STOP, CALL, AND VERIFY

BY LEANOR BAILEY HODGE | TRUST ACCOUNT COMPLIANCE COUNSEL, NC STATE BAR

IF I YELLED “STOP, DROP AND ROLL,” you would immediately know that you were on fire and would govern yourself accordingly by following my command. It would not matter whether you saw flames or even smelled smoke You would not be concerned about the time it would take to get down to the ground or the possibility that the fire might possibly be extinguished another way. You would simply hit the ground…IMMEDIATELY. You would act as if your life depended upon it because, it might. What if I told you to “Stop, Call, and Verify” would you know what to do? Would you immediately know that danger loomed ahead that could be avoided by heeding my directive? Because for too many lawyers, the answer to both questions is still no, the discipline landscape for lawyers who fall victim to wire fraud is changing.

Hopefully, everyone reading this column saw the segment titled “Wire Fraud – Heightened Discipline” in the Disciplinary Department section of the Fall 2021 State Bar Journal. If you have not, I commend it to you for reading. It was not captioned under the heading of warning, but it could fairly be taken as one. In it, a summary of grievance investigations into reports of computer hacking is provided. It offers a glimpse into some of the fact patterns at issue in the reports and details how the Grievance Committee disposed of many of these files. The piece ended with the following announcement: “ACCORDINGLY, THE GRIEVANCE COMMITTEE IS PROVIDING NOTICE THAT LAWYERS WHO FAIL TO TAKE ADEQUATE PRECAUTIONS TO PROTECT AGAINST WIRE FRAUD SCAMS CAN EXPECT IMPOSITION OF MORE SERIOUS PROFESSIONAL DISCIPLINE.”

The landscape is changing for lawyers who are “victims” of wire fraud but fail to heed the warnings and guidance that have been issued about it. One such recent directive about wire fraud is the reminder that our ethical duty to be diligent in our representation of clients includes certain duties relating to protecting against fraudulent theft of entrusted funds. Recently, in 2021 FEO 2, the Ethics Committee confirmed that our duties of competence and diligence as lawyers require us to be knowledgeable about the dangers of potential fraud in the practice of law and, specifically, fraudulent attempts to access entrusted client funds. The opinion notes that, in the case of counterfeit check scams, state and federal agencies have alerted lawyers to the “existence and persistence” of these scams for some time, and therefore, “reliance on the counterfeit check is unexcused.” This is not just true for counterfeit check scams, the same is true for criminal efforts to access entrusted funds by wire fraud.

The method hackers commonly use to access entrusted funds by wire fraud is the Business Email Compromise (BEC) scam. The FBI’s Internet Crime Complaint Center (IC3) began tracking the BEC scam in late 2013. “Business E-Mail Compromise.” FBI, 28 August 2015, https://www.fbi. gov/news/stories/business-e-mail-compromise. In August 2015, the total dollar losses in the United States exceeded $740 million. Id. At that time, the victims were from all 50 states with most of the fraudulent transfers ending up in Chinese banks. Id. Fast forward to today and the scams have increased exponentially. In its 6 April 2020 Alert No. I-040620-PSA, the FBI disclosed that between January 2014 and October 2019, IC3 has received complaints of losses totaling more than $2.1 billion. The FBI reported in its 2020 IC3 Internet Crime report that in 2020 IC3 received 19,369 BEC/ EAC (Email Account Compromise) complaints with adjusted losses of more than $1.8 billion. Internet crime is big business for the criminals and a significant risk for potential victims.

The response to this rise in internet crime has included efforts to inform and educate those who might otherwise be victims of these crimes. In North Carolina, our legal community addressed the problem early on when the Ethics Committee adopted 2015 FEO 6 on 23 October 2015. In this opinion, the Ethics Committee offered guidance about a lawyer’s ethical obligations in the wake of various types of theft of entrusted funds. Included among the scenarios considered was wire fraud in a real estate transaction in which the hacker tricks the lawyer into wiring entrusted funds to the criminal instead of the intended recipient. This opinion informed lawyers that we must use reasonable care to prevent third parties from gaining access to client funds held in the trust account and that we have a duty to also implement reasonable security measures. It also used as an example of a reasonable security measure, calling a known number for the intended recipient of entrusted funds to verify any change in disbursement instructions – said differently – stop, call and verify. In a more recent opinion, 2020 FEO 5, which was adopted on 15 January 2020, the Ethics Committee provided a few specific examples of ways in which a lawyer can satisfy the professional obligation to protect against risks associated with transfer of funds in real property transactions. Such measures included becoming educated about real property transaction scams, adequately communicating to the client the risks associated with transfer of funds

WANT TO LEARN MORE ABOUT TRUST ACCOUNTING?

Join Leanor Hodge for our June 2 Learn Over Lunch, Trust Account Compliance Oversight - TACO Thursday! beginning at 1 p.m. on Zoom. One hour of CLE credit is approved and is free for WCBA members.