Scam background – The client contacts the insured attorney seeking representation regarding closing out a settlement or collecting a debt. The client provides the lawyer with contact information for the third party who is “settling” their claim with the client.

The settling party can be an alleged former employer, insurance adjuster, debtor or any other party who might negotiate a settlement. The lawyer contacts that person, arranges the settlement, and then receives a counterfeit check from the third party, which is then deposited into the lawyer’s trust account. The client often calls and/or emails the lawyer urging that the wire transfer be sent as soon as the funds are credited, alleging circumstances regarding an immediate need for the funds. Once the lawyer’s bank makes the funds available in the account, the lawyer then wires the funds to an account set up for the fraud.

The money is removed immediately, the account is closed, and the “client” disappears. After the lawyer’s bank determines that the check is counterfeit, the bank then sweeps the trust account for the funds, which are now gone. If the account had remaining funds that are being held for other clients, the bank will take those funds, thus depleting the account of monies the lawyer owes to others. If the account does not have sufficient funds, the bank then makes a demand on the lawyer for repayment of the amount of the counterfeit check, which is usually a substantial amount of money.

It is a common bank practice for banks to make funds “available” to the customer several days before the bank receives the funds from the payee bank. The risk is that under the UCC, the bank can recoup the funds from the depositor’s account if the check is later determined to be counterfeit or NSF. Lawyer malpractice insurance policies are not designed to protect against crimes committed on the trust account. As a result this will likely not be covered under your malpractice insurance policy.

What To Do To Protect Your Practice:

  • Do not disburse funds until the bank has confirmed that the check has been cleared by the payee bank and finally deposited into your trust account – when the bank shows that the funds are “available”, that does not mean that the check has cleared. Make sure the check has cleared.
  • Avoid wire transfers, except when dealing with well-known existing clients.
  • Advise new clients at the start of the representation that they will not receive any payment until the check has cleared and that this will take time.
  • Keep in mind that there is a difference between funds from a check being “available” and the check having “cleared”!
  • Review your cyber and/or crime policy to see if there is coverage for this type of activity.

Contact Kaestner & Berry with any questions or to get a quote for Cyber or Crime Insurance!