Fraudulent Investment Schemes

Perpetrators of fraudulent schemes may try to use a lawyer – and that lawyer’s trust account – to add credibility to a fraudulent enterprise.  From a con artist’s perspective, duping a lawyer is very attractive.  If one lawyer can be tricked into participating in to a questionable scheme – for example, by passing funds through his or her trust account – a con artist may be successful in persuading many other people that it is legitimate.  Sole practitioners, small firms and lawyers in smaller communities may be most at risk.

The ‘red flags’ of a potentially fraudulent enterprise may include:

  • Minimal or no legal work is involved and significant amounts of money must be held in trust. Often the money is from private investors or from third parties who are paying fees to the lawyer's client for negotiating a financial agreement on their behalf.
  • The client's business involves negotiating loans, letters of credit or promissory notes with a foreign financial institution or a "prime bank" that is supposedly affiliated with a reputable international organization, such as the International Chamber of Commerce of the International Monetary Fund.
  • The client makes enquiries about the lawyer's indemnity coverage.
  • The client offers a significant amount of money in advance to induce the lawyer to accept the retainer.

Other common warning signs of a fraudulent enterprise include deals that promise unrealistically high profits, require little in writing, contain unnecessary confidentiality requirements, are overly complex or involve a pyramid scheme.

Before you agree to act on any matter, ask the questions necessary to ensure that you understand the transaction, its legitimacy and the reason for each step you are asked to take.  Think through the issues: Do you fully understand the transaction? Are you satisfied the investment is legitimate? Are you satisfied as to the nature and authenticity of the securities involved? Are you satisfied the source of the funds is legitimate? If a financial institution is involved, are you satisfied that it actually exists and is legitimate? Are you offering legal services and advice, and acting as a lawyer in the transaction? Are your obligations clear? If the answer is "no" to any of these questions, why are you involved?

And remember your ethical duty to be on guard against becoming the tool of a fraudster.  Code rule 3.2-7 of the Code of Professional Conduct for British Columbia states that a lawyer must not engage in any activity the lawyer knows or ought to know assists in or encourages any dishonesty, crime or fraud.  Code rule 3.2-8 creates obligations for lawyers employed or retained by organizations to act in a matter that the lawyer knows or ought to know involves dishonest, criminal or fraudulent activity or intent.

Learn more.  The material that follows will help you stay safe. 

The following is an excerpt from Potential fraudulent investment scheme operating in BC, Notice to the Profession, August 1, 2012

The Law Society has learned of a potentially fraudulent enterprise operating in BC. Lawyers may be targeted and asked to certify documents, receive funds into trust, or both.

The first phase involves "historical bonds." A lawyer may be asked to certify the existence of the "bonds," as well as prepare agreements relating to their sale. A second phase involves investor funds purportedly kept on deposit at a bank and leveraged to buy securities. In 2008, the BC Securities Commission found a scheme, in which investors were told that their investments would remain on deposit at a bank and within their control and not at risk, to be a Ponzi scheme.

  1. When scamsters target lawyers, Benchers' Bulletin (p. 17), 2003 No. 3 May–June
    Gives more information on fraudulent schemes and some of the questions lawyers should ask to help recognize and manage the risk of becoming the tool or dupe of an unscrupulous client.
  2. Fighting back against fraud — a dark and shifting landscape, Practice Tips (p. 9), Benchers’ Bulletin, 2005 No. 5 November–December
    Offers information on two types of fraudulent investment schemes:  Prime bank fraud and pyramid or Ponzi schemes.
  3. Fraudulent investments, Practice Watch (p. 18), Benchers’ Bulletin, 2009 No. 4 Winter
    Gives more questions to ask if you are approached by a client to receive money from investors.
  4. Protect your money: Avoiding frauds and scam
    The Canadian Securities Administrators (CSA) have put together this guide to help you recognize and avoid frauds and scams.
  5. The Little Black Book of Scams
    This online resource published by the Canadian Competition Bureau will assist with increasing your awareness of different types of scams and share some steps on how to protect yourself as well as how to get help and report scams.

The material on this page is based on Watching out for questionable schemes and scams, Alert! 1999:  No. 2 June; and Scamsters target lawyers, Notice to the Profession, July 8, 2005.

 

Last updated: January 2018