Fraud: How to Avoid Being a Victim

Over the last several months there has been an epidemic of frauds targeting lawyers, both in Ontario and in other provinces right across Canada. LAWPRO has seen a significant number of very costly fraud related claims. YTD in 2008 we have seen 89 claims that have cost us $5.7 millon. We are also aware of many lawyers that have narrowly avoided being victims. Sometimes due their own diligence, sometimes only by good luck.

No doubt many of you have read about these frauds, and some of you may even have been a victim or intended victim. Firms of all sizes (including large firms) are being victimized. We are hearing of new attempted and completed frauds on an almost daily basis. There is no easy “quick fix” way to avoid these frauds. The reality is that, as never before, lawyers have to take control of the processes and procedures in their offices and be constantly vigilant.

A big part of being vigilant is being aware of the common fraud scenarios. Make no mistake, fraud is no longer solely a concern for real estate lawyers. Litigators and corporate/business lawyers need to be aware that they are now being targeted. There are two common fraud scenarios we are seeing, business loan fraud and debt collection fraud.

Business loan fraud

In this type of fraud your firm will be retained by a new client that is setting up a business and is borrowing money to buy inventory or materials. The loan documentation will look legitimate. Your firm will complete the work required and deposit the certified cheque in its trust account. Funds will then be disbursed from the trust account as directed. Several days later there will be a call from the bank advising that the cheque was counterfeit and that there is a shortfall in the trust account.

The lesson? Be aware of new clients that are in a rush. Be extra vigilant during banking holidays. When banks are closed for a day and offices are short staffed, the fraudsters have a bit more time to complete their plans.

Debt collection fraud

This type of fraud targets litigators. A new client will contact your firm seeking representation on a debt collection matter. On a contingent basis there will be a promise of payment of a larger than usual portion of the recovered proceeds. All the documentation will look legitimate, and it will include copies of invoices, demand letters, etc. Phone calls to the creditor will be answered and messages returned. It will be the easiest collection your firm will ever do. After just a single call or letter, a certified cheque will be delivered to your firm. The cheque will look authentic and have all the normal security features. The instructions will be to send the funds, minus legal fees, to an offshore account. And a few days after doing so, the bank will call advising that the cheque was counterfeit and that there is a shortfall in your firm trust account.

The lessons here? If it seems too good to be true it is likely too good to be true. Do some independent checking on the debtor and creditor. Use Google to cross-check street addresses, e-mail addresses and phone numbers. Try a reverse phone search of the company phone number shown on the cheque, and check the bank’s website to determine if the bank address listed as a branch on the debtor cheque is correct.

Watch for “red flags”

These are common “red flags” that indicate a matter is potentially a scam. Just one or a few of them many not indicate a problem, but if several appear together on a matter you need ask more questions and proceed with caution. The common red flags are:
• Client is new to firm (and is often offshore)
• Contact will be by e-mail and/or phone contact (and even in person too)
• Client will be in a big rush
• Before long weekend/bank holiday
• Client will insist certified cheque goes through your acct and quickly gets wired to offshore bank
• Client will be willing to pay higher than usual fees on contingent basis from the monies to flow through your trust account
• A very agreeable debtor will pay-up after just one call or letter
• Client instructions will change at last minute
• Certified cheque or money order will look flawless, but phone and transit numbers, addresses etc. are wrong

Protecting yourself

If any of the red flags show up on a matter you need to dig deeper. Google the bank or “company” issuing the cheque. Don’t just rely on calling them as fraudsters will have someone to answer the specified phone number. Cross-check phone and transit numbers, address etc. Call recipients of cheques issued from your trust account to confirm they are in fact expecting payment and are familiar with your client

Dealing with the bank

There are several things you can do to protect yourself in your dealings with the bank Don’t rely on oral confirmation from your bank at time of deposit that cheque is good. Don’t disburse funds immediately – EVEN IF YOUR CLIENT IS PUSHING YOU TO DO THIS!!! Wait until second bank-to-bank verification before issuing funds from your trust account. This takes at least 2-3 banking days. For a better understanding of funds transfers see the Show me the money article from Summer 2008 issue of LAWPRO Magazine.

The good news

Many lawyers appear to be more alert to the fact that fraudsters are trying to dupe them, and they are developing a heightened sixth sense. We are getting letters and e-mails from lawyers telling us that they detected a fraud and avoided being victimized.

Preventing fraud requires vigilance by all of us. Make sure you, your lawyers and staff are well informed about fraud, familiar with the common fraud scenarios, and are able to spot unusual elements in a transaction that could be a clue to fraud. Ensure your firm and accounting department have in place processes and procedures that would help your staff spot a fraudulent transaction before it is too late. Don’t do work on a contingent basis – ask for (and get) a retainer. Trust your instincts: Ask extra questions or do some additional research if something “doesn’t add up.” Don’t let the anticipation of a payment on a large account make you blind to unusual circumstances on a matter. Being alert to fraud is the surest way to avoid being its next victim.

The LAWPRO website has an extensive list of articles and tips on recognizing and avoiding fraud at www.practicepro.ca/fraud. Please feel free to use our materials in your internal firm fraud prevention education efforts.

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