When scamsters target lawyers

This article is intended to alert lawyers to common elements of scams and fraudulent schemes in which they may be targeted to lend assistance. It does not describe any particular scam or any particular matter that has come before the Law Society.

Scamsters, it seems, are actively seeking out lawyers. Some lawyers have warned the Law Society about approaches to assist in questionable schemes. A few lawyers over the years, sadly, have been drawn in and come before the Law Society only in the aftermath, facing financial and professional ruin.

What is the profile of a lawyer most likely to be hooked into a scam? The most likely targets are sole practitioners and lawyers struggling in their law practices. Lawyers in serious need may be more vulnerable to persuasion by a scamster to assist with schemes they do not understand or, in the rarest cases, to embark on a lucrative venture knowing it is a scam or wilfully blind to the fact.

First, the offer to the public

Although frauds may take many forms and vary in sophistication, one of the most durable is the “prime bank scheme”—and it serves as a useful example. Typically, a scamster tells a potential investor that he or she is being offered a very rare and valuable opportunity to play with the big boys and get at the big money. The scamster explains that there are tremendously profitable investing programs used to generate the vast sums of money needed to finance institutions such as the World Bank or IMF. Occasionally, for the very well connected, there is additional room in a program for non-institutional investors.

The scamster purports to have such connections and to offer the high-yield investment opportunity confidentially to the investor. Investors are promised that, combined with others in minimum units of several million dollars, they will gain access to the investment, which locks up the funds for a few days and generates returns of hundreds of percent a year.

These investment opportunities are presented as available only by invitation and as risk free.

Some common characteristics of investment scams

There is little in writing

Scamsters prefer to commit themselves in writing as little as possible. They justify this by the confidential nature of the investments since, if word were out to the general public, everybody would want in and the opportunity would be ruined.

The investor must agree to keep the whole project confidential

An exception to the “little in writing” rule is often a confidentiality agreement. The agreement usually says that, if its terms are breached, the investor never gets a second opportunity and all returns are forfeited. Going to the police, for example, or even discussing the matter with other investors, is a breach. These agreements can have a tremendously powerful effect on investors. As odd as it sounds, there are cases in which investors realize they have been scammed and their investment money has been stolen, but they still will not cooperate in an investigation out of fear this will jeopardize any later opportunity to be invited into a genuine scheme.

The investment is baffling

It is surprising how many people will invest in something they don’t understand, especially if they think they should understand it. The supporting material for these schemes is often a hodge-podge of investment terms and concepts, with no real explanation of the assets being purchased or how they will generate a profit.

Whatever it is they are offering, the profits are extremely high

Promised returns of 100%, 200% or 300% per year are not uncommon. Sometimes investors in the same projects are offered different returns, apparently for no other reason than that it was difficult for the scamster to keep all the promises straight or that some investors required more persuasion than others. The common element is that these schemes are too good to be true.

It’s usually a pyramid

Information is spread by word of mouth among the people involved, and the pyramid provides lots of incentive for existing investors to bring in new investors. Ideally, there is little or no contact with people who are high enough up in the pyramid to know it’s a scam.

Why lawyers are a target

So far the story has been pretty straightforward. The scamster has prepared and made believable a scam to attract money from the public. All that is needed is for the scamster to persuade investors to turn over their money.

To understand just how useful it is to involve a lawyer, look at it from the standpoint of the scamster. The scam is ready to go, whether it’s something novel or a hardy perennial such as the prime bank scheme. The scamster has connections in the scam industry who will distribute the scam by word of mouth and others who handle the money once it is sent offshore. However, there are some basic problems the scamster faces.

First, how to collect the money? For the scamster, there are grave drawbacks to receiving the money directly. Ideally, the people involved have direct contact only with the person who recruited them and perhaps a few in their immediate circle of investors. Giving the scamster’s name and bank account information to all likely prospects is far too visible and makes the scam much too traceable. The money can be held by a third party willing to take the risk, but what risks are involved for the scamster? The third party might steal the money and leave the scamster with no recourse. Even if a third party is trustworthy, he or she may talk far too much, possibly even to the police, about the scam and the destination of funds being sent offshore.

The ideal solution is a third party who can be trusted not to steal or to talk about any involvement. A lawyer has a trust account, confidentiality obligations and solicitor-client privilege — combining as a perfect solution to the scamster’s quandary. Even though communications to perpetrate a fraud are not privileged, it takes time and likely court rulings to establish that privilege does not apply. This gives the scamster at least a valuable delay as only the client has the ability to waive a claim of privilege.

Another problem faced by the scamster in taking the scam into the world and making lots of easy money is that, no matter how polished the scam, there is always the danger it will  look to potential investors like it’s a little dicey. Potential investors may accept the argument that there are vast fortunes to be made in, for example, historical railway bonds stored in safekeeping in the Caribbean, but they may still hold back from handing over the money.

Having a lawyer involved provides great comfort to the investor. An investor may associate paying trust money to a lawyer with legitimate investments, for example, buying a house, and may believe that the lawyer will be accountable for the money and is also endorsing the scheme. The comfort to investors provided by the lawyer in this way is called “cover.” It is particularly useful for the scamster to have the lawyer attend a sales meeting, or part of a meeting. Even if the lawyer actually says little or nothing, by merely attending the meeting he or she may lend credibility to the scam.

A scamster is also challenged in moving large sums of money around fast without attracting a lot of unwanted attention. These days, a sophisticated scam sends the money offshore to a “high privacy” jurisdiction at the first opportunity. The trail for anyone looking into the matter ends there, and the money can be redirected at leisure to wherever the scamster needs to send it. A lawyer’s trust cheque is respected and anonymous — an ideal solution.

The offer to the lawyer

The lawyer is a godsend to the scamster. The problem is: how to find one? Most lawyers are going to be skeptical when a scamster walks into their office and explains the investment scheme — and the vast majority will simply decline to take on the matter. The answer for the scamster is to keep eyes and ears open for a prospect, then persevere. If the scam is good enough to raise money from the public, it may be plausible enough to attract an occasional lawyer, particularly if the lawyer’s need overcomes good judgement.

The task of recruiting a needy, gullible lawyer is occasionally made easier by the promise of big money, sometimes including fees or a small percentage of money directed to the lawyer’s trust account. Note this is “the promise” of big money. On those rare occasions when a scamster has succeeded in convincing a lawyer to assist with an investment scheme, little money is paid to the lawyer and it is often for legal services such as incorporation of companies. From the scamster’s viewpoint, this makes sense.

Scamsters have two ways of getting people to do what they want. Persuasion, which usually involves lying, is most common. This is easy, cheap and one of their strengths. They may even find it fun. The alternative is to actually pay for things. This is unpleasant, as the whole idea of the scam in the first place is to make a lot of easy money, not to pay it out. This is clearly to be used as a last resort. To the extent possible, the lawyer is usually paid in cheap promises rather than expensive money.

Crossing the line

Having a lawyer involved is a great convenience to a scamster, even if the lawyer is honest and believes that he or she is assisting with a legitimate investment scheme.

If the lawyer who is an honest dupe will send out money as directed, keep confidences and lend respectability to the exercise, this is well worth the scamster’s recruitment efforts. However, the real prize is to have a lawyer cross the line from acting as a lawyer to becoming an active participant in the scam. Sometimes, for example, money will come to the lawyer on trust conditions that make it awkward and difficult for the scamster to get at. If the lawyer can be led into breaching trust conditions, perhaps on the belief that the investment will soon pay off and all will be made right, the scamster may find it easier to access the money. At the point of realizing that all of this is a scam, the lawyer may be so compromised as to continue to cooperate out of fear that any earlier involvement in the scam will be revealed.

Holding the bag

No matter how sophisticated schemes sound and how plausible they seem to investors, inevitably they end in tears. The sad fact is that there is no way to make massive profits risk-free. Sooner or later, investors want to see some of the enormous profits they are expecting. Inevitably any trickle of money coming back to them as encouragement will stop. Most of the investments have likely been sent offshore and directed to who knows where, never to return.

The scamster has several options at this point. With a tidy sum socked away and hard questions being asked by investors, the scamster may decide this is a good time to relocate. Some may choose to remain and defend their good name, generally explaining that they had in good faith sent the money offshore to legitimate investments that unfortunately didn’t work out. Scamsters are unlikely to have local assets that might be vulnerable, and their foreign holdings will be highly confidential. The resources to deal with commercial crime in Canada are strained and the system very slow to act, so a scamster may well be able to stay, brazen it out and avoid charges, conviction or, at the very least, a significant sentence.

It’s a different matter for a lawyer. Lawyers are easy to find and may well have some personal assets. Even if they don’t, investors may think the deep pockets of the Special Compensation Fund or the Lawyers Insurance Fund make the lawyer worth pursuing. Indeed, the lawyer is often the only possible avenue of recovery for the now outraged investor. This is not to say the Lawyers Insurance Fund would cover the lawyer, it likely will not. The Special Compensation Fund is discretionary and covers only losses arising from the dishonest misappropriation or wrongful conversion of funds by a lawyer acting in that capacity. The lawyer may have absolutely no protection and may well face financial ruin alone.

The criminal law may not move against a lawyer who has not directly participated in a scam, but the Law Society likely will. Even if the lawyer has been honest in his or her dealings, the acceptance of investor money into the lawyer’s trust account likely created duties to the investor, at least a duty to warn that the lawyer doesn’t act for the investor. When the discipline process begins, there are interim remedies available to the Law Society, including the suspension of the right to practise until the citation hearing. Even if the lawyer acted perfectly honestly at all times, he or she will spend years trying to defend the conduct and clean up the mess to the extent possible, usually having received little except some fees, excitement and flattery. The lawyer is truly left holding the bag.

Questions to ask

For a lawyer to avoid having his or her reputation or trust account misused, these are some good questions to ask any potential client who is seeking assistance with an investment scheme:

Are the claims of investment returns too good to be true?

If so, it’s likely a scam.

Are you being asked to provide legal services for the money offered?

Scamsters don’t want legal advice, they already know it’s a scam. What they need is use of the trust account and the lawyer’s good name. If a prospective client doesn’t seem to need a lawyer except for the trust account, why is he in your office?

What is being offered to the lawyer?

Are you to be paid at an hourly rate? If so, for what services? An offer to compensate you by a percentage of money put through your trust account is not payment for legal services—it is treating you as a conduit.

The problem of lawyers being drawn into scams is a serious one for the financial integrity of the legal profession. The amounts these schemes generate are enormous, often in the millions. Once a scheme has collapsed, the Special Compensation Fund and Lawyers Insurance Fund maybe subject to claims which are also in the millions. Even if the claims are not covered, the process of investigation and consideration itself is extremely expensive.

For both the individual lawyer and the profession as a whole, participation in a scheme that turns out to be a scam risks disaster.