Lawyers targeted in new fraud scheme — incorporation and a small business loan

May 14, 2009

Editor's note: This fraud alert includes names used by fraudsters in BC. Real people with the same names may be the victims of a fraudster or of coincidence, but are not suspected of wrongdoing.

The Law Society of Upper Canada has warned its members about another counterfeit cheque or bank draft scam targeting Ontario lawyers. This scam involves incorporating a new company and, a few weeks later, acting in relation to a small business loan. This scam may show up in BC, so be on the look-out for it or some variation.

Here's how the scam works. A new client retains a lawyer to incorporate a company. He may say that he was referred by a real client of the law firm. The client presents a driver's licence and other identification (all well-made fakes). The client provides a working cellphone number, but the home telephone number doesn't work. The residential and business addressees (fake) are the same. The client pays the lawyer's bill in full, usually in cash.

A few weeks later, the now established client returns and asks the lawyer to act with respect to a small business loan of approximately $350,000. The client shows the lawyer brochures and invoices related to equipment or inventory that he will purchase with the loan proceeds. The client wants the loan completed quickly, often just before a holiday when the lawyer may be rushed or short-staffed. He instructs the lawyer to send the proceeds to a third-party corporation, not the client's new company. The only security is a promissory note or a general security agreement. So far the lender has used the names Halifax Venture Capital Corporation or Montreal Venture Capital Corporation. The lender's phone is answered professionally.

The lawyer receives the loan proceeds in the form of a well-made fake certified cheque or bank draft (e.g. including holographs, imprints and other security features). The lawyer deposits the fake instrument into the law firm's trust account. The lawyer writes a cheque or wires the funds to the third-party corporation, only later to find out that the certified cheque or bank draft was counterfeit. What can you do to protect yourself? Some steps you can take include:

1. Abide by the client identification and verification rules (Rules 3-91 to 3-102 and the "no-cash rules" (Rules 3-51.1 and 3-61.1).

2. Confirm the new client's addresses and telephone numbers by checking for published addresses and numbers to see if they correspond to the information the client gave you. Confirm the lender's contact information too.

3. Ask yourself why the new client chose you to act. If he or she says that they were referred to you by another client of the firm, ask if you can let that person know in order to thank the real client for the referral.

4. Ask your financial institution to contact the financial institution issuing the certified cheque or bank draft to confirm that the funds have cleared.

5. Wait for the funds to clear before paying out. This reduces the risk but may not eliminate it completely.

For more tips on protecting yourself from fraudsters who seek to use your trust account, see Practice Watch (May, July, October and December 2008 and April 2009) in the Benchers' Bulletin, as well as earlier Notices to the Profession. A further list of Law Society publications on these and other scams is available in the Insurance / Risk Management section of the website.

If a fraudster has attempted to scam you, report it to the RCMP or your municipal police force. You can ask the police to report the matter to PhoneBusters or you can do it yourself (1-888-495-8501). To report it to the Law Society or to discuss the contents of this article and receive confidential advice, you are welcome to contact Practice Advisor Barbara Buchanan at 604-697-5816 or bbuchanan@lsbc.org.