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Check Scams That Target Lawyers: How Check Scams Work and How to Avoid a Loss by Bob Luttrell | McAfee & Taft - JDSupra
Check Scams That Target Lawyers: How Check Scams Work and How to Avoid a Loss by Bob Luttrell
This article first appeared in OBA E-News - March 30, 2010.
Numbers of lawyers, and the general public, are being targeted with ascam that goes something like this: A message, usually e-mail, arrives requesting services or wanting to buy goods. The sender usually checks out in an Internet search. (Web sites aren’t that hard to set up.) At somepoint a check arrives in what appears to be a legitimate business trans-action. The check may be in response to a demand letter from a lawyer in the payment of a claim or as a retainer to pay for services in advance orfor the purchase price of a car. You get the picture. The check looks and feels like a real check, maybe even a cashier’s check. Usually, it purports to be issued by (or drawn on) a bank at a remote location with no local branches.
Article authored by McAfee & Taft attorney: Bob Luttrell.
Check Scams That Target LawyersHow Check Scams Work and How to Avoid a LossOBA E-News -March 30, 2010By Bob LuttrellNumbers of lawyers, and the general public, are being targeted with ascam that goes something like this: A message, usually e-mail, arrivesrequesting services or wanting to buy goods. The sender usually checksout in an Internet search. (Web sites aren’t that hard to set up.) At somepoint a check arrives in what appears to be a legitimate business trans-action. The check may be in response to a demand letter from a lawyer inthe payment of a claim or as a retainer to pay for services in advance orfor the purchase price of a car. You get the picture. The check looks andfeels like a real check, maybe even a cashier’s check. Usually, it purportsto be issued by (or drawn on) a bank at a remote location with no localbranches.Almost immediately after the check arrives, there is a request to sendpart of the funds by wire transfer. The client may want the amount collected less fees. The client may haveoverpaid the retainer and want a refund. The car buyer may have paid for shipment and now says theyhave taken care of this expense directly and would like a refund.Once the funds are wired, they are almost impossible to recover. UCC §4A-211. The wire is usually to anaccount in another country. And, in any event, the funds are typically again wired to another institution outof reach as soon as they hit the designated bank. So, the victim is left to hope that the check is “good.” Itnever is.These scams work because of a basic misunderstanding of how checks are collected and when the fundsrepresented by those checks are “good,” i.e. they cannot be reclaimed. Because of complaints that depositswere not available for use in a timely manner, Congress adopted the Expedited Funds Availability Act (12USC §4001-4010). The Federal Reserve Board adopted Regulation CC (12 CFR §229.1 et seq.) toimplement it. Among other things, they mandate the latest time when funds of various types of depositsmust be “made available” to the depositors. Funds from cashier’s checks must be “made available” withintwo business days. Many banks have adopted shorter “availability schedules.” These schedules do not bearany relationship to how long it may take to discover that a check will not be paid.Checks that are “sent through clearing” (all deposited checks) do not have positive confirmation ofpayment. The funds become “available” for withdrawal based on the bank’s availability schedule (with themaximum limit governed by FRB Reg CC). “Available” funds do not equal collected funds. A check can bereturned after the funds have been “made available.” Having the funds “available” is not the same asknowing that the check has paid. If a check is sent through clearing, you get a negative confirmation thatthe check is not paid when it is returned. This will generally take three to four days at best. The check ishandled electronically. Scammers gain additional time by using a fake bank routing number. Then, thecounterfeit check bounces around in the clearing system until it kicks out to get human attention. In thosecases, the check can take a week or more to find its way back to your account.Numerous time frames are thrown out about when it is safe to “assume” that a check is “good:” “midnightdeadline,” 11 days or a week. There really is no time after which it is safe to assume that the check haspaid. (Obviously the longer the time, the more likely it has paid. But that is a rule of probability, not a ruleof law.)The best practice to be safe is to go to your bank and ask to send the check for “collection.” Ninety percentof the tellers may not know what you mean. This is done all the time with oil and gas lease drafts. UCC 4-501. When you finally find someone who does, the check will go out of the bank under a “collection letter,”not “through clearing” under a “cash letter.” Then you will receive positive confirmation some days laterthat the check has been paid. As you would expect, there is a fee for this special handling.Some people want to talk to the bank and rely on what the bank “said.” What the bank “says” may not bewhat the customer “hears.” When talking to the bank, either the depositary or the payor, the customermust listen carefully to the “bank speak.” All the payor bank will generally say is that “a check in thatOKLAHOMA CITYTENTH FLOORTWO LEADERSHIP SQUAREOKLAHOMA CITY, OK 73102-7103(405) 235-9621 office • (405) 235-0439 faxTULSA500 ONEOK PLAZA100 WEST 5TH STREETTULSA, OK 74103(918) 587-0000 office • (918) 599-9317 faxamount will clear at this time,” not that “we will pay your check when presented.” Or the depositary bankwill say that the “funds will be available on,” not that “these funds are good.” Any commitment that aparticular check represents “good” funds and will be paid according to its terms should be in writing. Thatwill clear up the ambiguity. I have never seen a bank give such an assurance.To recap, the standard check collection process contains no positive feedback that a check is “good.” If adepositor wants to know that a check has paid, the check should be sent by the bank “for collection.” Thenthe collection is outside the normal system and a positive response “up or down,” as they say ingovernment, is received. There are lots of ways for the bad guys to trick the regular check collectionsystem so that a check may bounce around for days or weeks before it finds its way back. If the money isgone, the depositor is liable. See UCC §3-415 and the bank’s deposit account agreement.As a further aside and to keep you up at night, the way some of these scams work is to alter a legitimatecheck. In such a case, a claim against the depositor for breach of warranty can exist for as long as threeyears. UCC §§4-111 & 4-207(a)(3). Altered checks are usually, but not always, caught within about 60days. But that is well outside the time that lawyers would be required to forward client funds. MRPC Rule1.15(d). This warranty liability cannot be disclaimed by a non-recourse endorsement. UCC §4-207(b). Itmay be possible to disclaim this warranty in the collection letter by sending the check “without recourseand disclaiming any warranties created by the contract of endorsement,” but that is an open question.In the days of a flat world it may be increasingly difficult, but the way for lawyers to keep out of trouble isto know their client.This article appeared in the March 2010 issue of OBA E-News. It is reproduced with permission from the Oklahoma BarAssociation.LinksBob Luttrell's Bio