Bad cheque scam: Steps to manage the risk
To avoid the risk of loss, first learn to identify the "bad cheque" scam:
- Become familiar with the common characteristics and red flags, the ruses used and the twists and developments in the ruses and the scam.
- Keep on top of new variations that the Law Society notifies the profession about. Make it a priority to read the email notices the Law Society sends.
- Review the names and documents page for some of the different names and documents fraudsters have used in BC.
- Appoint someone in your firm to ensure that lawyers and relevant staff keep up to date with Law Society notices and are familiar with common scams that target lawyers.
And then take steps to protect yourself. The Law Society’s publications on the bad cheque scam offer a number of risk management tips, all of which are set out below for your convenience. Although a tip may reference a certified cheque, for instance, appreciate that it may apply equally to another payment method (e.g. bank draft, money order or even regular cheque).
Risk management tips
- Trust your instincts; ask questions
- Be wary if someone contacts you over the Internet or by email
- Often, the best response is no response
- Follow the client ID and verification rules
- Ask for a retainer
- Verify information
- Verify referrals and “lawyers”
- Do not pay out hastily
- Consider a trust payment protocol
- Talk to your bank if you’re suspicious
- If you’re still not sure, take preventive measures
Some scenarios should make you suspicious. Don’t be fooled by someone who presents as a legitimate client, such as a business person or someone trustworthy (one individual claimed to be a pastor), or by documents that look real. For instance, ask yourself:
- why the client asked you to act. Does it make sense that a stranger from England, Italy, Hong Kong, Japan, the US or China would ask you to collect their money or provide some other service? Don't succumb to flattery; check out the information;
- whether the client is willing to pay you too much money for little or no work;
- why a client that purports to be a business is using a free email service.
If you can’t get the comfort you need that the client and the scenario are real, don’t act.
Be cautious about anyone who contacts you via the Internet, and about emails that say that the opposing party (usually a "debtor") “resides in your jurisdiction” and do not refer to you by name in the body of the message. Commonly used salutations are “Dear Counsel,” “Good day” and “Dear Attorney.” However, don’t be fooled if a letter does address you by name. Your name and the fact that you are a lawyer is widely available information.
Don’t respond to obvious scam emails, even to say that you know it’s a scam. Sometimes fraudsters send you a follow-up email if you don’t respond the first time. If you respond, you alert the sender that he or she has found a viable address. That can lead to other problems.
Know your client, and follow the Law Society's client identification and verification rules (the “Rules”):
- Verify the identity of your new client and follow the Rules. Information about the Rules, answers to frequently asked questions, the client identification and verification procedure checklist (with precedents) and an online course are all available on the Law Society’s website. The scamster may well disappear when you ask for a retainer and attempt to arrange for your agent to verify the client’s identity in the foreign jurisdiction, pursuant to the Rules. Appreciate that compliance with the Rules is a prerequisite for any coverage under the compulsory policy if you actually suffer a trust shortfall.
- Under the Rules (with limited exemptions), when a lawyer provides legal services in respect of a ”financial transaction” (a defined term), including a non-face-to-face transaction, the lawyer must take reasonable steps to verify the identity of the “client” (a defined term) using what the lawyer reasonably considers to be reliable, independent source documents, data or information.
- There is a wide definition of “client” in the Rules. “Client” includes another party that the client represents or on whose behalf the client otherwise acts in relation to obtaining legal services. It also includes an individual that instructs you on behalf of a client in relation to a financial transaction. For example, with limited exemptions, you are required to verify the identity of an individual who instructs you on behalf of an “organization.” Note that you must verify the identity of a client who is an individual at the time (or before) you provide legal services in respect of a financial transaction. Consider at the start of the retainer who will physically meet with the client to verify their identity. Plan ahead who can act as your agent if the client is outside of Canada. Don’t rely on a potential scamster to choose your agent.
- Appreciate that because you must take reasonable steps to verify the client's identity in person (no matter where the client claims to live), it's not sufficient for the client to send you a fax or email scan of what the client claims is a valid passport, driver's license, Nexus card or other identification. See the checklist (doc) for how to verify identity using a guarantor (if a client is in Canada and you are unable to meet with the client in person) or an agent (for a client outside Canada), sample attestation forms for clients in and outside Canada, and a sample agreement with an agent to obtain the required information and attest to the individual’s identity for a client outside Canada.
- Ensure your file opening procedures include a requirement to comply with the Rules. Use the checklist (doc) to ensure no step is overlooked. Provide information about the Rules to new and existing clients in retainer letters and on your law firm website. Modify trust accounting procedures to require confirmation of Rule compliance before paying funds out of trust.
Legitimate clients will provide a retainer up front (although beware that in some cases a client will provide a retainer with a well-made bad cheque and a bank may not notify you that it’s no good for a period of weeks). Don’t agree to take your fees out of the funds received from the opposing party.
Verify telephone numbers and other information provided, including in any documentation, independently of your “client” (in one matter, a fake lawyer referred a fake client who used the name of a real company to collect a debt. The lawyer contacted the real company who told the lawyer that it had never done business with the client, didn’t owe it any money and hadn’t sent a bank draft to the lawyer):
- If the new client is a business that provides a link to its website, check that the business name is an exact match with the name used in the website. Sometimes a fraudster provides a website address that belongs to a business with a similar, but not identical name.
