The scammers and fraudsters are alive and active. The Boards of Realtors, Title Companies, Bar Associations and local and national news media have all written warnings.  Frequently.  I have even written about it (see my blog HERE). Yet, some people miss the warning signs and get caught.

Unfortunately, I am in the middle of one such situation – the other side. I represent the seller of the assets of a small business.  We closed 2 months ago.  As per the contract, $50,000 of the seller’s proceeds were held in escrow at closing by the buyer’s attorney to give the buyer time to determine whether any undisclosed liabilities pertaining the assets popped up.  The escrow was to last for 60 days.  10 days ago, on the 61st day, on behalf of my client, the seller, I e-mailed the escrow agent and requested that the escrow agent, buyer’s attorney, release the money to the seller.  I directed the escrow agent to wire the funds to the same account as used for closing pursuant to the same wire instructions.  The escrow agent responded shortly thereafter via e-mail that she would do so but that she would need both the buyer and seller to execute a release and that she would prepare and send one to me that afternoon.  The next day, Friday, the release was signed by both the buyer and seller.  The escrow agent indicated that she would process the wire.

However, I learned 5 days later that my client never received the wire. When the broker and I inquired, the escrow agent advised that the seller had sent a confirming e-mail to the escrow agent acknowledging receipt of the wire on the Monday following.  The client denied sending the e-mail.  The escrow agent produced the e-mail and it was clear that the e-mail had not come from my client.  The e-mail account had been spoofed.  We then asked the escrow agent where she had sent the wire.  It turned out that 90 minutes after my initial e-mail to the escrow agent, the escrow agent had received a second e-mail purporting to come from me, forwarding an e-mail from my client which attached new wire instructions.  These wire instructions were to a 3rd party bank account in New Jersey.  The e-mail address from me was not my address, though it looked similar to mine (used my domain name in the sender field but had a mail.com domain name).  The client’s e-mail address was similarly spoofed.  The grammar and spelling in my e-mail and the client’s e-mail was poor and inconsistent with all prior correspondence with the escrow agent.  And, the client’s purported e-mail instructions to me were time stamped 2 hours prior to my initial e-mail to the escrow agent.

The timing of the contradictory wire instructions should have been a big enough red flag to the escrow agent for her to call me to confirm whether I had in fact sent those instructions. But, the e-mail addresses, the grammar and spelling, the time stamps on the e-mails, the 3rd party to receive the wire all should have given pause to the escrow agent.  Nevertheless, she wired the money to the wrong account.  She is a victim of the scam and is now responsible for making my client, the seller, whole.

This is a classic example of a common e-mail/wire scam. It could have been easily avoided with simple attention to detail and one phone call to verify the new wire instructions.  Best practice requires those who are responsible for wiring money to verify ALL wire instructions by telephone follow up, not just revised wire instructions.

At this point, the escrow agent, an attorney, will be responsible for making her trust account whole. While her malpractice policy may cover the shortfall, settlement might take some time.  Though this is clearly a theft of funds, it remains to be seen whether law enforcement will be able to track the perpetrator or whether law enforcement has an interest in the case.  Though $50,000 is a lot of money to the victim, wire fraud cases don’t generally get the attention of federal law enforcement until there are a lot more zeros involved.

Hopefully, a lesson has been learned. Verify all wire instructions by confirming on that antiquated device – the telephone!

Over the last year or more, we have been bombarded with news about Hillary Clinton’s use of an unsecured e-mail server, Russian hacking of the DNC and other servers, and Wikileaks and its release of confidential, perhaps classified, documents. We don’t have to get into a political debate to discuss what is a really scary issue for everybody; if computers can be breached at the highest levels of government, how secure are we ordinary folks?  The bad news keeps coming in with data breaches at financial institutions, retailers, hospitals and airlines.  The list goes on.

Those of us in the real estate industry are all too familiar with the potential for fraud and computer breaches. There have been many scams involving real estate closings over the last few years.  Many have involved attempts, countless successful, to misdirect wire transfers of loan or closing proceeds.  This scam, unfortunately, is too easy to perpetrate.  Sometime just prior to closing, usually at the last minute, the closing agent receives an e-mail changing the wire instructions for disbursement of the seller proceeds.  The e-mail appears to come from someone the closing agent has been dealing with, like the broker.  The wire is sent, the seller never gets its wire and the closing agent has been scammed.  But, so has the broker.  Somewhere along the line, the broker’s computer system has been hacked allowing the thieves to know that a closing is about to occur, who the parties are, who the closing agent is and enabling the thief to spoof the broker’s account.  The closing agent thinks he/she is doing the right thing having dealt with the broker throughout the process.  Was the closing agent wrong to trust the e-mail?  She thought the e-mail was from the broker.

