The bank drafts looked good, but the grammar in the other lawyer’s e-mail was bad. That’s what made James Morgan suspect he was being targeted for a scam — an attempt to get money out of the small-town Ontario lawyer’s trust account on the strength of forged cheques and a phoney loan to one of his clients.
But watch out lawyers and law firms everywhere! There’s a new breed of fraudster out there who has learned to spell, brushed up on their grammar, and knows enough about the law and legal practices to launch elaborate and credible scams. “They’ve become more sophisticated and polished,” says Dan Pinnington, director of PracticePRO, an initiative of the Lawyers’ Professional Indemnity Company that provides risk management, claims prevention, and law practice management information to Ontario lawyers. “They’re getting very tough to spot,” says John Allen, treasurer and investigator at the Law Society of Saskatchewan. He notes that forged cheques are getting so good that bankers can’t always see they’re not genuine.
Lawyers are easy targets, because the nature of their business requires that they deal with a great many people whom they don’t really know, observes Morgan of Mandryk Stewart & Morgan in Tillsonburg, Ont.
So what do lawyers and law firms need to know and do in order to avoid becoming victims?
“Be aware, be alert, and look out for red flags,” says Pinnington, who says he hears about new fraud attempts on lawyers almost every day. The majority of these attempts are unsuccessful, but fraudsters sometimes get lucky and everyone is potentially vulnerable, he says.
What kinds of fraud do you need to watch out for? Until recently, the key concern was real estate and mortgage frauds, usually involving flip transactions whereby a property is purchased at an inflated price by a non-arm’s-length buyer who then applies for a mortgage based on the artificially high purchase price. Lawyers are not directly targeted in such schemes but, if they do the paperwork without enough due diligence, they become vulnerable to negligence claims from the lender who is left holding the bag.
A high-profile example of this is the massive lawsuit recently launched by the Bank of Montreal, which has accused 18 Alberta lawyers, including one who is now a Tory MP, of negligence in connection with a $69-million mortgage fraud. If proven in court, these allegations would serve as a stark reminder of the fact that real estate lawyers can become unwittingly caught up in sophisticated fraud schemes, in spite of all the warnings that have been circulating within the profession over the past several years. However, the fraudulent transactions alleged in this case occurred several years ago, when the Calgary real estate market was red-hot and prices were continually soaring. Since then, the markets have cooled off, properties change hands less frequently, and prices are relatively stable, so, as Pinnington points out, flip frauds are less viable and therefore less common.
So, fraudsters have moved on and figured out ways of targeting lawyers directly by trying to con them into depositing bad cheques in their trust accounts and paying out good money before the cheques bounce. “The magic that makes these frauds work is giving the lawyer a worthless piece of paper and having the lawyer write a cheque against his trust account,” says Pinnington, who notes these scams come in two flavours.
One type involves fake business loans for equipment purchases. Typically, a new client will hire a lawyer to incorporate a business and then return to the lawyer a few weeks later saying he has negotiated a loan and wants to use the money to purchase some equipment. He asks the lawyer to deposit the loan into a trust account and then advance the money to a third party for the equipment purchase.
The other common fiddle that fraudsters are currently trying to pull on thousands of lawyers involves a phoney debt collection — sometimes a bad business debt, but most often on a family law spousal support payment. The method is similar to the loan scam. A new client approaches the lawyer asking for help in collecting a debt and the lawyer discovers the debt is surprisingly easy to collect. A cheque is deposited and the client pressures the lawyer to release the funds immediately, most commonly, under some pretext, to an offshore bank account.
Some fraudsters bombard the legal profession with e-mails soliciting help with a loan or collection. Pinnington says he and other lawyers at LawPRO have received such e-mails themselves from con artists who are evidently unaware of whom they are targeting. However, either by design or simply because the con artists are sending the messages to everyone, some of these messages will land on the desk of lawyers who routinely handle loans, debt collection, or spousal support matters. In such cases, it is not always easy to spot the fraud. “Everyone is vulnerable, it’s a question of the right file coming across your desk,” says Pinnington.
Deborah Gillis, risk and practice management adviser at the Lawyers’ Insurance Association of Nova Scotia, says it’s a measure of the sophistication some of these frauds have achieved that many attempted scams target lawyers who specialize in collaborative family law — people who are always dealing with situations where ex-spouses will reach an agreement to pay some of what they owe.
As a first line of defence, Gillis and Pinnington urge lawyers to ask questions of their clients in any situation where they have cause for suspicion — and there is often something about the fraudulent scenarios to raise a lawyer’s antennae: an out-of-province client, a draft from a U.S. bank, documentation from a U.S. jurisdiction, or a request to send funds overseas. But such swindlers have learned from the kind of questions they are getting and will now often respond with very good answers, convincing explanations, and authentic-looking legal documents.
Fraudsters have also learned to limit the scale of their schemes to amounts more in keeping with the kinds of deals lawyers likely handle every day. In the past, they would try to con lawyers out of millions, now they’ll be forging cheques for $200,000 or $300,000, says Pinnington. In some cases, the client will present himself or herself as coming from the same ethnic community as the lawyer being targeted, says Pinnington, who recalls how one young lawyer was so concerned about her reputation in her community that she failed to see what should have appeared to be an obvious fraud.
It’s not only small firms and solo practitioners who are likely to be conned. Pinnington says he knows of two recent cases where large firms came close to cutting a cheque for a fraudster. In one case, it was someone in the accounting department who sounded the alarm after noticing that the amount on a cheque was exactly the same as another cheque she had seen earlier. In the other case, the matter had been referred to a junior lawyer who happened to have dealt with a case involving fraudulent cheques before and felt the instrument that crossed her desk for processing didn’t look quite right.
Protecting against fraud requires a team effort, says Gillis. Not only all of the lawyers in the firm but also the office staff should remain alert and bring to attention anything that seems unusual. She and other experts advise that you should be concerned about clients who don’t seem to have any connection with you or the jurisdiction you are in. You should search online to verify the identity of the client and any third party involved in the deal. You should examine the quality of the paper bank drafts are printed on. You should certainly ask questions about any aspect of the deal that seems suspicious.
But, above all else, law firms are advised to resist all pressure to make a quick payment out of their trust accounts and wait to make sure the cheque they have received has cleared and is genuine.
Pinnington notes LawPRO now provides Ontario lawyers with insurance against cheque fraud. The insurance is contingent upon the lawyers satisfying the following conditions: before disbursing funds they must wait eight days for the cheque to clear, confirm with the bank that the cheque is good, and follow up that confirmation in writing. Whether you are eligible for this insurance or not, if you follow those conditions, you probably won’t need it.