United States: Are You Covered Against The Business E-Mail Compromise Scam?

Your company's controller receives an email instruction from your CEO to wire funds to complete a time-sensitive and confidential deal–seems like a clear directive to execute, but it's not. It's an increasingly common scam known as the "Business E-mail Compromise" (BEC).

In a BEC scam, as we previously described, fraudsters send spoofed e-mail to trick employees into making unauthorized transfers of funds, generally through wire transfers. The employee, usually a controller or other individual responsible for wiring money, receives an e-mail which appears to be from a high-level company executive, company lawyer or advisor, or even a trusted long-standing supplier or vendor. The e-mail pressures the employee to transfer company funds to a bank account, often offshore, urgently and secretly. The scammers may attempt to add credibility by sending the targeted employee spoofed e-mails from multiple trusted accounts or by plying the employee with fraudulent telephone calls, websites, and documents on formal letterhead. As discussed by our White Collar defense colleagues, victims of the BEC scam have reported to the FBI and international law enforcement agencies over $1.2 billion in exposed losses, much of which occurred in 2015 alone. While being victimized by a BEC scam can be costly, some of these losses may be covered by insurance.

For example, earlier this year on January 4, 2016, manufacturer AFGlobal Corporation of Houston, Texas, sued its insurer, Chubb, in Harris County, Texas, in connection with its loss of $480,000 to a typical BEC scam in May 2014. AFGlobal's Director of Accounting received email purporting to be from the company's CEO. The email instructed the director to cooperate with a named attorney to handle a highly confidential financial operation. The director then received follow-up telephone and e-mail communications from the purported attorney, who explained that the director should immediately wire $480,000 to a Chinese bank account to pay the due diligence fees related to a sensitive acquisition in China that AFGlobal was pursuing, according to the "attorney." A week after the director transferred the funds, he received another e-mail from the CEO's account requesting a second transfer in the amount of $18 million. The director became suspicious and notified his supervisors, who determined the company had been scammed. AFGlobal's bank could not recover the transferred $480,000 from China.

AFGlobal promptly tendered notice to its crime policy insurer and filed a proof of loss, seeking reimbursement for the loss of its own funds under several insuring agreements, including forgery coverage, computer fraud coverage, and funds transfer fraud coverage. The insurer denied coverage, arguing that none of the insuring agreements applied to the BEC scam. The insurer claimed that the forgery coverage was not triggered because there was no forgery of a financial instrument as required by the provision. The insurer also argued that the computer fraud coverage was not implicated because the loss was not caused by hacking into a computer. Finally the insurer contended that the funds transfer fraud coverage was inapplicable because the wire transfer instructions were issued to the bank by AFGlobal itself rather than by a fraudster claiming to be AFGlobal.

The scam on AFGlobal was similar to the one suffered by Medidata Solutions, on which we reported last September. Medidata, which unfortunately lost $4.8 million to the BEC scam, has also sued its insurer, Chubb, for coverage under the computer fraud part of its crime policy.

Courts have started to address issues related to potential insurance coverage of BEC scams. For example, a Connecticut state judge determined that there could be coverage for a BEC scam under the computer fraud insuring agreement of a crime insurance policy in Owens, Schine & Nicola, P.C. v. Travelers Cas. & Sur. Co. of Am. (Conn. Sup. Ct. 2010). In that case, a fraudster sent a Connecticut law firm a spoofed e-mail purporting to be from a North Carolina attorney looking to refer a client for a debt collection in China. The potential "client" then e-mailed the law firm, which accepted the representation. Subsequently, the fraudster "client" e-mailed the law firm that its debtor had agreed to send the owed funds to the firm's office. When a bank check arrived, the law firm deposited it into its client IOLTA account and, pursuant to the "client's" e-mailed instructions, had its bank wire the funds to the "client's" account in South Korea. The bank check was, of course, fraudulent and the law firm's IOLTA account ended up almost $200,000 in the red.

In the law firm's suit against its insurer for indemnification for the loss of its clients' funds, the judge concluded that there was a sufficient amount of computer usage to constitute computer fraud, rejecting the insurer's argument that policy only covered hacking-style schemes in which the transfer of money occurs in the computer itself. The judge also ruled that the BEC scam directly caused the loss under Connecticut's proximate cause standard, despite the insurer's contention that the loss was directly caused by the law firm's decision to wire the money to South Korea rather than by the fraudulent e-mails. (The parties later stipulated to vacate this decision.)

A California federal judge, on the other hand, found no coverage for a BEC scam under a policy's forgery coverage, computer fraud coverage, and funds transfer fraud coverage provisions in Taylor & Lieberman v. Federal Insurance Co. (C.D. Cal. 2015). There, a scammer spoofed the e-mail account of an accounting firm's client. Purporting to be the client, the scammer sent e-mails to the accounting firm requesting that the firm wire money from the client's account, over which the firm had power of attorney, to an account in Malaysia. By the time the firm discovered the scheme, it had lost almost $100,000 of its client's money. The judge disposed of the accounting firm's subsequent coverage lawsuit on the grounds that none of the provisions covered third-party losses.

Despite insurers' attempts to avoid paying out for BEC scam losses under existing policies, a few insurers have begun marketing endorsements that would ostensibly provide additional coverage for these losses under the rubric of "social engineering fraud." The endorsements promise coverage for executive impersonation, client impersonation (one of them even describes the scenario in the Connecticut Owens case, where an attorney collected a check for a client and issued a wire transfer to the client, only to discover that the check was fraudulent), and impersonation of a trusted third party such as a vendor or supplier. One of the insurers extends coverage even where the fraud did not involve a computer, email, or telephone.

Notably, the low limits the insurers advertise for these new endorsements may not satisfy many policyholders. The above cases illustrate that a company can quickly lose hundreds of thousands or even millions of dollars to a BEC scam. A company seeking to protect itself with this type of endorsement should ensure that the coverage limit is commensurate with the risk. Regardless, these endorsements are worth examining for whether they would provide additional risk abatement in a business environment of more frequent and varied computer fraud schemes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
18 Sep 2018, Speaking Engagement, London, UK

Partner Christoph Brenner will attend as a panelist at the Annual Private Equity Europe Forum on the panel "Middle Market & Growth Investing" on Tuesday, September 18 at 3:45 p.m.

18 Sep 2018, Business Breakfast, London, UK

We are pleased to invite you to a breakfast briefing on the ground-breaking reforms of France’s bank monopoly laws.

20 Sep 2018, Seminar, Tokyo, Japan

Orrick's Total Access Japan Event Series provides entrepreneurs business, tactical, and legal education through complimentary panels and seminars and networking events. The next event will take place on Thursday, September 20 from 6:00 pm to 7:30 pm.

Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions