Trust fund scams have been a feature of the legal landscape for years. But knowing about them and not falling prey to them are two different things. Here’s how to achieve the latter.
It’s always a good day when you sign a new client, right? Not always, as the following scenario suggests.
A potential client sends you an email wanting you to represent him in a collections dispute. You’ve never heard of the person or of his firm. But you do some quick due diligence on the documents the person emailed and nothing appears out of order. The other party in the dispute appears to be an actual firm doing business in your state. A phone call with the client confirms all of the above, and the person agrees to your retainer fee and signs your engagement letter.
A couple days later, the dispute apparently settles after just one contact from you. The adverse entity sends you a six-figure certified bank check in your name for the benefit of your client. You advise your client of this and deposit the check in your Interest on Lawyers Trust Account (IOLTA). However, the next day, the client sends you an urgent email. He now needs the money immediately to use for another business opportunity. He directs you to wire him the cash net of your fee . . . immediately!
Taken aback by the urgency of the request, you call the bank that holds your IOLTA. You ask if the deposit is available for use. The bank answers yes. So you go ahead and wire the money to your client. Another few days pass and you now receive notice from your bank that the check did not clear. In fact, the check was not even valid. Still, the bank wired the proceeds to the client on a provisional basis. But since it didn’t clear, you are now on the hook and responsible for the full amount. Either you or your other clients with funds in your IOLTA must now cover the bank’s loss.
Sadly, not every new client represents a positive opportunity for your firm. In fact, if the client is a scammer in disguise, he or she may be a financial catastrophe in the making.
IOLTA Fraud Dangers
Welcome to the hazardous world of attorney trust fund scams. It’s a place where clients aren’t who they appear to be and the money in your IOLTA can vanish at the click of a mouse. Even though such scams have been around for years and bar associations and professional liability insurers have issued alerts, lawyers continue to fall for them. How can you avoid becoming a victim yourself?
Lest you think that such schemes are rare and will never happen to you, consider the latest data from the FBI’s Internet Crime Complaint Center (IC3). In 2019, the center received 23,775 email compromise complaints worth over $1.7 billion. Not all of those cases involved lawyers, of course, but a significant percentage did. Lawyers are vulnerable because they often get hired to help with the transfer or collection of money on behalf of clients. The work they do in real estate transactions, debt collections and collaborative law agreements in family law matters makes them fraud targets for scammers all over the world.
Also disturbing is the fact that trust-fund scams come in many different forms. The counterfeit bank check discussed earlier is one of the most common scams. Another involves compromised wire instructions. Here, a scammer breaks into the email account of the parties involved in a real estate (or other) transaction and attempts to request a fraudulent wire transfer. How does it work? The scammer learns about the nature of the transaction and the parties involved. Then he or she emails the attorney with instructions to wire money to the scammer’s account. When the attorney tries to confirm the instructions by calling the phone number listed in the email, she reaches the scammer, not the actual client. After the scammer verbally authorizes the transfer, the lawyer contacts the bank to initiate it. After the money is sent, typically abroad, it will never be seen again.
Forged trust account checks are another fraud possibility. Here, a scammer obtains your IOLTA account information and then writes a fake check payable to cash. The person submits the check to a check-cashing company, using a forged signature. Even if attempts are made to recover the stolen funds from your bank, you will still have a shortage in your account balance. If one or more IOLTA checks are outstanding, you may be at risk of them bouncing, which will cause big problems with the clients to whom you owe money.
Other scams involve email messages claiming that your IOLTA account has insufficient funds to cover a written check or requests from overseas for help collecting on a divorce settlement. Whatever the specifics, when a request arrives involving payments from your IOLTA, often under extreme deadline pressure and from abroad, your fraud warning bells should be ringing loudly.
