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Fraud Prevention

A few years ago I attended a seminar in New Orleans.  A large segment of this seminar concerned the detection of fraud by a title and escrow company.  The presenter, who was an investigator, discussed a number of situations which had resulting in large losses.  In many cases the loss was a direct result of fraud.  The presenter also discussed how in almost every case, the fraud could have been prevented if the title and escrow company would have followed a few basic guidelines.  One suggestion that was make included the review of the endorsements on trust account checks.

Fraud often occurs on multiple transactions.  The fraudsters develop a friendly relationship with others involved in the real estate transaction including the escrow officer or other individual in the title and escrow company.  Over time they develop a relationship of trust.  The title and escrow company is not aware of any problems and may not be held liable for any damages.  However, in many fraud cases, everyone involved in the transaction gets sued.  The cost of defending this type of suit is very expensive.

A review of the endorsements on trust account check will often disclose questionable actions which occur after the closing.  When a trust account check is endorsed over to another party associated with the transaction, or made payable to a third party, it may be a red flag of potential problems.  This is especially true when the endorsement to a third party becomes a regular practice.  It would be impossible to review all the different types of third party endorsements and the problems associated with each.  The closing of a real estate transaction with a title and escrow company should be a safeguard.  Through the review of trust account check endorsements, the habits and practices of your clients can be watch.

A Recent Example:  A New Jersey state grand jury indicted two real estate agents on October 22, 2009 and charged them with first-degree money laundering, first-degree conspiracy, two counts of second-degree theft by deception and third-degree failure to file corporate tax returns, among other crimes.  The state attorney general accusing these individuals and their real estate company of stealing more than $600,000 from home sellers in connection with 11 home sales.  The accused individuals were also charged with defrauding three mortgage companies of $641,800 by falsifying the earnings of applicants for three home loans.  Many of the checks issued by the title companies handling the property sales were written to the home sellers, but these indited individuals convinced the sellers to sign the checks over to them for payment of business expenses and fees.  These activities occurred between August 2006 and February 2008.

If the title companies had been reviewing the endorsements on their trust account check, many of these fraudulent transactions could have been prevented.  Title and escrow companies have a unique position in the transaction.  They have information which is not available to others.  While the review of endorsements on trust account check may reveal a problem that has already occurred, it will give them a better understanding of their client’s practices and may prevent future fraudulent transactions.

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