Beware conmen bearing gifts

Alistair Walters is a partner at Walker Martineau. His book on advance fee and prime bank instrument fraud is published by Sweet & Maxwell.

The recent publicity about the discovery of an advance fee fraud run from Torquay has once again thrust this type of scam into the spotlight.

There have been many similar frauds over the past few years with victims ranging from the Salvation Army to the Belling Pension Fund. On each occasion, there is a flurry of newspaper and magazine articles accompanied by warnings from professional and regulatory bodies.

But advance fee fraud keeps recurring despite these attempts to raise public and professional awareness about the risks. There are a number of reasons for this. One of the most significant is the complexity of the non-existent transactions that are concocted by fraudsters to confuse their victims and to convince them to part with up-front fees.

The Torquay fraud involved false certificates of deposit.

In 1993, The Salvation Army was defrauded of £6.2 million by conmen in a spurious transaction to trade standby letters of credit. Other transactions may involve the opportunity on the part of the victim to receive the benefit of a very low interest or interest-free 'self liquidating' loan.

In each case the victim will have to put some money up-front before they are permitted to take advantage of whatever it is the fraudsters claim to be able to offer. The mechanism of the fraud may vary in detail, but the aim is always the same: to steal money.

Fraudsters operate internationally through trusts and similarly obscure organisations. They may allude to the involvement of a non-existent bank as a means of trying to establish credibility.

The use of forged bank notepaper is common. The trust or organisation is usually in countries such as Panama and Liechtenstein, and is often introduced to its victims by intermediaries or brokers. The latter are generally self-styled financial advisers who through contacts or advertising find people who are looking for cheap loans or lucrative investment opportunities.

The intermediary, who may or may not be involved in the fraud, will probably be promised by the fraudster a fee or a percentage of the value of the transaction as the payment for the introduction.

Solicitors can become involved in these frauds as intermediaries. This can happen in the following circumstances:

They may be advising a client who is contemplating paying an advance fee in what appears to be a legitimate commercial deal. The client may be tempted by an apparently lucrative transaction and may not understand what is being proposed. The problem is compounded if the solicitor acting for the victim does not understand the transaction or is, for example, having his fees paid by the fraudster.

It is at this point that a solicitor should carefully consider his position. If he allows the client to proceed and any upfront fees are stolen then the client will turn to the solicitor for reimbursement.

In some cases a solicitor may introduce a client or contact to a source of finance. There is a risk that by introducing clients to unconventional sources of finance and dubious investment advisers solicitors will increase the possibility of a client becoming the victim of a fraud.

This will inevitably result in scrutiny of the solicitor's role and will raise the question of whether he is an accomplice to the crime or a co-conspirator. If the solicitor receives payment or reward for the introduction then his involvement will appear much deeper.

The solicitor may be acting for the person or organisation carrying out the fraud (whether innocently or not) and/or may be nominated to receive and hold the victim's advance fee in escrow pending the happening of certain events. The solicitor may represent to a victim that a transaction is valid or that there are funds available for a loan or to purchase instruments.

A solicitor in such a position must verify the facts before they are represented as true. If a solicitor misrepresents the position to a victim who relies on that information to his detriment then the solicitor may have a liability to the victim and may face prosecution as a party to the fraud.

Solicitors have been offered substantial payments for the use of their client accounts to receive funds from transactions which may be based on the alleged trading of instruments such as Prime Bank guarantees or discounted letters of credit.

Fraudsters will often want to persuade victims that a bank or firm of solicitors is involved in the transaction. This helps to make the scam seem more authentic. Fraudsters can misuse notepaper to create misleading documents and letters which are apparently from reputable organisations but which are false and are merely intended to reassure victims. This is something law firms should be particularly aware of – maintaining control of their headed notepaper is imperative and care should also be taken when replying to unsolicited correspondence from strangers.

There are further dangers for solicitors. For example, a solicitor may receive money paid in advance by a victim and asked to hold it in his client account in escrow with instructions only to release it to a third party following confirmation that certain events have occurred. Both the payer and the solicitor must know upon what terms the money is being held and when it can be released.

The solicitor is a trustee of the money and liable to return it to the victim if the specified events do not occur. He must be sure that before handing any money over to a third party he is entitled to do so.

In frauds where the underlying transaction is non-existent this places a heavy burden on the solicitor. If he accepts the fraudster's word that the preconditions to release have been satisfied and the money is subsequently stolen, the victim may well have a claim against him for breach of trust and perhaps negligence.

Use of a client account to allow a third party the use of a client account as the conduit for money allegedly earned through trading non-existent instruments breaches every statute, rule and regulation covering money laundering.

It may also lead to a civil liability on the part of the solicitor concerned if the funds are stolen and can be traced into the client account. This may seem obvious but the above example is the outline of an actual proposal made to a firm of solicitors with an offer of substantial fees as payment for the use of the account. To hard-pressed practices such lucrative offers may seem tempting.

In this area of fraud, there cannot be enough caution, suspicion and investigation into proposed transactions. If there is any doubt about the authenticity of a deal, or it simply appears too good to be true, then it should be avoided and reported to the local fraud squad.