December 02, 2013
Increasingly Sophisticated Internet Scams Continue to Target Lawyers
by James M. McCauley, VSB Ethics Counsel
The generic “Nigerian Mail Scam” is now on steroids. Recently, a lawyer contacted us to warn that he almost fell prey to a well-orchestrated but fraudulent scheme in which the lawyer was asked to assist in the collection of debt arising out of the sale of goods by a national company located in Chesterfield County, Benco Dental Supply Company (Benco), and a U.K. company, Swallow Dental LTD. The purported contact called for the sale of more than $4million of dental supplies by Benco to Swallow Dental. The lawyer was contacted by e-mail when Benco supposedly defaulted on the contract by failing to deliver the goods. Swallow Dental sought the lawyer’s assistance in recovering a portion of the purchase money that Swallow Dental had supposedly wired to Benco. The lawyer was asked for his fee agreement, which the lawyer sent to Swallow Dental, and the agreement was executed and returned to the lawyer to begin the representation. The lawyer indicated that he checked the internet regarding both Benco and Swallow Dental, and concluded that they were legitimate companies, acting through corporate officers and employees whose identities were confirmed. Both companies had web sites and other indicia of legitimacy.
The “client,” Swallow Dental, provided the lawyer with a copy of the purported sales agreement between the two companies, copies of wire transfer payments, and a string of e-mail communications leading up to the execution of the contract and its performance and breach thereafter. The e-mail exchange included Swallow Dental’s attempt to obtain a refund of funds Swallow Dental claimed to have paid Benco, and informed Benco that Swallow Dental had now retained counsel to assist in the recovery of the debt. The lawyer received a “cashier’s check” drawn on Chase Bank on Benco’s account. The lawyer was ready to deposit this check in his trust account when his secretary observed that a Canadian postmark was on the envelope in which the check was delivered, and the envelope did not have a return address. Since the debtor was a local company, the Canadian postmark was suspicious. A call to the local company, Benco, revealed that the company’s identity had been hijacked and representatives of Benco warned the lawyer that the check was not theirs and that the collection case was a scam.
Dianne Karpman, a Los Angeles lawyer who represents lawyers and law firms, states that according to federal court documents, one group of scammers obtained $29 million from seventy different law firm trust accounts in the United States and Canada during a two-year period. The good news, if there is any, is that the perpetrators of these scams are being caught and prosecuted. An international coalition of agencies, including the US Postal Service, the FBI, the Secret Service, Toronto Police Services, the Royal Canadian Mounted Police, and the Nigerian Economic and Financial Crimes Commission, have worked together to apprehend, try, and convict persons engaged in these crimes. See Nigeria: How Nigerian Jailed in U.S. Stole U.S.$11 Million, Vanguard, September 12, 2013 at http://allafrica.com/stories/201309120403.html.
Lawyers, however, can take precautions and need to exercise reasonable diligence, especially when dealing for the first time with prospective clients over the Internet. Most importantly, lawyers need to verify early on with whom they are dealing. Contacting the local company, Benco, in this case proved that the lawyer was being targeted by a scammer. Secondly, when receiving what may be a masterfully counterfeited and forged cashier’s check, the lawyer must not disburse against those funds until the check is “cleared” and not simply when the lawyer’s bank says the funds are “available.” Some lawyers have reported the possibility of a fraudulent check to the security department of the bank on which the check is allegedly drawn, which will result at least in the preparation of a “suspicious activity report” and either reporting the matter to the White Collar Crimes section of the local FBI office or filing a complaint with the Internet Crime Complaint Center (a partnership between the FBI and the National White Collar Crime Center). Alternatively, the lawyer in receipt of a cashier’s check under these circumstances can also file a complaint with the Internet Crime Complaint Center (http://www.ic3.gov).
The drawee bank’s security department can confirm the validity of the check, and confirm whether the check is authentic or fraudulent. If they determine that the check is fraudulent, the bank will report to the Controller of the Currency and to the United States Attorney’s office. If the drawee bank determines that the check is good, then the lawyer may proceed with the transaction. John Mueller, an Ohio lawyer who has advised lawyers and law firms under these circumstances, advises that a lawyer might consider sending the check directly to the bank on which it is drawn for collection. This is a process banks used to follow daily when insurance companies and others used “drafts payable at” a specific bank to pay obligations, i.e., settlements. The process involves the following steps: the payee endorses the check and delivers or hands it to his or her bank officer; the bank officer affixes the bank’s endorsement. This allows presentation of the check to the bank on which the check is drawn. The lawyer’s banker then sends the endorsed check to the appropriate officer at the drawee bank, with a cover letter, on bank stationery, instructing the bank on which the check is drawn to hold the item for sufficient funds to pay the check (usually five to ten business days) and instructing the bank on which the check was drawn concerning the manner of remitting funds or for return of the check unpaid (in case of insufficient funds). If your banker is unfamiliar with this process, have them check www.bankersonline.com for confirmation and the existence and validity of this process. The reason for taking this approach is because the scammer has often tampered with the routing number on the check to cause delay in the item’s processing through the banking system.
If the lawyer has already deposited the cashier’s check into his or her trust account, the client/scammer will press the lawyer to quickly wire the “collected” funds to his or her account. But the lawyer must resist the pressure and inform the “client” that no funds will be disbursed unless and until the funds have “cleared,” i.e., the bank on which the check is drawn has “paid” the item. If it is a scam, of course, this is not going to happen, but at least the lawyer will not suffer the consequences of disbursing funds on a deposited check that is later proven fraudulent.
Some lawyers wonder if they are breaching their duty of confidentiality by reporting a possible fraudulent check scam to law enforcement authorities because they have undertaken an agreement to represent the “client” and cannot divulge information that would be detrimental to the interests of the “client.” I addressed this issue in an earlier article “Internet Scams Target Lawyers,” March 28, 2011 (http://www.vsb.org/site/news/item/internet-scams-target-lawyers/ ) but since that time, authorities in New York, California, and South Carolina have likewise agreed that there is no duty of confidentiality owed to an internet scammer posing as a “client” solely for the purpose of perpetrating a crime in which the lawyer is the victim. New York State Bar Ass’n Committee on Prof. Ethics, Ethics Op. 923 (May 18, 2012)(citing California and South Carolina authority, and citing with approval informal advice I posted on March 28, 2011). As a practical matter, lawyers and law firms are reporting this criminal activity to law enforcement on a regular basis. To my knowledge, none of these criminals has filed a grievance with the reporting lawyer’s state bar.
But the real issue here is common sense. Lawyers cannot reasonably expect to receive the very generous fees these bogus cases promise without having to perform any work. The cashier’s check arrives much too quickly and in many cases the lawyer has not even started any meaningful activity to collect the money. As the saying goes, “If it’s too good to be true, it probably is.”Updated: Dec 02, 2013