Verify the withdrawals from your accounts
LAWPRO has received claims from lawyers who fell victim to fraudsters diverting and depositing cheques meant for their clients. In two cases to date, lawyers issued cheques to their clients as part of their professional services. However, in both cases, an identical amount was withdrawn from the lawyer’s trust account but payable to a third party. The banks initially refused to assist and recommended the lawyers contact their insurance company.
Both lawyers reported a claim to LAWPRO; one just under $130,000 and the other under $30,000. In the latter case, the fraudsters attempted to deposit multiple cheques for the same amount to different payees. Unfortunately, LAWPRO does not generally cover this type of loss. Coverage under the policy applies when a lawyer does something wrong or fails to do something required. The lawyers did not have additional commercial insurance to cover the fraud-related loss.
Eventually, the banks reimbursed the lawyers (one only in part) for the fraudulent withdrawal. Timing is crucial – lawyers are required by the Law Society to immediately cover any deficiency in their trust account using their own funds. It’s important to remember that banks are only required to verify the account number provided for the deposit is valid – they do not have to confirm that the account holder’s name matches that of the intended recipient or any other details on the cheque. While banks used to verify signatures and ensure that the recipient’s name matched the account holder, they are not doing so now.
In one instance, a lawyer was informed that they had 24 hours to notify the bank of any discrepancies in their statement, after which it was the lawyer’s issue to resolve on their own. The lawyer could see online the amount withdrawn but not by the intended recipient, as the payee name had been changed. The lawyer could pay $5.00 to view the deposited cheque or upgrade their banking plan to automatically include the viewing of deposited items.
LAWPRO contacted Payments Canada who sets the rules for fund transfers and have been advised that:
“Rule A4, section 5 states: Subject to section 6, each Item being returned must be returned by the Drawee, to the Negotiating Institution, as set out in section 11, no later than the Business Day following receipt by the first organizational unit of the Drawee that is able to make or act upon a decision to dishonour the Item.
Exceptions (only included exceptions that could be considered fraudulent):
- Subject to subsection 7(c), Items may be returned for the reason “Forged Endorsement”, as per section 15, up to and including 6 years after being received by the Drawee;
- An Item that is being returned for the reason “Duplicate Payment Item” may be returned up to and including 90 calendar days after being received by the Drawee;
- An Item may be returned for the reason “Material Alteration”, as per section 15, whether it is apparent or not, up to and including 90 calendar days after being received by the Drawee; and
- An Item that is being returned for the reason “Intended Payee(s) Not Paid”, as per section 14, may be returned up to and including 6 years after being received by the Drawee.
As I understand these rules, lawyers have 90 days to return any withdrawal if the cheque has been materially altered, and changing the name of the recipient should qualify as a material alteration. Further, if a deposit was made via the remote deposit feature in an app, the 90-day return rule would apply if it were a duplicate payment.
Lawyers should regularly verify their accounts to ensure no unauthorized payments are made. This means not only checking the transaction amount but also the name of the recipient. You might want to verify what information your bank provides you with and when, so you can flag for review, identify and report any discrepancy to your bank as soon as possible.
When verifying unauthorized withdrawals, lawyers should review the following:
- The recipient’s name and amount of the cheque;
- Your signature on the cheque – is it yours, similar or completely different?
- The sequence number of the cheque – does it follow the series your office is issuing?
- The watermark on the cheque – if you order your cheque from the bank, it should have their watermark in the background; and
- Is there an endorsement on the reverse side of the cheque?
These details can assist you to demonstrate to the bank that it is their error, and they should immediately reimburse your account. They may investigate and delay the reimbursement, but they should not arbitrarily dismiss your request.
I invite you to contact me if you have any questions or wish to discuss your situation at [email protected] or [email protected]
Be vigilant and ensure to verify all withdrawals from your accounts as soon as possible.
This article is by Ray Leclair, VP, Public Affairs at LAWPRO