- Keep in mind that it’s easy to make calls look like they are being made from inside or outside of British Columbia. The caller could be phoning you from two blocks away or from another country.
- Use telephone books, the Internet and other resources to cross-check names, addresses and telephone numbers to see if they correspond to the information provided. If the scam involves real property, use the title search as well in the cross-check.
- Use reverse directories to see if the number the client provided corresponds to the name and address and to find out if the number is a cell phone or land line.
- Verify that the drawer of the cheque is as expected – for instance, that the drawer of a retainer cheque is the same as the client or that the drawer of a cheque for the payment of a debt is from the debtor.
- Do a "Google search" on the names provided. A search on a drawer’s name, for instance, coupled with the word "fraud" or "scam," may well identify a company that has been victimized by fake instruments.
- If the scam involves a “collaborative law agreement” purportedly signed by the client and the opposing party and witnessed by lawyers, appreciate that collaborative law agreements are easily obtained from websites. Ask the client for permission to contact the lawyers who witnessed the agreement. Also, if the opposing party has counsel, you shouldn’t contact the opposing party directly anyway.
Verify referrals or lawyers sending funds and beware of possible fake websites
- If the client says that they were referred by a lawyer, accountant or someone else, ask if you can contact that person. You will want to thank the person for the referral if it’s true. If a lawyer actually did make the referral, you may find that lawyer does not actually know the client but referred the client to you because the lawyer doesn’t practise family law or civil litigation.
- If you receive a referral from a lawyer whom you don’t know, check with independent sources such as the lawyer’s regulatory body (a Canadian law society or the equivalent in a foreign jurisdiction) to find out if the lawyer exists and is licensed to practise. If the person doesn’t exist, you won’t accept the referral. If the person does exist and you are interested in the referral, compare the contact information provided by the law society with the contact information from the referring lawyer. Does the information match? If it doesn’t match, use caution. Contact the real lawyer using the contact information provided by that lawyer’s law society to find out if the lawyer actually did make a referral to you.
- Scamsters may use phony law firm websites or develop new ones. Make sure that a firm and the lawyer sending you funds are real by checking with independent sources such as the law society in the lawyer's jurisdiction, and then comparing the information provided to see if it matches with that provided by the firm.
Just because a client is anxious to get their money does not mean that the pay-out must be right away. Talk to your bank if you’re suspicious (see tip 10).
Consider implementing a protocol for payment out of trust that includes a check-box on your trust withdrawal form, requiring you to answer two questions: is this an existing client of the firm (more than 6 months) and has this client paid at least 2 firm invoices? If the answer to either is no, or there are still reasons to be suspicious, talk to your bank (see tip 10).
If you receive a certified cheque or bank draft, take it to your bank and ask it to verify that it’s legitimate. They can contact the bank on which the instrument was drawn and ask probing questions. If you deposit the instrument, wait for the funds to clear before paying out. Ask your bank to confirm with the institution that issued the instrument that the funds have cleared. This reduces the risk, but may not eliminate it completely. For instance, a cheque that purports to be drawn on an actual bank account may well clear initially, with the bank later finding that the instrument was bad.
You can confirm with the drawee bank, as well, but be certain you’re connecting with the real institution (don’t use the telephone number on the cheque to make contact).
If you receive the confirmation you need, get your bank or a real drawee bank to confirm, in writing, that the instrument is authentic and you’re safe to pay out on the funds.
If you are not sure if you might be dealing with a scamster, appreciate that you can eliminate the risk of loss of funds from your trust account entirely if you:
- decline the retainer;
- refuse to let any funds go through your trust account. For instance, you can require payment to be made to your client directly by cheque or wire transfer. If by cheque, you can hold the cheque until your retainer is paid; or
- talk to your bank in advance about the advantages/disadvantages of receiving funds by electronic transfer (receiving payments electronically may eliminate this risk entirely).*
And get to know your bank’s representatives before you have problems so that they know you, and get advice about protecting yourself. Be familiar with your institution’s policies and your banking agreements, especially with respect to the security measures that protect your firm’s accounts, and keep a close watch on your trust account.
* In addition, talk to your bank or a wire transfer service if you are concerned about giving out your trust account information to a potential new client for the purposes of receiving a retainer electronically. You may be able to avoid this disclosure.
Two Canadian websites that you can view to inform yourself generally about scams and new trends are fraudcast.ca and antifraudcentre.ca. The latter is the Canadian Anti-Fraud Centre’s (CAFC) website that used to be commonly known as Phonebusters. CAFC is an organization jointly managed by the Ontario Provincial Police, the RCMP and the Competition Bureau of Canada. The Criminal Intelligence Analysis Unit analyzes scams and, if appropriate, may disseminate the information to law enforcement agencies and regulatory bodies both inside and outside of Canada.
See also FBI news release: Nigerian National Sentenced to 100 Months for Involvement in Scheme to Defraud Lawyers of Millions (Philiadelphia Division, September 5, 2013).