Fraudulent Wire-Transfer Instructions and Other Scams

Aug 31, 2017 Dianed Garcia

In recent months, several yacht brokers and other members of the yachting industry have fallen prey to fraudulent wire-transfer instructions and other scams. These scammers have long targeted real-estate transactions, in which large sums of money move electronically, and they are now using the same techniques to target yacht transactions. 

Yacht brokers need to take measures to defend themselves and their clients against these scams. This article briefly explains how these scams work and what brokers can do to protect themselves and their clients.

In one common scam, a yacht broker receives an email shortly before closing with wire-transfer instructions that appear authentic but actually divert funds to the scammer’s account. The broker orders its bank to transfer the funds according to the scammer’s instructions and, by the time the intended recipient alerts the broker that the funds never arrived, the scammer has disappeared with the funds. 

Phony wire transfer instructions
Scammers sometimes pose convincingly as the intended recipient by monitoring email traffic between the parties and copying the forms of their messages. These scammers often gain access to a party’s email by “phishing”: sending official-looking messages designed to trick a person into revealing his password.

Electronic funds transfers are governed by Article 4A of the Uniform Commercial Code (UCC). Under the UCC, senders can demand the return of an unauthorized and ineffective wire transfer. There are two important caveats, however. First, a wire transfer ordered by the sender or its agent is considered “authorized” even if the sender or its agent acts on fraudulent instructions. 

Second, a wire transfer ordered by someone other than the sender or its agent—an “unauthorized” wire transfer—is nonetheless effective if the bank uses a “commercially reasonable” security procedure to verify the order. In other words, while the law initially puts the risk of an unauthorized transfer on the bank, the bank can shift that risk to the customer by adopting reasonable security procedures. Banks often enter into agreements with their customers that describe the security procedures for processing wire transfers and require customers to follow these procedures.

Brokers who lose their client’s funds can be held liable for the loss. Moreover, many common forms of liability insurance, including even some computer-fraud policies, may not cover losses as a result of fraudulent wire-transfer instructions. Several insurers have resisted claims by arguing that their computer-fraud policies cover losses as a result of unauthorized transfers by hackers, not authorized transfers according to incorrect instructions. Brokers should talk to their insurance agents to make sure they are covered.

Fraudulent cashier’s check
In another common scenario, the scammer, posing as a buyer, gives the broker a fraudulent cashier’s check and purposefully overpays. The broker deposits the check in its trust account and the scammer asks the broker to wire back the overpayment. The broker sends the wire and only then learns that the bank has dishonored the scammer’s check, leaving the broker liable to its bank for the money it wired to the scammer.

The UCC allows a collecting bank—the bank to which the check is presented—to provisionally credit the amount of a check pending final settlement by the payor bank—the bank on which the check is drawn. The UCC requires collecting banks to exercise “ordinary care” by taking proper action before their midnight deadline on any item, notice of nonpayment or dishonor, or final settlement of funds they receive. The UCC specifically allows collecting banks to revoke a provisional credit and charge back their customers or obtain a refund for the amount of any check dishonored by the payor bank.

What can brokers do to protect themselves? 
Most important, brokers should follow their banks’ advice regarding best practices to defend against wire-transfer scams. Some banks, for example, now require their customers to confirm wire-transfer instructions with the intended recipient orally by telephone. Brokers should implement procedures within their offices to ensure that all wire-transfer instructions are vetted and confirmed in advance of closing. 

They should be especially careful when wire-transfer instructions change. Finally, brokers can protect their email accounts by using strong passwords and multifactor authentication. Of course, never follow a link or open an attachment from an unknown sender.

To protect against fraudulent checks, brokers should not accept checks in excess of the amount of the deposit or the purchase price, as the case may be. Brokers should not wire funds deposited by check until the broker’s bank confirms that the check has cleared or, in banking terms, final settlement has occurred. 

Remember that funds may be “available” even before final settlement if the bank provisionally credits the amount of the check. If in doubt about a check’s authenticity, brokers should contact the payor bank.