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Attorneys: Beware Trust Fund Schemes

Is signing a new client a time to celebrate? Usually, but there are exceptions, as the following story suggests.

A potential client emails you about help collecting an unpaid bill. You’re not familiar with the company that owes the prospect money. But reviewing the attached documents and doing limited research reveal nothing suspicious. The company cited in the paperwork is in your city. A phone call with the prospective client raises no red flags, and the person agrees to pay your retainer and inks your project agreement letter.

Several days pass, and the dispute resolves after you contact the indebted party once. The company sends you a certified bank check in your name to remit to your client. You give the person the good news and deposit the check in your Interest on Lawyers Trust Account (IOLTA). However, a day later, the client emails you with an urgent request. Now he needs the money right away to pursue a new business deal. He tells you to wire him the net cash (after deducting your fee) immediately. He stresses there’s not a moment to waste.

Struck by the urgency of the desired transaction, you call your bank, asking if the deposit is available for withdrawal. The bank says yes. So, you proceed to wire the funds to your client. After several more days, you get an alert from your bank saying the check failed to clear. In fact, the check was bogus. Yet, the bank transmitted the funds provisionally. Since the check bounced, you or clients with money in your IOLTA must cover the bank’s loss.

Sadly, what appeared to be a promising new engagement turned into a money-losing mess. The only party to profit from the deal was the scammer, who vanished without a trace.

IOLTA Fraud Dangers

Welcome to the perilous world of attorney trust fund crime. It’s where clients can be criminals and your IOLTA money can vanish instantly. Even though these schemes have existed for years, and bar associations and insurers have issued many alerts about them, lawyers still fall for them.

“It will never happen to me,” you say. Think again. The FBI’s Internet Crime Complaint Center(IC3) received 23,775 email fraud complaints worth over $1.7 billion in 2019. Not all these cases involved attorneys, but a significant number did.

Why do lawyers have targets on their back? Because they often collect and transfer money for their clients. Real estate transactions, debt collections and collaborative family-law agreements make them sitting ducks for fraud.

Here’s what else is troubling: Trust-fund scams come in many different types. The counterfeit bank check just discussed is a common one. Another involves compromised electronic-funds-transfer (EFT) instructions. In these instances, a criminal breaks into the email accounts of people involved in a financial transaction and requests a fraudulent wire transfer. When the attorney tries to confirm the instructions by the phone number listed in the email, the scammer authorizes the transfer, and the lawyer tells the bank to initiate it. After the lawyer wires the money, typically abroad, the scammer and funds vanish.

Forged trust account checks are another fraud exposure. With this scheme, a scammer obtains your IOLTA account information and writes a phony check from it payable to cash. The person submits the check (with a forged signature) to a check-cashing company. Even if you try to recover the money stolen from your bank, your account balance will be short. If you have multiple IOLTA checks waiting to clear, they may bounce. This will get you in hot water with the clients to which you owe money.

Another scam involves emails claiming your IOLTA has insufficient funds to cover a check or asking for help collecting on a divorce settlement. Regardless of the request, never send money without doing further due diligence. When a transaction has the following elements, proceed with great caution:

  • Someone requests funds from your IOLTA
  • The request comes from abroad
  • The person wants the money immediately

When you see these three red flags, stop the transaction immediately.

Furthermore, scammers often tailor their schemes to fit your practice type. If you serve business clients, they may hit you with an equipment or inventory purchase scam. If you litigate, they may want help with a commercial debt or personal debt collection. If you do family or real estate law, they may scam divorce settlements and escrow deposits. Finally, if you do intellectual property law, scammers may try to retain you to seek damages from phony trademark or copyright infringement matters.

Whatever a scam’s details, the outcomes can be devastating. When a real estate property deal collapses because a criminal stole the escrow funds, the buyer and the seller might seek compensation from you. Making matters worse, the bank that provisionally covered the wire transfer, but lost money, might use your other IOLTA money to make up the difference. This might leave you vulnerable to lawsuits from your other clients or disciplinary action for improperly safeguarding IOLTA funds.

Prevention Is Key

How should you protect yourself against trust account scammers? First, beware people requesting wire transfers by email. Always assume an email is suspicious until you can thoroughly check it out. Also, be careful when a client’s only contact method is email, when one or multiple parties are abroad and when the transfer amounts— or legal fees— are substantial, especially when the legal work is limited.

That’s just for starters. Also, you should learn how to detect the red flags of IOLTA fraud. Here are some significant ones:

  • A prospective client’s email addresses you as “Dear Counselor” or “Dear Attorney” in an email and doesn’t mention your practice’s name.
  • The person in an email’s “from” line is not the person the message asks you to contact.
  • The client uses a free email service, not a dedicated business email address. 
  • The person’s domain name (in email address or website) is new.
  • The location in the email header isn’t the client’s alleged location.
  • The desired engagement involves debt collection or some other funds transfer.
  • The client messages you from abroad.
  • The person refuses to speak with you by phone.
  • The debt or other financial obligation resolves too quickly and with little or no effort on your part.
  • The client sends you what appears to be an authentic cashier’s or certified check. It may arrive in a plain envelope without a cover letter. 
  • The check amount is more than what you expected to receive.
  • The check comes from an account unconnected to the payer. For example, a business account generates funds for a divorce settlement.
  • After the check arrives, the client wants immediate payment. The person asks you to transfer funds to a foreign account.
  • The person exerts intense pressure on you to wire the money before the check clears.

Once you master these fraud signs, react decisively:

First, always retain deposits in trust until the check successfully clears. A provisional bank payment does not mean the bank has received the money. For this reason, don’t authorize any fund transfers until you confirm the bank has cash in hand. Disclose this requirement in your engagement letter so there’s no confusion later.

Second, extensively research the person contacting you and all related entities. For example, Google all names, addresses and phone numbers. Then verify addresses on Google Maps and Street View. Check with your bank to confirm that the check’s bank and routing numbers are legitimate. Finally, consider purchasing a full background check on the prospective client for large transactions.

Third, use two-factor authentication on all wire-transfer transactions. And always call the person requesting the transfer to confirm details using prior contact information, not details found in the email.

Fourth, beware last-minute transaction changes. For example, someone who abruptly asks you to wire money to a different email address is an immediate red flag.

Fifth, use email security protocols, including digital signatures and other encryption methods. Never open spam email, but if you do by mistake, don’t click on any message links. As a standard precaution, don’t use free email programs such as Gmail for business purposes. 

Finally, since IOLTA fraud is a known scam, not protecting your trust account may leave you vulnerable to a client malpractice lawsuit, a bar disciplinary hearing or worse. For this reason, the time to get serious about IOLTA scams is now.