Guarding Against Check Deposit and Wire Transfer Scams
Most people have seen the warning message on the ATM machine that recently deposited funds may not be made available for immediate withdrawal. What people may not realize is that a number of scams have been designed to take advantage of the lag time between deposit and collection. A variation of the scam even has the notorious honor of being named one of the top ten scams of 2011 by the Better Business Bureau. And bar associations nationwide have warned lawyers to be on the lookout.
This is what happens: An American attorney is retained by a foreign client to help the client collect a debt or enforce a judgment. The lawyer does his due diligence and determines that the email, web site and address provided appear to belong to a legitimate company. In fact, it may even be publicly traded. The debtor agrees to pay or settle the amount due. The debtor sends along a check, which the attorney deposits. The attorney then promptly arranges to have the funds wired to the foreign client.
Eventually the bank realizes that the check was forged, but by then the account is overdrawn. Sure enough, the attorney who oversaw the transaction is left fighting with the bank to clear himself of any liability.
Outside of the corporate context, the scam usually involves people selling goods or subletting apartments via websites like Craigslist. The buyer/tenant lives abroad and sends a foreign check for more than the amount owed. Realizing the mistake, they ask the vendor to please deposit the check and just wire back the difference. Sure enough, the original check eventually bounces and the vendor is liable for the amount previously wired.
So, why does it take so long to clear a foreign check? Well, because even in this day and age, when you deposit a check from a foreign bank, the physical check actually has to be mailed overseas for collection. That’s right, mailed. While abroad, it may need to make an additional five to six stops before the funds are fully cleared: One bank’s spokesperson explains that the mailed check goes to the bank’s international group abroad, which sends it to the corresponding bank in the country involved, which may need to send it to the bank on which it was drawn. The check then makes its way back to the correspondent bank and then again to the international division. All that back and forth can take weeks and weeks.
So what does this mean for the person who originally deposited the funds? Well, even though it may initially appear that the funds cleared, in fact there are no assurances until the bank has completed the lengthy process.
Some banks leave no room for doubt, holding all funds until the transaction is officially completed. While this sort of policy is inconvenient, it does have the advantage of protecting against scam artists.
Usually, though, banks are eager not to inconvenience their clients. They take a less rigid approach, using a scoring system to determine what kind of hold, if any, is necessary. Among the factors they consider are the size of the check and the customer’s relationship with the bank. If they deem the check a low risk, they’ll release the funds before the process is done. But if it is a con, then the client, and not the bank, is left footing the bill.
Contrast this long bank clearing process to wire transfers. Once a wire transfer is authorized, the funds are automatically transferred. There is no lengthy delay, there is no time for clearance. The money is instantly gone.
Given how sophisticated some of these con artists are, perhaps the best way to protect against this sort of scam may be to refuse to wire any funds until after all checks have completely cleared. With the caveat, of course, that for foreign funds this means being prepared to wait anywhere from 10 days to 8 weeks, depending on the amount and the country of origin. And if clients aren’t willing to wait that long, ask them to wire their original funds to help move things along. If they are con artists, they’ll most likely cancel the deal, cut their losses and move on to their next target.