Timely Reconciliation Alerts Firm to Trust Account Fraud

In Vermont, client trust accounts must be reconciled no less than monthly.  In addition to being required by the rules, timely reconciliation can help to alert a lawyer or law firm to trust account fraud.

Last Friday, an employee of a Vermont law firm reconciled recent trust account activity.  Reviewing digital copies of checks presented against the account, the employee discovered three fraudulent checks.

I’ve seen images of the fraudulent checks.  They look almost exactly like the firm’s real checks. Each includes the firm name, address, account number, routing number, and a forged signature of one of the firm’s partners.

The employee caught the fraud because two of the checks were duplicates.  That is, each was the same number as a legitimate check that the firm had issued.  The third bore a number that was well outside the range of the firm’s current checks.

Each fraudulent check had been negotiated using a mobile banking app.  The mobile deposits were to accounts at a different bank than where the firm’s trust account is maintained.  Many thousands of dollars were stolen. It seems that the fraud occurred outside the United States as two of the fraudulent checks were dated using the “dd/mm/yy” construct.

The law firm immediately notified its bank and law enforcement.  Funds that remained in trust were transferred to another account.  A few legitimate checks remain outstanding. The bank agreed not to honor them without contacting the firm for approval.  As of last night, it appears that the banks are going to make good on the funds fraudulently obtained from the firm’s trust account. The firm and the bank are discussing whether the bank can make it so that the firm’s trust account checks cannot be negotiated electronically.

The situation shows the importance of timely reconciliation. The employee discovered the fraud within days of it happening.  It’s also an example of the importance of “actual” reconciliation.  Don’t just glance at the statement and conclude that the balance “looks about right.”  That is not reconciling.  An actual reconciliation includes reviewing each and every transaction on the account.

As always, be careful out there.

Related Material

Videos:

• Don’t Fear, Simplify.  (25 minutes)
• Basic Requirements(41 minutes)
• Contingent Fees, Referral Fees & Fee Sharing(22 minutes)
• Flat Fees, Misappropriation & Trust Account Scams(35 minutes)
• Collecting & Disbursing Funds(33 minutes)

Blog posts:

• Back to (trust account) school
• Safeguarding Client Funds: Tech Competence & Mobile Payment Apps
• Taylor Swift & Trust Accounts: Don’t Say I Didn’t Warn Ya
• Disbursing without Collected Funds
• Mobile Payments & Legal Fees
• Trust Accounting Tips
• Trust Account Scams Continue
• T.I. & Jack Torrance: an overview of the trust account rules
• Third-Party Claims against Client Funds
• With trust accounts, verify
• Misappropriation: Don’t.
• Trust Account Tuesday: Nonrefundable fees
• Teddy KGB on prompt notification and delivery
• When a third-party asserts an “interest” in funds held in trust
• Trust Account Tuesday: (generally) don’t disburse absent collected funds.
• Trust Accounting: Basic Requirements
• Trust Account Tuesday: Don’t Commingle
• Trust Accounts & ACH Transfers
• Trust Account Scams: Change in Wire Instructions? CAUTION!!!!
• Don’t overcomplicate trust accounting.

Resources

• The Professional Responsibility Program’s Guide to Managing Trust Accounts