Many Steps Required for Handling Trust Money in an Electronic Age

(The following article is reprinted from the Real Estate Bulletin, official publication of the California Department of Real Estate. Statute citations have been changed to the comparable North Carolina law.)

More and more real estate brokers are taking advantage of the electronic disbursement options made available to them from their bank or other financial institution. These options are available for the trust accounts used by a broker. If done properly, trust money can be paid out from a trust account via electronic disbursements. Not only must a broker comply with the Real Estate License Law including G.S. 93A-6 and the Commission rules including Rule A.0107, but it is important that the broker know that there are many caveats and steps that need to be taken in order to assure that there is proper authorization, documentation, and protection for electronic disbursements.

An electronic disbursement includes such processes as wire transfers and electronic funds transfers (EFT’s). A wire transfer is an individual transaction set up between one entity and another, typically with funds transferred from one bank account to another. Wire transfers may be more costly and are usually used for large transactions.

An EFT is a transfer of funds initiated through an electronic terminal, telephone, computer, or other means authorizing a financial institution to debit or credit an account. An EFT is often a very cost effective means of distributing funds. In the United States, the Automated Clearing House (ACH) is the primary means through which EFT’s take place.

Who Can Disburse Funds Electronically?

The requirements of Commission Rules A.0107 and A.0110 apply whether a disbursement is made using a paper check or electronically. Disbursements should be made from a trust account under the supervision of the broker-in-charge.

Policy and Procedures

Long-established internal control practices, such as written policies and procedures, authorizations, segregation of duties, and monitoring are vitally important in the electronic disbursement process. Supervisory oversight is especially critical to assure that trust money is not embezzled and is accounted for properly.

Before you begin making electronic disbursements, it is advisable to create detailed policies and procedures to spell out:

who is authorized to initiate electronic disbursements;

how electronic disbursements will be approved by the broker-in-charge;

who will send electronic disbursements if they are not automated; and

who will account for these transactions and reconcile accounting documentation related to electronic transactions (of course the requirements of Commission Rule A.107, .0108 and .0110 apply).

In order to establish a recurring bill payment from the trust account on behalf of a client (e.g., mortgage payment), policies should be in place that include, but are not limited to, obtaining authorization from the client, direction of the broker-in-charge for initiating the process, and an approval process that will prevent incurring negative balances.

Proper segregation of duties is especially critical for electronic transactions. Proper segregation of duties reduces the chance that one person could be in a position both to commit a wrongdoing and to conceal it. At least two individuals should be involved in an electronic distribution. If possible, the authorization and transmitting functions should be separated and the recording function should also be assigned to someone who does not have either approval or transmitting duties.

For non-recurring bill payment, access to the electronic disbursement function should be controlled and its use should be authorized and actively monitored due to the ease with which transfers can be made. Safeguards for initiating an EFT or wire transfer could include, but are not limited to:

having a callback provision in your electronic or wire instructions that requires the bank to call someone other than the person initiating the transaction;

using a restricted password to authorize the bank to make a transfer;

hand delivering a letter of authorization to the bank with the transfer instructions; and

having a policy with the bank that limits recipients of wire transfers.

Failure to establish controls could result in a trust account shortage.

Brokers should also be aware that, depending on the transaction flow, the use of a third part service intermediary provider may not meet the broker-in-charge’s trust money handling requirements.

If done properly, electronic disbursements can be a time and money-saving process, but the process requires strong supervisory oversight, controls and record keeping. It can be a nightmare for a broker, ripe with danger of substantial loss of funds and/or loss of accounting controls, if the broker is not fully involved and does not have policies in place.

This article came from the Feburary 2012-Vol42-3 edition of the bulletin.