New ‘Traps’ Example: Vulnerability to fraud

Thursday, June 17, 2021
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The Massachusetts Bar Association is in the process of updating its Traps for the Unwary publication, a member-exclusive reference guide last published in 2011 that looks at some of the malpractice hazards for attorneys who practice in a general, civil practice. While the guide is nearing completion, we invite members to share any “traps” they’ve come across in their practice for possible inclusion in the next edition.

Share your trap suggestion by emailing it to Attorney James E. Harvey of O’Malley, Harvey & Brosnan LLP, who is again serving as editor-in-chief for the project and is working closely with liaisons from several MBA section councils.

To help you identify potential traps, the MBA will periodically publish excerpts from Traps for the Unwary in eJournal. View this week’s trap, plus previously shared examples, below.

TRAPS EXAMPLE: VULNERABILITY TO FRAUD

Lawyers who act as settlement agents or transfer agents for funds received from unfamiliar sources can be targeted in scams and suffer substantial losses. When a bank accepts a deposit and confirms that a deposited check has “cleared” (Note: “cleared,” not “collected,” an important distinction) and the funds are “available” to be withdrawn, it only means that the funds are available for use, based on Federal Reserve Reg. CC, 12 CFR Part 229, “Availability of Funds and Collection of Checks.” It says nothing about the ultimate collectability of the deposited item! If the item is returned unpaid by the issuing bank, which can take days or weeks, the bank will charge the depositor, who ultimately will be responsible for the collectability of the item. A lawyer who has already disbursed funds, perhaps by wire transfer, will suffer the loss, which could be sizeable. 

Wired funds cannot be retrieved. If a new “client” is in a hurry for payment and instructs the attorney to wire funds, an alarm should go off. When making payments, especially wire transfers, to anyone it is a good practice to double-check (1) that the payee is your actual intended payee and (2) that the funds for the payment have been collected by your bank. This is especially true when it is a new payee. See, e.g., Sarrouf Law LLP v. First Republic Bank, 97 Mass. App. Ct. 467, 148 N.E.3d 1243 (2020), where a scammer in the guise of a new client induced a law firm to wire money to the new “client” after the scammer’s colleague sent a large check to the firm in the course of the sale of equipment by the “seller” client to the “buyer” colleague. The check’s funds were “available” according to the firm’s bank, but the funds had not yet been collected by the firm’s bank. The check bounced after the firm wired funds to the scammer in another country, and the firm lost over $300,000. 

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