Wire Fraud In A Real Estate Transaction

Where is the weakest link?

Unless you are Matt Damon and have spent the last 350 Sols on Mars growing potatoes, you should know that back on Earth CYBER CRIME is running and ruining how we do our business and how we guard our personal information.

Welcome to the hottest topic to hit, not only the escrow industry, but also the world financial industry since the economic crash. WIRE FRAUD. One moment of inattention and you may make that dreaded decision that can cause you the loss of hundreds of thousands or even millions of dollars.

What is wire fraud? I looked it up on Wikipedia and was disappointed on how bare and simple their article was for such an important subject. So I put together this long article to educate anyone who is interested. I also look forward to putting together another short one for those who want to get to the nitty gritty quickly. So together we will cover the long and the short of it!

How does this type of fraud happen? Forget the international institutions and their fraud problems. Let’s just talk about something close to home – your real estate transaction.

Client is opening or closing escrow and needs to deposit final funds.
Escrow company sends wire instructions to client
Hacker intercepts the email containing the wire instructions
Hacker sends a fake email and substitutes their own instructions, directing the funds to their own account
Client does not know of the hacked email and instructs their bank to wire per the instructions they received – straight into the hacker’s account
By the time the client realizes that the escrow company never got their money, those funds are already broken down into smaller amounts and sent to many accounts throughout the world
The money is lost, the clients have a nervous breakdown and the escrow officer has a nervous breakdown
Too late. The chances that all of it will be recouped is slight

Here are questions:

Who is doing it?
Who are their intended targets?
How do they do it?

The first and second questions have simple answers; the third is more complicated.

Have you ever seen global cyber attacks in real time? Go to http://www.norse-corp.com/ and click on “Live Attacks”. Scary, right? Each shot is a cyber hacking attack.

A Little Bit of Background….

Who is doing it?

Unfortunately, with the Internet, news has blazed at the speed of light through HACKER circles that the American settlement (escrow) industry handles lots of U.S. dollars day in and day out. Find a way to hack into their system and divert the funds and you hit the motherload. FRAUDSTERS from all over the world are parked at our doorsteps waiting for a chance to slip in. These doors can only be opened with caution. What a miserable way to transact business.

Who are their intended targets?

The Buyer, the Seller, the escrow companies, even the Lenders are not immune. Anyone who sends or receives money by wire is a target.

How do they do it?

Funds are diverted when fake wire transfer instructions are sent and received. Like all communications in the tech age, these instructions are given mostly through email. Fraudsters then look for the weakest link. Whose emails are easily hackable? Whose emails are not secure or not encrypted? Business Email Compromise (BEC) is the newest acronym for emails that are compromised by hackers.

Fraudsters are extremely smart and patient. They do their homework. What areas/cities of the country are showing high market volume? Troll the social media sites in that area, look at Yelp, pinpoint the real estate agents and the escrow companies who are popular. If the agents are using a public domain like Yahoo, AOL, Gmail, Hotmail to host their communication or the escrow company emails are not encrypted, it becomes easier to hack into their servers, park themselves there and monitor the email conversations. When they see that information for wire is sent, the hacker steps in, intercepts that email, substitutes his own fake email along with their own wire information. The Buyer gets the wrong information to wire funds in or the escrow company gets the wrong information to wire out the Seller’s proceeds.

The settlement, title and lending industry have taken on the installation of encryption software and secured email capabilities. Many escrow companies have instituted double verification of outgoing and incoming wires. Education of the industry and companies’ staff has also been a very important priority. No one can afford to lose hundreds of thousands of their client’s funds.

It is even more important that the general public, which includes clients, third parties, like their attorneys and financial counsel, be educated and made aware of this terrible problem. Everyone should be doing their own part to verify that the information given and received are correct.

What are the Best Practices?

For the Consumer:

Call the settlement agent before sending the funds. Verify the correct bank, the correct account numbers. Do not Trust! Verify!
Do the wire instructions look fishy? Is the bank address located out-of-state? Is the name of the recipient the name of the escrow company?
Are your emails secure? Look at the email address before you open it. Are you sure it belongs to your real estate agent or your settlement agent?

