In June 2022, the FBI and Internet Crime Complaint Center (IC3) issued a warning about a new wire fraud scam involving attorney trust accounts and the acquisition of medical equipment that resulted in approximately $2 million in losses. See https://www.ic3.gov/Media/Y2022/PSA220630. IC3 described in the warning a fairly complex twist to previous wire fraud and trust account scams.
How the Scam Starts
A bad actor posing as a would-be client approaches an attorney through a professional networking site to request legal representation in reviewing a commercial transaction and serving as an escrow agent. The bad actor(s) then poses as one or more legitimate participants in the commercial transaction – such as the broker, lender, buyer, or seller. The bad actor provides the attorney with what appears to resemble legitimate names and contact information for the companies and individuals involved in the underlying transactions. Most of the companies and individuals involved, however, are fake as the emails, invoices, or transaction documents contained a slightly different spelling from the real company, person, or address.
How the Scam Works
The bad actor/client tells the attorney that funds will be wired to the attorney’s trust account and the attorney will serve as the escrow agent for funds to purchase very specialized medical equipment as part of the transaction. The bad actor hacks the business email of a third-party, which results in successive wire transfers of almost $2 million to the attorney’s trust account that represent the loan proceeds for the equipment. The bad actor, while posing as the lender/client, pressures the attorney by instructing that the fraudulently obtained funds be disbursed to the purported seller of the medical equipment. The lender also provides the attorney with bogus invoices from the seller showing purchase of the equipment to the purported buyer, a medical facility. The attorney, being pressured, acts on these instructions and quickly disburses the funds to an account controlled by the bad actor without ever independently communicating with the seller or buyer in the transaction.
Why the Scam Works
This particular scam worked for a number of reasons. The bad actor enticed the attorney with a large commission on the transaction. This attorney (a small solo practitioner) may have been in need of a new client, and experiencing low cash flow, took shortcuts without independently verifying information about the client or the participants in the transaction. Had the attorney conducted basic due diligence, the scam would have been over quickly after it started. A simple internet search by the attorney of the names and addresses of the underlying companies and participants would have revealed the broker and lender were not legitimate. A Google Maps search of the address for the lender showed a “marina” and the address for the “broker” was a demolished Chinese restaurant. A simple phone call by the attorney to the actual seller of the medical equipment would have revealed that the sale was also not legitimate. The real seller of the medical equipment had no knowledge of the sale and did not offer this specific type of equipment for sale. All red flags that could have alerted the attorney to the scam.
Who has Legal Liability?
In fraudulent wire transfer cases, courts have adopted and applied what is commonly known as the Imposter Rule to allocate loss between parties that were not the perpetrators of the fraud itself. See, e.g., Beau Townsend Ford Lincoln, Inc. v. Don Hinds Ford, Inc., 759 Fed. App’x 348, 354 (6th Cir. 2018); Parmer v. United Bank, Inc., No. 20-0013, 2020 WL 7232025, at 6 (W. Va. Dec. 7, 2020); Jetcrete N. Am. LP v. Austin Truck & Equip., Ltd., 484 F. Supp. 3d 915, 920 (D. Nev. 2020); J.F. Nut Co., S.A. de C.V. v. San Saba Pecan, LP, No. A-17-CV-00405-SS, 2018 WL 7286493, at 3 (W.D. Tex. July 23, 2018); Arrow Truck Sales, Inc. v. Top Quality Truck & Equipment, No. 8:14-cv-2052-T-30TGW, 2015 WL 4936272, at 4−6 (M.D. Fla. Aug. 18, 2015). Under the Imposter Rule, courts assess the totality of the circumstances to determine which “innocent” party was in the best position to avert the fraud and should be held liable for the resulting loss. See Beau Townsend Ford Lincoln, Inc., 759 Fed. App’x at 354 (explaining that the losses due to a third party’s fraud “should be borne by the party in the best position to prevent the fraud”).
Here, the attorney and the legitimate entities were not perpetrators of the scam itself. However, the attorney is likely legally responsible for the loss of almost $2 million as the person in the last best position to prevent the fraud from occurring and having wired the funds to the bad actors’ account without conducting basic due diligence.
Ethical Implications for the Attorney
But wait, wire fraud scams do not end with potential legal liability for attorneys and law firms. Rather, these scams can also result in ethical and disciplinary implications from State Bars. In the Fall 2021 edition of the North Carolina State Bar Journal, the Grievance Committee warned North Carolina’s practitioners “who fail to take adequate precautions to protect against wire fraud scams can expect imposition of more serious professional discipline.” See https://www.ncbar.gov/media/730651/journal-26-3.pdf at page 24.
Five Steps to Prevent Wire Fraud Scams
IC3 noted in its June 2022 warning that this particular scam worked because the attorney failed to verify information, did not follow firm policies, or wait for funds to clear. Here are some best practices for attorneys and law firms to follow:
- Verify the identity of the client or participants in the engagement or transaction by phone, video call, or internet searches. Relying on email alone to establish a client or entity is legitimate can lead to bad outcomes with the prevalence of hacking and business email compromises.
- Ensure the URL in email addresses is associated with the actual business/individual it claims to be from.
- Be alert to email addresses or contact information that may contain slight misspellings of the actual name or addresses.
- Be skeptical about wire fraud transactions and instructions that are communicated by email.
- Before sending any funds by wire based upon an email, use a secondary method to verify the wire instructions by calling the person first. Do not use the contact information contained in the potentially fraudulent email. Rather use the person’s prior contact information or available on the internet.