Thanks to several experienced arbitrators in our community of friends, we’ve heard reports that there’s a new scam going around targeting arbitrators, so you should keep an eye out.
The scam works like this. Two parties contact an arbitrator and request to engage the arbitrator’s services. The parties present an agreement that includes a provision saying that the parties will deposit a significant portion of the funds in dispute into the arbitrator’s account as escrow. Once the arbitrator agrees to the engagement, the money is sent to the arbitrator. Soon after the funds are sent, however, the parties contact the arbitrator to inform them that the matter has been settled and the funds should be returned. The arbitrator then distributes the money according to the agreement. But of course, the initial transfer to the arbitrator is fraudulent (perhaps as a counterfeit cashier’s check, which takes time for the bank to figure out) so the arbitrator loses the money that they sent to the parties.
This is a variation on a common scam that has targeted lawyers, the trust account scam. The cashier’s check may look 100% legitimate, and it may actually be cleared by your bank when you deposit it. But sometimes banks are robbed and stacks of actual blank cashier’s checks are stolen, and they can be made out by fraudsters to look legitimate. That’s why it can take time for your bank to figure out that the deposit was fraudulent, and why they may initially clear it and have it appear to be accessible to you in your account.
Several of our customers experienced a similar scam back when I worked at eBay. A fraudster would approach a seller selling a high dollar value item (like an antique violin) and say they would explain that they absolutely had to have the item and that they would pay top dollar, higher than any official bid to secure it. The seller would then take the item off of eBay and sell it to the buyer at a higher price. The buyer would then send a cashier’s check for the full purchase price to the seller. The seller would cash the check with the bank, and it would clear – appearing in their bank account as available balance. Then they would ship the item to the seller. Of course a few weeks (or even months) later the bank would find that the cashier’s check was fake, and they would take the money out of the seller’s account.
On some occasions, the fraudster even put extra money in the fake cashier’s check and told the seller to use the extra to build a crate to ship the item in, and then to reimburse any overage back to the buyer. In that case, the seller was scammed out of the item, the cost of the crate, the cost of the shipping, and the additional amount of money they sent back to the buyer in cash. These kinds of scams have been running for a long time.
In an attempt to fool the arbitrator, the scammers may provide contracts and concoct elaborate ruses around the relationship between the businesses and the nature of the dispute. They may steal identities from real corporations in order to sell the scam. A little investigation (and the low quality of the legal writing in the documents) can be a tell, but a little well-founded skepticism about deals that are too good to be true can also assist you in avoiding a situation like this.
Sadly regulators and consumer protection agencies have shown little enthusiasm for hunting down the perpetrators of schemes like this, so you are unlikely to find much assistance from them should you get fooled. Often the perpetrators are international and have taken steps to shield their identities, so there isn’t much local law enforcement or state government can do to hunt them down and bring them to justice.
Stay aware and be safe! Let’s all keep an eye out and share information so we can protect our fellow practitioners from getting scammed.
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