Keith Mack
Law firms can wire money, and wire transfers are a common method of accepting payment. However, there are several risks associated with this practice, including wire fraud, high fees, and the potential loss of funds. Law firms and their clients can be vulnerable to scams and cybercriminals, who use sophisticated methods to target valuable information and funds. As a result, it is essential for law firms to exercise caution and implement risk-management strategies to protect themselves and their clients from potential threats.
| Characteristics | Values |
|---|---|
| Common method of accepting payment | Yes |
| Risks | Loss of funds, exposure of the firm's bank account number, trust account violations, high fees, manual posting |
| Fraud risks | Email wire fraud, man-in-the-email-scam, phishing emails |
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What You'll Learn
Wire transfer fraud
Wire transfers, also known as bank transfers, credit transfers, or EFTs, are a common method of accepting payment for law firms. However, they come with significant risks and downsides for both the firm and its clients.
One of the biggest risks of wire transfers is the potential for the client to lose their money. Once a wire transfer is sent, it often cannot be reversed, even if sent to the wrong account or person. This irreversibility also makes wire transfers a preferred payment method for fraudsters.
Lawyers who work with real estate clients and/or wire funds as part of their practice are particularly vulnerable to wire transfer fraud. In the United States, the Federal Bureau of Investigation (FBI) reports that as much as $1.33 billion has been lost to fraudsters. A common scam involves a compromised email account from one or more parties to a transaction. The scammer assumes the identity of a party to the transaction and uses an email address that appears to be from the legitimate sender. They may even use caller ID so that their phone calls appear to be coming from a legitimate source. The scammer then requests that the attorney wire out the money, often hundreds of thousands of dollars, to the scammer's account. The money is quickly transferred by the scammer to an overseas bank before the scam can be uncovered and stopped.
To avoid becoming a victim of wire transfer fraud, it is recommended that attorneys:
- Exercise a healthy dose of skepticism whenever money is being wired to complete a transaction.
- Employ second-factor authentication via telephone calls prior to wiring funds.
- Be cautious of unexpected or last-minute requests for money transfers, especially to foreign countries.
- Verify the authenticity of such requests before taking any action, especially if being asked to act immediately.
- Be wary of offers that guarantee returns or promise “no risk” on investments in cryptocurrency, gold, or foreign real estate.
- Never wire funds to fix a supposed account problem, as legitimate businesses or financial institutions will never ask you to wire money to resolve an account issue.
- Be cautious of overpayment schemes, where you receive a check followed by a demand to wire back excess funds, as the check is likely bogus.
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High fees
Although wire transfers are a common method of accepting payment for law firms, they often come with high fees. Banks and other financial institutions typically charge substantial fees for sending and receiving wire transfers. For instance, a US bank charges $14 to receive a domestic wire for a business and $40 for a business to send one. International fees are even higher. As a result, for a client to send money to a law firm and for the firm to accept it, there is a combined cost of $54.
In addition to the financial cost, wire transfers can also be time-consuming and cumbersome for both the client and the law firm. They require extra steps such as manual posting, which can be a hassle for busy law firms. Furthermore, there is a risk of loss of funds during the transfer process. If the client accidentally sends money to the wrong account, they may not be able to recover the funds. This can result in a significant financial loss for the client and create complications for the law firm.
Moreover, wire transfers can expose the law firm's bank account number. If a client forwards an invoice with wire instructions to the wrong recipient, the recipient can use the information to take money from the firm. This type of fraud is a growing threat to law firms, with cybercriminals targeting them due to the perception of valuable information and significant funds held by the firms. Law firms must be vigilant and implement robust risk control and IT practices to protect themselves and their clients from potential scams.
To mitigate the high fees associated with wire transfers, law firms can explore alternative payment methods or work with financial institutions that offer competitive rates for wire transfers. They can also provide clear instructions and guidance to clients to help them understand the process and potential risks involved. By being transparent and proactive, law firms can help clients make informed decisions about payment methods and potentially find more cost-effective solutions.
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Loss of funds
Wire transfers are a common method of payment for law firms, but they come with certain risks. One of the biggest risks is the potential for the client to lose their funds. Once a wire transfer is sent, it often cannot be reversed. This means that if the client accidentally sends money to the wrong account, they may not be able to recover their money.
In 2017, Dentons Canada, the largest law firm in the world, fell victim to a scam and wired $2.52 million of client funds to a fraudulent account. The firm had been involved in a real estate transaction with Timbercreek Mortgage Servicing Inc. and was supposed to transfer the money from its trust account to the client. However, Dentons received emails from people claiming to be affiliated with Timbercreek, stating that one of their accounts was being audited, and requesting that the money be sent to an international account in Hong Kong. Dentons attempted to verify the information by leaving a voicemail and seeking letters of authorization, and when they received what appeared to be legitimate authorization letters, they proceeded with the transfer. It was only when Timbercreek enquired about the money several weeks later that Dentons realized their mistake.
To avoid such scenarios, it is important to educate clients about the risks associated with wire transfers. Clients should be informed that any document containing wire instructions is sensitive and should not be forwarded to individuals they do not trust. They should also be encouraged to verify suspicious requests to wire money and to contact the firm using known emails or phone numbers if they have any doubts about an invoice's validity. Additionally, attorneys should be vigilant about potential wire fraud scams and exercise skepticism when wiring large sums of money. Implementing second-factor authentication via telephone calls prior to wiring funds can also help to uncover potential fraud.
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Trust account violations
Trust accounting is a tedious but important part of practicing law. Lawyers need to be aware of all laws and rules when dealing with these accounts, as mistakes may come with serious repercussions. For example, in Florida, the Supreme Court has recently disciplined hundreds of attorneys for violating Bar rules, with several of those sanctioned having committed trust account violations. While each jurisdiction has its own requirements, the main rule is that funds in trust must not commingle with the firm's funds.
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Risks and downsides
Wire transfers are a common method of accepting payment for law firms, but they come with several risks and downsides.
One of the biggest risks is the potential loss of funds. Once a wire transfer is sent, it often cannot be reversed. This means that if the client accidentally sends money to the wrong account, they may not be able to recover the funds. This risk is heightened by the prevalence of wire fraud scams, which can result in significant financial losses for lawyers and/or their clients. Scammers can compromise email accounts and assume the identity of one of the parties to the transaction, providing fake wiring instructions to redirect funds to their own accounts. Law firms must be vigilant and employ measures such as second-factor authentication via telephone calls to mitigate this risk.
Another downside is the exposure of the firm's bank account number. If a client forwards an invoice containing wire instructions to the wrong recipient, the recipient can use the information to take money from the firm's account. This risk is heightened if the client's email is compromised, as scammers can alter wiring instructions and resend the invoice to the client.
Wire transfers are also associated with high fees. Banks and financial institutions typically charge significant fees for sending and receiving wire transfers, resulting in increased costs for both the client and the law firm.
Additionally, there is a risk of trust account violations. Since law firms are not notified when a client sends a wire, a client with access to wire instructions for both the trust and operating accounts can mistakenly or intentionally send unearned funds to the operating account. This misallocation of funds may go unnoticed until the next operating account reconciliation.
Finally, law firms must also be vigilant to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. Lawyers are at risk of being exposed to money laundering activities, as perpetrators may seek legal assistance to legitimize their illicit financial transactions. Compliance officers within law firms are responsible for monitoring client activity, keeping secure records, and reporting suspicious transactions or behaviour to the authorities. Non-compliance with AML obligations can result in severe consequences, including criminal charges and loss of license.
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Frequently asked questions
Wire transfer fraud is a type of scam where scammers target lawyers by sending forged emails to law firms, their clients, or financial institutions, instructing them to wire funds to accounts controlled by the scammers.
Scammers compromise the email account of one or more parties to a transaction, often a real estate or commercial transaction. They then use an email address that appears to be from a legitimate sender but with a slightly altered domain name. They instruct the law firm or client to send funds to a specified account, and the money is quickly transferred by the scammer to an overseas bank.
Wire transfers can expose law firms to high fees, loss of funds, and potential trust account violations. Additionally, there is a risk of wire fraud, where scammers can alter wiring instructions and redirect funds to their own accounts. Law firms must also be cautious about maintaining the confidentiality of client information and safeguarding client funds.
