Recent Arrests, Jury Verdict Highlight Ongoing Need for Wire Fraud Diligence

A recent international law enforcement sweep and a federal court decision upholding a jury’s negligence verdict against a Kansas real estate agent serve as strong reminders of the ongoing need for all transaction participants to be aware of the very real threat of real estate escrow/closing wire fraud.

The Arrests: In June, the U.S. Department of Justice (DOJ), the Federal Bureau of Investigation (FBI) and other cooperating federal agencies announced the arrest of over 80 individuals in the U.S., Nigeria, Canada, Mauritius, Poland and other countries in connection with various alleged business e-mail compromise (BEC) scams. The FBI says that these sophisticated scams often target employees with access to company finances and trick them in various ways into making wire transfers to bank accounts that are thought to belong to trusted partners, but actually belong to criminals. The arrests were accomplished with the cooperation of law enforcement entities in Canada and several other countries, identified millions of dollars in hijacked transaction funds, and seized or disrupted the fraudulent transfer of millions more. The FBI says that since its Internet Crime Complaint Center (IC3) began keeping track of BEC and its variant, the e-mail account compromise (EAC), there has been a loss of over $3.7 billion reported to the IC3.

Real Estate Escrow Wire Scams on the Rise: In connection with the arrests, the Department of Justice said, “The same criminal organizations that perpetrate BEC also exploit individual victims, often real estate purchasers, the elderly, and others, by convincing them to make wire transfers to bank accounts controlled by the criminals.” Real estate escrow wire fraud involves criminals who digitally impersonate sellers, real estate licensees, title companies and other transaction participants in order to accomplish the fraudulent diversion of transaction funds. According to the FBI, “From calendar year 2015 to calendar year 2017 there was over an 1100% rise in the number of BEC/EAC victims reporting the real estate transaction angle and an almost 2200% rise in the reported monetary loss.”

Jury Holds Licensee Liable: The U.S. District Court for the District of Kansas recently upheld a jury verdict against a seller’s representative and her brokerage company in a transaction marred by escrow/closing wire fraud. According to the posttrial decision in the case, “An unknown criminal  inserted himself into the transaction through emails, including with the use of fake email accounts with names similar to the accounts used by participants in the transactions, with the result that plaintiff [the buyer] lost the purchase price of $196,622.67 when he wired that amount to a bank account controlled by the criminal.” As summarized in the court decision, the evidence reflected that the criminal accomplished this by creating fake closing instructions and sending them to the seller’s representative, who then allegedly forwarded them to the buyer. The seller’s representative denied that she sent the email containing the fake instructions. The jury assigned 85 percent of the fault to the seller’s representative and 15 percent to the buyer. Accordingly, the U.S. District Court entered judgment for the buyer in the amount of $167,129.27.

The seller’s representative brought post-trial motions challenging the verdict, alleging that there was insufficient evidence to support it. The court denied the motions and ruled, among other things, that:

• The jury could reasonably have found that in supplying the wiring instructions to the buyer, the seller’s representative was impliedly asserting that those instructions were correct.
• The jury could reasonably have concluded that the seller’s representative failed to act with reasonable care because she “conceded in her testimony … that she did not confirm that she had the correct instructions (despite oddities in the instructions, such an incomplete out-of-the-area bank address) and that she had the responsibility to make sure that she sent accurate information to [the buyer].”
• There was sufficient evidence to support the jury’s finding that the buyer, an experienced real estate investor, reasonably relied on the instructions received.

Resources: While real estate escrow/closing wire fraud scams have been widely reported, it is apparent that only heightened diligence on the part of all transaction participants will reduce the continuing risks. Numerous resources providing information about these scams and how to avoid them have been generated by industry associations, consumer groups, regulators and many others. Here are a few selected examples:

• According the National Association of REALTORS®, several of its state associations have generated suggested wire fraud notices that explain the risks to clients and how to avoid being victimized. [Please note: Such notices are or may be subject to copyright laws-Ed.]
• Numerous federal agencies have issued warnings and tips, including the Consumer Financial Protection Bureau, the Federal Trade Commission (in cooperation with NAR) and the FBI/IC3.
• Warnings and advice to real estate and other licensees, and consumers, have been issued by regulators in dozens of jurisdictions, including Colorado, New Jersey and Utah; and in the Idaho Real Estate Commission’s most recent The Real Estatement publication and a previous edition of the North Carolina Real Estate Commission’s Real Estate Bulletin.

© ARELLO®. Reprinted courtesy of ARELLO’s Boundaries magazine.