Don't Believe Your Bank When it Reports a Check has Cleared
At some point a scam becomes so old and tired that I assume no one would ever fall for it. Certainly one of my fellow attorneys could not be duped by, for example, the old "Nigerian trying to get money out of the country" scam, right?
Tell that to Houston attorney Richard Howell, Jr., a 23-year legal veteran and partner in the firm of Buckley, White, Castaneda & Howell. He fell for the oldest check fraud scam around. And he is not the only attorney victim of this variation on the Nigerian scam.
Here’s how it works. An attorney is contacted via e-mail from a foreign company ("FC"). FC did business with a company located near the lawyer’s office, and is looking for representation in collecting a huge unpaid account of, say, $900,000. The attorney is asked to handle the matter on a one-third contingency basis. The attorney is understandably intrigued by the possibility of collecting a $300,000 fee. But being wary of an email from a foreign company, he goes on line and confirms that there is in fact such a company located near his office, doing the sort of business discussed in the email.
Sometime later, perhaps even before the attorney has sent a fee agreement, FC sends another email stating that the local company has made a partial payment of, say, $300,000. FC still needs the attorney to collect the remaining $600,000, and it is honoring the contingency agreement. FC has instructed the local company to make the check payable to the attorney, and asks that the attorney please deposit the funds and wire $200,000 to FC’s account, keeping $100,000 for himself.
Sure enough, the check arrives a few days later, and the attorney deposits it in the firm’s account. But our savvy attorney is no fool. There is no way he is going to wire funds to FC until he is damn sure the check has cleared. He waits a full ten business days, and only after the bank confirms that the funds have cleared does he wire the money to FC. About six weeks later, the attorney gets a call from his bank stating the $300,000 deposit has been reversed. The attorney is now out $200,000.
But how is that possible if the check "cleared"? This scam only works because the vast majority of people, even attorneys, do not understand what it means when a bank says "the funds have cleared." In our scam, FC printed up some fraudulent checks from a company it knew would have lots of money in its account; let’s call the local company Humongo Steel. The account information is easy to come by, either by dumpster diving or just by getting a legitimate check from Humongo Steel, perhaps by way of a merchandise refund or being one of the company’s vendors. Alternatively, Humongo Steel might be in on the scam. Let’s assume Humongo Steel banks with Bank of America. FC writes a fraudulent check to the attorney on Humongo Steel’s Bank of America account, and the attorney deposits it into his Citibank account. Citibank’s computer asks Bank of America’s computer, "is there sufficient money in Humongo Steel’s account to cover a $300,000 check?" Bank of America’s computer answers "yes" and credits the money to Citibank. This all takes place the same day the check is deposited, but banking regulations date back to a time when the checks had to be physically transported around the country, so the Feds allow Citibank to hold those funds for ten days. Citibank takes the full ten days so it can play the float. After the ten days, Citibank happily reports to the attorney that the funds have cleared and shows the $300,000 in his account.
But there is another step in the process. The check written on Humongo Steel’s account sits in the bank until the next time statements are sent out. If the check hits the bank right after statements were mailed, that check could sit there 29 days. Assuming Humongo Steel has not opted for checkless statements, the check is eventually stuffed into Humongo Steel’s account statement and mailed. The mailroom gets the statement and passes it along to accounting. Accounting goes to reconcile the account and finds the fraudulent $300,000 check. Humongo Steel has up to 30 days to report that fraudulent check. When it does, the bank has Humongo Steel sign a statement swearing to the fraud, and Bank of America then gets its $300,000 back from Citibank, who gets is back from attorney.
Did you do the math? The bank told the attorney the funds had cleared after just ten days, but it can take 59 days or more to know if funds have really cleared. Richard Howell, Jr. is suing Citibank, claiming it was negligent in reporting the funds had cleared, but he is going to lose. By law an account holder has 30 days to report a discrepancy in an account statement. The attorney should have known better.
Lesson for all businesses:
I’m reminded of teaching my young son about stranger danger. I told him not to get in the car with a stranger. I told him the stranger might temp him with candy, or a toy, or ask for help finding a lost puppy. One day my wife and I both got delayed, so we sent a stranger (to him) to pick him up. I told our friend that if he was resistant, tell him to go talk to the people in the office, who I had put on notice of the situation. He got in our friend’s car without hesitation or question, and when I later asked him why he did that despite all my warnings about stranger danger, he said, "I knew it was okay because she didn’t offer me candy or a toy, or ask for help finding a missing puppy."
The scam might not take the precise form just discussed, but if it involves you cutting a check or wiring funds from a deposited check, it might be a variation. Don’t do it. You now know that it can take two months for a check to truly clear. Even a cashier’s check can be bogus.