The roots of scams like this go back to the e-mails we used to get (and sometimes still get) from Nigerian Princes needing help moving large sums of money to the United States or from attorneys for long lost deceased relatives who have left us large inheritances. Attorneys have been targets of “new client” scams.  A lawyer I know accepted a closing from a broker he regular worked with to handle a large residential closing.  The client was located in Great Britain and sent a cashier’s check drawn on a Canadian bank to cover both the initial deposit and the additional deposit, about $150,000 in total.  The lawyer deposited the check in his trust account.  Two days later the client called and asked that $60,000 be wired to Japan to cover another deal.  Since the remaining funds still covered the initial deposit and the additional deposit wasn’t due for a few weeks and the money was the client’s, the lawyer felt that he was obligated to do as instructed.  He checked with his bank to make sure that the check had cleared.  The bank said that it had and the lawyer wired the funds.  The next day, the bank called to say that the cashier’s check was a forgery and the funds were not in the account.  Was the lawyer wrong to trust the client and follow his instructions?

My kids use Venmo all the time to transfer money among their friends. When I send them money from time to time, I write checks.  They tease me telling me how old fashioned I am and how much easier it would be if I just got Venmo.  But I see fraud and fraud attempts all the time.  Should I trust a new technology for small transfers or will I be giving access to my bank account to countless unknown persons?

In today’s day and age, trust does not go both ways. Those who want to defraud you are extremely sophisticated and have the means to do so if you aren’t extra diligent.  When we wire proceeds at closing, wire instructions must be verified over the phone by a phone call that we place to the person providing us with the instructions.  If the instructions change, we require double verification.  We rarely accept funds for closing any more by any means other than wire.  If we don’t know you, there is no exception to the rule.

It is not a matter of trust anymore. The world is too big, technology is evolving too quickly.  In our business, we have to be diligent to protect ourselves and our clients.  And, if you think this way in your professional life, why would you think this way in your personal life as well?

A Business Men Climbing a Pile of Papers

Starting tomorrow, October 2nd, the selection of a closing and title agent for residential closings will become a treasure hunt. As a result of the Great Real Estate Meltdown of 2008 through 2011, Congress decided to micromanage the residential closing process. The Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB) to address increased disclosures and oversight for lenders, settlement agents and others who may handle consumer funds in any way.

The CFPB published extensive regulations that require greater oversight of residential lenders and mandate more detailed disclosures to their borrowers (see our previous post Questions About the Simplification to Real Estate Closing Documentation to be Implemented Nationally on October 3, 2015 – September 17, 2015). The long-standing HUD-1 Settlement Statement and Truth in Lending Act disclosures that have become fixtures at the closing table are a thing of the past. New closing statements and disclosures will become the standard when loans are closed starting Monday, October 5th. Will these new forms be more easily understood by borrowers and closing agents? Probably not. Even if the new forms prove to be less confusing to consumers, the wholesale replacement of the loan closing documentation and closing process will result, at least in the short term, in mass confusion, busted deals and more disputes between sellers and buyers when a loan closing is delayed or cancelled. As residential lenders are subject to strict liability for violations of Dodd-Frank and the CFPB’s new rules, borrowers and closing agents should expect zero flexibility on the part of lenders in closing any loan, regardless of amount or the relationship with the borrower.

While standard residential purchase and sale contracts in use are being modified by groups such as the Florida Bar and the Florida Association of Realtors, attorneys and brokers must take extra care in addressing the rights of sellers and buyers when the confusion inevitably results in loans not being closed. The not atypical “simultaneously close a sale and then close a purchase” will be a thing of the past if loans are involved on both ends of the transactions.

A key consideration for a seller, buyer or lender in the selection of a closing and title agent will be whether that agent, whether a title company or an attorney agent, has timely registered with the CFPB and implemented the “Best Practices” initiative of the American Land Title Association (ALTA). The Best Practices procedures are intended to assist settlement service providers in complying with this new stricter environment. Lenders will insist that each closing agent be properly and timely registered and have completed and be in compliance with a detailed, phonebook thick manual of compliance with the Best Practices. The manual must address procedures for and regular tracking of agent licensing, trust account maintenance and management, data privacy and security, background checks, settlement procedures, title policies and production, consumer complaints and other requirements of the Best Practices rules.

Even a seller must be concerned if the seller is contractually obligated to provide title evidence and insurance to a buyer/borrower. If the seller’s designated agent is not registered and compliance with Best Practices, the agent will not be approved by the buyer’s lender. This will cost both parties additional expense and will delay closings. Whether the transaction involves a single home sale or refinancing or volume unit closings for a developer of condominiums, condo-hotel units, or homes, the lender’s closing mandate will not be forgiving or allow any exception to having a compliant closing agent. These stricter requirements on closing and title agents will likely result in many companies and attorneys leaving the residential closing market entirely.

The lawyers of Assouline & Berlowe, P.A. have invested significant time and resources to ensure that the firm has been registered and is Best Practices compliant in order to serve our clients, whether developers, lenders, buyers or sellers. More information on our Best Practices may be obtained through any of our offices.

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    Welcome to Assouline & Berlowe’s Florida Real Estate Law and Investment Blog with news, insights, and commentary for investors, developers, and their advisors.

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