lawyers increasingly targets of fraud check schemes_AFI

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Lawyers are Increas- ingly the Targets of
Email/Fraudulent Check Schemes

• Lawyers are increasingly receiving emails from
  alleged potential foreign clients looking to
  collect debts from customers. More likely than
  not, the email is the first step in a fraudulent
  scheme which involves a deposit and withdrawal
  from your special client fund account. A basic
  knowledge of Article 4 of the UCC and simple
  precautions can help lawyers avoid becoming a
  victim of these schemes and protect against other
  potential fraudulent deposits into lawyers
  special accounts, including fraudulent settlement
  checks and retainer checks.
• The scenario is a familiar one by now for many
  lawyers. There are variations, but it generally
  unfolds something like this
• A lawyer receives an email from a new potential
  foreign client looking to collect an outstanding
  debt from a customer in the lawyers
  jurisdiction.
• The lawyer always anxious for new business
  agrees to represent the new client and collect
  the debt.
• Shortly thereafter, the client informs the lawyer
  that its customer has agreed to voluntarily pay
  the outstanding debt and that the customer will
  shortly be forwarding a check to the lawyer. The
  client further asks that the lawyer deposit the
  check into his account and, after confirming that
  the check has cleared, wire the funds to the
  client after deducting the lawyers fees.
• Sure enough, a check soon arrives from the
  customer. The lawyer deposits the check, waits
  for it to clear, and then wires the money to the
  client.
• Sounds like a great way to build your practice,
  right? Think again. Invariably, lawyers who
  respond to these sorts of email solicitations
  and engage in the above-described scenario are
  receiving calls from their banks

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informing them that the checks they deposited in
their accounts are counterfeit and demanding
immediate reimbursement from the lawyers. And
the banks are perfectly within their rights to do
so! The mistake most lawyers make is that they
assume that once they hear from their bank that
the deposited check has cleared and the funds
are available there is no risk in wiring those
funds. This is simply not true. The Expedited
Funds Availability Act, 12 U.S.C. 4001, et seq.,
requires banks to disclose when deposited funds
will be made available. However, a banks making
funds available is only provisional until the
check is actually paid by the payor bank (i.e.,
final settlement). UCC 4-201 provides that
prior to final settlement, the depositors bank
merely acts as the customers agent for
collection of the check and any advancement of
funds by the depositors bank is provisional. UCC
4-214 further provides that if there is no
final settlement (i.e., the payor bank does not
pay the check), the depositors bank may charge
back the sum of any provisional advancement of
funds or demand a refund from the customer. As
applied to our illustration above, this means
that the attorney who deposits the check and
wires the funds to his client once the check
clears may ultimately be liable to the bank for
the amount of the fraudulent check. The bank may
either charge the lawyers account if sufficient
funds are available in the lawyers account or
demand a refund and pursue legal action against
the lawyer for the amount of the check. Lawyers
can take some steps to avoid being victims of
these fraudulent check schemes. First, be
extremely wary of taking on any representation
from a foreign client who contacts you only via
email. As with any new client, a lawyer should
investigate the client thoroughly. This includes
determining the actual existence of the client
and the validity of its operations. A diligent
lawyer should call references for the client,
check public records, and obtain supporting
documentation of the alleged debt that is owed to
the client. Second, never assume that simply
because a check has cleared and funds are
available that a check has been paid by a payor
bank. Upon receiving a check from a suspicious
client, a diligent lawyer should call the payor
bank to verify the account and determine if the
check is a forgery. A lawyer should also not draw
on deposited funds from a suspicious client
until he or she receives confirmation from the
bank that there has been a final settlement and
the deposited check has actually been paid by
the payor bank. Finally, lawyers should be
cognizant that any check they receive may
ultimately be dishonored and they may be liable
if they draw upon any provisional funds supplied
by the depositor bank. Prudent practice dictates
that attorneys ensure that they receive final
settlement on retainer checks from clients, and
settlement checks from opposing parties and
attorneys, before disbursing funds from those
checks.
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