The other challenge comes from the fact that scammers are often savvy enough to customize their schemes to fit an attorney’s practice type. If you’re a business lawyer, they will approach you with an equipment or inventory purchase fraud. If you’re a litigator, the fraudster will seek your help with a commercial debt or personal business loan collection. Family lawyers will be the target of divorce settlement fraud, and real estate lawyers will have their escrow deposits attacked. Even intellectual property attorneys are at risk, with scammers hiring them to seek damages in connection with fake trademark or copyright infringement cases.
Regardless of the specifics of the scam, the outcomes are consistently damaging. Once IOLTA money is stolen, bad outcomes ensue. When a real estate property deal falls through because escrow money is taken, for example, both the buyer and the seller might seek financial relief from you. And you may be responsible for the attorney’s fees and costs all the parties incur in trying to resolve the situation. But this could be just the beginning. Since the bank provisionally covered the wire transfer, only to lose money when the scammer’s check was found to be counterfeit, it might tap the other funds in your account to cover its loss. This will leave you liable for claims from your other clients or even potential disciplinary action for misusing or misappropriating client funds.
Prevention Is Key
So what can you do to protect your firm against trust account scams? To start, it’s important to be wary of any wire transfer requested by email. Because scammers can easily hide their true identities, the best defense is to assume an email is suspicious until you can properly vet it. Also be skeptical of a client contacting you via email or whose only means of contact is email, in which one or more parties to the matter are outside the U.S. and in which significant money transfers and legal fees are involved, especially if only a limited amount of legal work is involved.
However, becoming more skeptical is just the starting point. Also train yourself to be more observant of the red flags of IOTA fraud.
Here are some of the major ones:
- A prospective client emails you personally, but addresses you as “Dear Counselor” or “Dear Attorney.” The person fails to specifically mention your practice.
- The person in the email FROM line isn’t the same as the person you’re asked to respond to in the email body.
- The prospective client uses a free email service instead of a dedicated business account.
- The person’s domain name (in email address or website) was only registered recently.
- The location information in the email header doesn’t coincide with where the client says he or she is located.
- The proposed engagement involves collecting a debt or some other movement of money.
- The “client” is contacting you from a foreign jurisdiction.
- The person expresses a strong preference for email, not telephonic communication.
- The debt or other financial obligation resolves almost immediately with little or no effort on your part.
- You receive what appears to be an authentic cashier’s or certified check. It may be so good that it fools even your bank. It may arrive to your office in a plain envelope with no cover letter.
- The amount of the check is larger than what you had been led to expect.
- The check comes from an account that bears no relationship to the payor (for example, a business account produces funds for a divorce settlement).
- Once the check arrives in your office, the client demands immediate payment of the funds, less your fee. The requested wire transfer is to an offshore account.
- The person pressures you for the funds before the check clears.
Once you’ve become more skeptical and alert to signs of fraud, there are additional steps you can take to protect yourself.
First, always hold deposits in trust until the check clears. Just because a bank has made a provisional payment doesn’t mean it has actually received the funds. Be extra careful to not authorize a transfer until the money is actually in house. Also, advise clients of this fact in your engagement letter so there are no surprises or complaints later.
Second, do extensive due diligence on the prospective client and other entities. For example, Google the names, addresses and phone numbers of the client and other parties involved. Also check addresses on Google Maps and Street View. Finally, check with your bank to make sure the check’s bank and routing numbers are legitimate.
Third, use two-factor authentication on all wire-transfer requests. Always get outside a potentially hacked email chain by calling the person requesting the transfer to confirm the details using prior contact information, not information found within the email.
Fourth, watch for last-minute changes in the transaction. For example, a client who suddenly asks you to wire money to a different account or email address should raise your fraud concerns.
Fifth, use simple email security measures, including digital signatures and other encryption tools. Never open spam email, but if you mistakenly do so, never click on a link within it. As a standard practice, never use free email programs such as Gmail for business purposes.
Finally, accept that “I didn’t know about IOLTA fraud” is no longer an excuse. Since it’s a known scam, not taking reasonable steps to protect your trust account—and your clients’ money within it—may leave you exposed to a client malpractice claim, a bar disciplinary action or worse. Don’t let this happen to you!
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