Alarming New Escrow Fraud Tactic

As a part of our diligence as insurance brokers, we keep tabs on the industry and where the trends are going.  In our discussions with one particular insurance company, we have gleaned some interesting data on claim trends seen in the title industry revolving around escrow funds.

There has been an increased amount of theft of escrow funds in the past 12 months.  Much of this fraud takes place around falsified instructions to move money.  These thieves have used hacked email accounts to perpetrate the crime.  There were at least five separate claims this insurance company experienced.  Here are a couple examples along with their descriptions of what has taken place:

At the end of 2013, a claim was filed against a title agent who was acting as the buyer’s closing agent as well.  The seller’s agent had their email hacked and from this email an “updated” set of instructions was sent to the escrow agent.  Not to think this was a simple trick, the escrow agent also sent an email to the other closing agent to confirm these instructions.  This email was intercepted by the hacker and a fake reply created verifying the new (i.e. fake) instructions.  The agent wired the funds to the hackers and the FBI was never able to recover the assets.  The insurance company paid over $250,000 to settle.

In April of 2014, an unrelated settlement agent was set to wire the seller’s proceeds after a transaction closed.  The seller emailed the wire instructions to the agent.  The next day another email came in from this seller with a different account number.  The agent wired the funds to this new account number.  It was later discovered that a hacker had read this first email, then created an email address that was very similar to the seller’s.  The settlement agent didn’t realize the difference until it was too late.  The money was already withdrawn from the account before it could be recovered.  The insurance company paid nearly $3,000 and the insured paid a $5,000 deductible.

In September of this year, an escrow agent received instructions to release funds on a home purchase to the closing agent.  The only problem was that the email was not from the closing agent, but from someone posing as the closing agent and the account number given was the incorrect account.  The escrow agent notified the bank to reverse the transaction.  They explained that it was a legitimate transaction and they could not reverse it.  The FBI has been alerted but the money remains to be recovered.

These claims all have a similar train of events.  A fake email modifying or redirecting the course of a release of escrow funds.  In some cases, the escrow agent attempted to independently verify and in others they did not.  There are a few important risk management tips title agents can take away from this.

  • Verify Instructions – It is important to verify the instructions to release funds.  The verification should be performed using two mediums.  Relying solely on one medium can lead to problems.  Picking up the phone or asking for a fax to confirm can often save confusion – or even catch a thief.
  • Research Changes – When instruction on where to release funds is changed at the last minute – this should be a red flag.  It is again important to verify these changes with multiple parties.  It is often difficult to add extra steps to a busy day, but it might be worth it if it saves a firm from paying a deductible or going through the headache of a claim.

Contact us to discuss additional ways to protect and insure your title agency from legal malpractice claims.