does the initial email contain spelling errors or odd grammar? Was the “bank check” delivered by UPS or express mail? Check the sender’s address. In a recent scam targeting lawyers in the southeast, checks came from an address in Canada.
  8. Watch for changed payment instructions. Hackers break into computer systems and steal data on actual transactions like real property closings. They notify the closing attorney – sometimes using a legitimate email address – about a change in the payment account or destination. The new bank account belongs to the criminals, and the money quickly disappears. Confirm any change to your payment instructions with a telephone call to the parties and financial institutions involved. Document your actions.
  9. Don’t become a conduit for client funds. You’re not a bank, so don’t act like one. Decline involvement if your role is merely to accept and forward funds. Tell the prospective client you won’t forward the funds until they are irrevocably credited to your account. Have payments made directly to the client, or from the client to their payee. If a client is legitimate, there are ways to help them without endangering yourself.
  10. The larger the amount, the greater your risk. Act as if your personal funds are at risk – because they are. If fraud occurs, you and your firm may have to cover the loss. Your professional liability policy likely excludes losses that could have been prevented by exercising caution and common sense.
  11. Implement systems and safeguards. Have a strict protocol for handling bank accounts. Document all transactions. Have more than one person sign off on transfers of client assets. Educate the entire office on banking procedures, client funds and common scams.
  12. Report all scams. Notify the Federal Trade Commission and the FBI. Also contact your malpractice carrier and state bar authorities, so they can alert other lawyers.

The Bottom Line: Scams prey on human greed. Don’t let yours put your law practice and livelihood at risk.

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