For the Real Estate Agent:

Use a private domain site to host your emails, preferably one that has encryption capabilities
Take precautionary steps in opening emails. Watch out for spam and virus infecting your computer or a Trojan Horse inserted.

For the Escrow companies:

Install encryption service and secured email platforms
Decrease the chances of interception by bypassing the real estate agent and providing wire instructions directly to the customer
Internal procedures should be put in place for verification of outgoing wires
Fake wire transfer receipts! Check with your bank that the incoming wires are real and are credited to your account before using the funds to close
Ask clients to call before the wire is sent to confirm the wire instructions and account number they are sending to
Request clients to complete, manually sign and mail back proceeds instructions forms
If you can’t meet the client in person, at least make sure you have a good phone number for them
Make it a procedure to call the client directly to confirm proceeds instructions before wiring to them
Do not allow clients to change proceeds wire instructions right before closing. If they do, require them to complete sign, and hand in new instructions, maybe even have it notarized
Under no circumstance should the escrow company take any instructions for change of proceeds wire instructions via an email request
Cashiers Checks instead of funds wired in? This traditional way or funds remittance is still accepted, provided the escrow company is given at least 2 weeks to let the check clear (see my Check Fraud article)
Reconcile Trust Accounts on a daily basis to immediately catch discrepancies
Be very careful when opening emails. Check the email address of the sender. Is this your clients’ address? Is this a legitimate communication?
Slow down. Do not allow the client to rush you. Mistakes are made when we are rushed

A Few Bitter Examples

When doing the month end reconciliation of their Trust Account, the escrow company realized that thousands of dollars were siphoned off by wire, $10,000, $20,000 each time, to a tune of about $250,000. The wires were unauthorized of course, but the heartbreak is that they were not discovered until many days had passed. By that time the trail was cold. The owner had to make arrangements to put back the $250,000 loss immediately upon discovery or lose their escrow license. Remember, the funds did not belong to the escrow company, they are held in trust for their clients’ transactions. It took months and a team of attorneys to negotiate with their bank to cooperate with their efforts to locate the funds.

A recent lawsuit filed by First American Title is suing the fraudsters and the real estate agents as accomplices in a wire fraud action. The loss sustained by First American was caused by a hacker who hacked into the email address of the Seller’s real estate agent and a fake email sent to First American to change Seller’s wire instructions for net proceeds. The lawsuit stated that the Real Estate Agent failed to “implement and maintain reasonable security procedures and practices to protect the personal information of the Seller from an unauthorized access, use, modification or disclosure.”

Can an incoming wire transfer be fake? Many escrow companies have instituted procedures to verify if incoming wire notifications are real. There is an instance of a hacker diverting Buyer funds and then faking an incoming wire notification from the escrow company’s bank so perfectly that the escrow officer closed the transaction, thinking the Buyer’s funds were really in.

A Seller’s attorney’s email was hacked and fake wire instructions sent to the escrow.

The email of the loan officer funding a loan was hacked and he received fake wire instructions which he used to send out the loan funds.

A prospective Buyer made an offer on a hot property which required the deposit of $12,000. He was notified by email from the “escrow company” to immediately wire the deposit to secure the offer. The Buyer rushed to the Bank and did the wire, only notifying his real estate agent and the escrow company after the fact. The escrow company disavowed ever sending the email and wire instructions. The Buyer’s bank refused to put a stop to that wire.

Fraud of this nature happens not only in the real estate industry but also across the board in all industries, against all manners of persons and companies nationally and internationally. Caught, it is punishable under Title 18 of the U.S. Code Chapter 63 Section 1343. It behooves the banking industry to take an active role in its prevention. One effective way would be to match the name stated on the incoming wire to the name on the account it is going to and to raise the question when they do not match. Another way is to cooperate and help the public when fraud is called in by putting an immediate freeze on the account in question until the fraud can be investigated further and the FBI can step in.

There are many things that we can do, but it takes each one of the participants in the transaction to do their part correctly. Any weak link and the chain can be broken and Mr. FRAUD will slip in.

Are we having fun yet?

You can download our pdf wire procedures from this link ,this one is in Chinese for your Chinese clients. Hope this helps!

Juliana Tu, CSEO, CEO, CBSS, CEI, SASIP
Escrow Manager