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WIRED IN – WIRED OUT; International Crime Rings Target U.S. Law Firms
By Mark Albright and Troy Fox
The email memo arrives at the law office, and sounds like many others that arrive during the day
soliciting legal services. A potential commercial client, albeit located overseas, needs some legal
assistance collecting on debts from their customers located in the U.S. They may be willing to pay
on a contingency fee basis or hourly basis. They explain that generally their slow paying
customers will pay once counsel is obtained in the U.S. and a little bit of pressure is applied. It
makes sense, the law firms sends off a client fee agreement and it comes back signed. Later
names and addresses, and perhaps telephone numbers of several customers located in the U.S.
arrive at the law office. Due diligence performed by the law firm on the internet indicates that the
new client is a major manufacturer in Europe or Asia. The web pages of the customers are
similarly impressive. A telephone call indicates that the slow paying customer is willing to pay the
client via the law firm. The cashiers check arrives shortly. It seems to be a potentially lucrative
client for the lawyer.
Then the scam kicks into high gear. The client, located overseas, desperately needs the funds for
some major deadline approaching, perhaps to pay suppliers to meet new orders. With the
cashiers check from the customer in the bank after several days, the law firm doesn’t hesitate to
wire the funds over seas, often to a bank in China. The law firm, just to be extra cautious, waits
three days to make sure the check clears, and perhaps even has its own bank call to verify that
the funds exist in the customer’s account. Then disaster strikes. It is later discovered, days,
weeks or even months after the check is deposited in the law firm’s trust account, that the check
was a counterfeit, or worse, a forgery, which explains why both banks involved thought it would
clear. Depending upon how many days have transpired, the conspirators, in what is likely a large
international organized crime ring, have disappeared. The funds were probably wired out the
moment they arrived in an Asian or European bank to who knows where, making it difficult, if not
impossible to trace the money, let alone trying to freeze the account by court order. The law firm
desperately tries to locate counsel in the city where the funds were wired to, but it is difficult to
locate an attorney willing to act immediately due to time zone and language differences. The cost
of Hong Kong counsel often exceeds the rates charged by large New York firms. The depositor
bank in Asia refuses to voluntary place a hold on the account without a court order due to the
local banking laws and customs. Indeed, due to privacy concerns, most Asian banks will not even
voluntarily acknowledge if the funds even exist without a court order.
The law firm has been the victim of a growing scam targeting litigation and collection attorneys
throughout the U.S. It’s a new twist on an old scheme, which has most of the appearances of a
legitimate collection case. The crime ring must create and maintain sophisticated web pages for
both the fake client and the fake customers. It must have people available to answer phone calls
placed from the law office to either the client or the defendant/customer. But with call forwarding,
this is a simple matter and the phones may be answered anywhere in the world, perhaps in an
empty room in Shanghai or Hong Kong. With Court delays of just two or three days, the money
has usually disappeared, along with the participants in a well oiled crime ring, who are ready to
send hundreds of new emails soliciting hundreds of new unsuspecting lawyers throughout the
Country. The danger of the scam is that it can change and mutate into hundreds of apparently
legitimate variations and locations; a movie producer in Japan hasn’t been paid by customers in
New York, a furniture manufacturer in Taiwan needs to recover unpaid invoices from a retailer in
Chicago, a jeweler in London needs a letter sent to Los Angeles, a pipe supplier in Germany
needs just a phone call to his customer in Denver.
Organized check fraud has been on the rise. A report from the American Bankers Association in
1994 found that from 1991 to 1993, dollar losses to financial institutions because of fraudulent
checks and other negotiable interments rose to $815 million annually. Major financial institutions
attribute at least half of that total amount to organized groups. At least one source has found that
more than 1.2 million worthless checks are accepted for payment every day. Many of the
organized groups, while also involved in white-collar crime, drug crimes, and even violent crimes,
find check-fraud crimes to be what are considered "safe" crimes because it carries a low risk of
being caught and minimal penalties even if they are caught.
There are some red flags that law firms should be aware of so they can avoid being a victim of
this organized crime. One of the red flags to watch for is that neither the client nor its customer
resides in the same jurisdiction as the attorney. That would make it too easy for the law firm to
send a runner over to the local address to verify the authenticity of the addresses and business
locations.
Another flag to watch out for is a swarming effect. It seems that often, once a law firm expresses
an interest in or signs up one of the scammers, additional scammers almost immediately begin
contacting the firm. An FBI agent in Cleveland Ohio reported that law firms in Ohio have lost
between $100,000.00 and $500,000.00 apiece from these types of scams. (Sheryl Harris, The
Plain Dealer, "Law firms defrauded in collection scam" Dec. 5, 2007). The end result of this
swarming behavior is that a single law firm could easily receive several large counterfeit or forged
checks within a single week. The plan of the conspirators is to have all of the funds wired
overseas before the unsuspecting collection attorneys discover the fraud. Given the large amount
of money involved with each of these check, even the largest of law firms can be devastated by
these scams.
