The Advisory: Volume 8, Issue 5, December 2010
Client Verification Rules and Fraud Prevention
By Nancy Carruthers, Practice Advisor, Law Society of Alberta
FRAUD IS OF increasing concern to Alberta lawyers and the Law Society of Alberta. Mortgage and real estate fraud have long been identified as an issue of particular concern to our real estate lawyers, as well as to lenders and property owners. Lately, however, we have all received the Law Society e-mail notices, advising of the latest attempts by scam artists to defraud our lawyers.
The typical scheme involves someone from a foreign or remote jurisdiction, writing or emailing to a lawyer and asking for representation in a matter involving debt collection or financing. There is no advance call from the unsolicited client, the lawyer may or may not practice in that area of law, and/or there may be no logical connection between the lawyer’s geographical location and the client’s matter. In the debt collection matters, the delinquent debtor too readily sends payment to the lawyer, while the eager creditor asks for immediate payment from the lawyer’s trust account – minus the lawyer’s fee, of course.
Sometimes the “client” sends a cheque or draft, asking that the lawyer deposit it into a trust account and later asking the lawyer for some form of payment. Sometimes the client purports to have been referred by a trusted representative or agent in Alberta, or even a lawyer in another jurisdiction, in attempt to make the lawyer think that they are a legitimate client.
All these efforts are directed at obtaining funds from a lawyer’s trust account, leaving the lawyers with a shortfall when they release funds to a client and later discover they have relied on fraudulent cheques or bank drafts.
Our client identification and verification rules were implemented December 31, 2008, in response to pressures from the federal government in its fight against money-laundering and terrorist financing. These rules do, however, assist lawyers in preventing and protecting themselves from more basic fraudulent schemes. Before cash is received from or on behalf of a purported client for a debt collection matter or purchase and sale, the lawyer must identify and verify the client, which means the lawyer must obtain basic contact information as well as a copy of identification to confirm the client’s identity and address. The lawyer must either meet the client face to face or, failing that, must engage a guarantor or agent to obtain a copy of the identification by meeting the client face to face and preparing a written attestation.
Also remember that the client identification and verification rules apply to “third parties”. You are expected not only to verify the identity of the individual client instructing you, but also a third party if they are directing or instructing that client. These third parties include principals who may be represented by agents, or donors who have granted power of attorney to others, who then instruct counsel.
If purported clients are told that identification is required, many will move on. Their hesitation to provide identification should serve as a warning sign. In some cases, individuals have attempted to send copies of passports or other documents directly to lawyers. The documents were suspicious in appearance and were not accompanied by an attestation of an appropriate agent or guarantor.
It is not enough to simply obtain and copy the identification – look at it and make sure the photos and names match the individuals in front of you. Check their signatures, addresses and their dates of birth. If relying on guarantors or agents, do some due diligence to ensure their authenticity and reliability as well.
Try to talk to the client directly, over the phone, or even using Skype or other videoconferencing tools, rather than relying solely on email. Get to know the client and understand the motivation behind the transaction. If the client alleges they have been referred by someone, ask to speak to the referral source to determine how well they actually know the client, if at all.
If relying on a client’s cheque or bank draft, call the issuing bank, using a phone number other than the one on the document. If the cheque is written on the account of a corporation, call the corporation at an independent telephone number, rather than the one provided on the cheque. You can also ask for assistance from your financial institution. Do not pay out funds until the cheque has cleared.
There is an exemption in the client verification rules with regard to electronic fund transfers. Lawyers should read the rules and be familiar with their application. Lawyers should, however, be very cautious about providing details of their trust accounts to others, and should not assume that funds received by electronic transfer or direct deposit are more reliable. Not all electronic fund transfers are the same and, if there has been reliance on a forged or fraudulent document, the bank may reverse the deposit transaction after you have released funds in reliance on that deposit.
Train your staff so that they will be your allies in following the client identification and verification rules and identifying potential frauds. Read Law Society bulletins and fraud alerts regarding suspected fraudulent schemes that may be of concern to you as a legal practitioner. If you suspect a new client may be a fraudster and you would like confidential practice advice, you are welcome to contact the practice advisors.
[Back to Index]