So why don’t either US or foreign banks catch this problem more often? The biggest reason is
that the checks not only look real, but they seem to be from accounts that actually have the funds
necessary to support the check. Both the receiving and paying bank have no reason to suspect
the checks aren’t going to clear. It isn’t until the customer of the account contacts the bank
claiming they didn’t approve of the check, that any bank is aware of the forgery. So how much
time does a person have to bring the forgery to the attention of the bank? The answer is covered
by the Uniform Commercial Code (UCC). The UCC 4-406 does impose on the customer a duty to
"exercise reasonable promptness in examining the statement [from the bank] …to determine
whether any payment was not authorized because of an alteration of an item or because a
purported signature by or on behalf of the customer was not authorized." U.C.C. 4-406(c). So
what is reasonable promptness? Well further down in section 4-406(f), the code says:
"Without regard to care of lack of care of either the customer of the bank, a customer who does
not within one year after the statement…[is] made available to the customer discover and report
the customer’s unauthorized signature on or any alteration on the item is precluded from
asserting against the bank the unauthorized signature or alteration." (emphasis added)
While "reasonableness" in the code is almost always situational, at least one interpretation that
some banks hold is that the customer has up to one year to discover the forgery. Now this might
seem an unfairly large time, and in many circumstances it is. However, one must remember that
in very large companies, even $500,000 errors might not be discovered until annual accounting or
audits. The UCC keeps the bank at risk for up to one year because the customer may report the
unauthorized signature for up to one year after the customer receives the statement. The bank
passes that risk onto the customer law firm.
Sadly, there isn’t much a law firm can do to protect themselves from these scams, or recover if
they have been a victim of one of these scams. While there is insurance for third party fraud, it
may be cost prohibitive for many firms
If the firm has been a victim of one of these scams, it may be possible to hire counsel overseas.
However, that too may be cost prohibitive for many firms.
It is usually appropriate to contact the Postal Inspector’s Office, specifically the Fraud Complaint
Unit, because most of the times the fraudulent cashiers checks have come through the mail. Also,
contacting and filing a complaint with FinCEN (the Financial Crimes Enforcement Network) may
lead to investigation into these types of crimes. However, these crime rings are extremely difficult
to defeat because they are multi-headed. Even when one member is sued, or when one member
of the ring goes on the run and is identified by federal authorities, the rings continue to operate.
They will continually move their bases of operation, which makes it difficult for authorities to pin
them down. One firm recently sued the owner of the key account in Hong Kong, which caused the
local member of the ring to flee the jurisdiction. Nevertheless, other members of the ring, at other
locations and in other jurisdictions, continued to solicit U.S. law firms, using the same bogus
clients and customer names.
The crime rings spend so much time and effort into creating the web pages, client lists, contact
information, etc., that they do whatever they can to keep going. Once a group knows they have
been detected and are being investigated or if they discover that the name they are using has
been identified as a fraud, they simply make changes to the names they are using. Instead of
redoing an entire web site, they simply change the name and the domain and continue using the
same page layout they have already developed. They will also change the name of the alleged
company that is soliciting the law firm, and re-register names, company information, and e-mail
addresses.
However, such changes do provide another potential red flag. When a soliciting company has an
e-mail address that is a generic free e-mail ending like yahoo.com or hotmail.com, this should
raise a red flag. Most companies now have their own domains that are more easily traceable than
free yahoo, hotmail or other free e-mail services. Another red flag to watch for is that the
scammers often mail the law firm a cashier’s check from Canada, making it more difficult for the
authorities to trace.
An additional possible solution would be to send a check as opposed to wire money. This will buy
the firm some time to conduct more of an investigation. It also gives the bank more time to
confirm the cashier’s check. If a fraud is discovered, then the firm can put a stop payment on the
check, hopefully before the money has disappeared. Prudence would dictate that a firm list in its
agreement that no check will be issued on deposited funds for 45 days. This does not provide a
100% guarantee of detecting fraud, but generally provides enough time for the banks to ascertain
whether the negotiable instrument is a possible forgery or counterfeit.
Perhaps the best solution for a law firm to adopt is a "wired in – wired out" policy. That is, a law
firm policy that only money that has been wired in will be wired out to customers, particularly to
new clients located overseas. While this may make some transactions more difficult, it also
provides some protection from being victimized by this type of collection fraud. Nevertheless, one
type of new scam for money laundering targets law firms, where the overseas clients request the
firm to collect monies from subsidiaries and wire to Asia. Hence, law firms need to be constantly
vigilant to protect against not only scams but money laundering schemes as well. Such a policy
should be written into the retainer agreements which any law firm uses with new clients,
especially overseas clients. Exceptions can be made for long term clients the law firm knows and
trusts. If a new client is unwilling to accept such a term, then it might be better to simply not do
business with that particular client.
Reprinted by permission of Mark Albright and Troy Fox

Hello,
The information you provided is really interesting this is right that anyone can be a victim so don't take any risk just prepare yourself to bear this problem.