As if there wasn’t enough uncertainty coming into 2023, the failure of three banks in March has darkened the outlook for an economy that otherwise seemed to be holding its own in the first quarter.
The banks affected had significant exposure to technology and cryptocurrency, and included:
Silvergate Bank (cryptocurrency) announced on March 8 it was winding down due to losses in its loan portfolio
Silicon Valley Bank (technology-start up lender) taken over by California regulators after experiencing a run on the bank due to its failure to raise needed bank capital
Signature Bank (cryptocurrency) closed by bank regulators, citing systemic risks
Although state regulators, the FDIC and the U.S. Treasury Department all stepped in quickly to attend to the failed banks and reassure the entire banking system, there were plenty of investors, industry pundits and business owners with the jitters in the weeks that followed.
The question for the housing industry is, how might the banking industry problems affect the long-term outlook for real estate sales in general and interest rates in particular?
The most immediate concern highlighted by many industry analysts is that nervous banks may tighten their credit standards, affecting every aspect of lending, from consumer credit and auto loans to residential and commercial mortgage loans.
Susan M. Wachter, Wharton professor of real estate and finance, said bank investors are anxious about real estate lending because commercial real estate lending has become “unattractive” due to rising vacancies.
Speaking on the Wharton Business Daily radio show that airs on SiriusXM, Wachter said, “Banks are likely to respond to their investors’ distress by lending less, and this is not a good thing for real estate.”
But she quickly qualified her remarks by noting that an “economy-wide credit crunch” would most likely be avoided, given the federal government’s quick response that quelled fears within the banking industry.
The real estate industry is also keeping its eye on what this all means for the economy in general and further potential interest rate escalation.
Responding to stronger-than-expected economic data, Fannie Mae’s Economic and Strategic Research (ESR) Group revised upward its first quarter 2023 GDP forecast in its latest monthly commentary, projecting a modest recession to begin in the second half of 2023, rather than in Q2 as previously forecasted.
“While uncertainty has risen following turbulence in the banking sector, the ESR Group noted that bank failures often foreshadow economic downturns,” Fannie Mae stated. “As such, the ESR Group believes that the recent events may act as the catalyst that tips an already precarious economy into recession, primarily via the combination of tighter lending standards among small and midsized regional banks and weakened business and consumer confidence.”
In its March 2023 release, the Conference Board mirrored Fannie Mae’s outlook, saying U.S. GDP growth defied expectations in late 2022, and early 2023 data has shown unexpected strength. The Conference Board said this is due to the fact that consumers have resisted the dual headwinds of high inflation and rising interest rates.
In light of this, they upgraded the Q1 2023 forecast to 1 percent growth. However, they also continue to forecast that the U.S. economy will slip into recession in 2023 and expect GDP growth to contract for three consecutive quarters starting in Q2 2023, largely due to persistent inflation and Federal Reserve hawkishness.
Minutes from the March Federal Open Market Committee (FOMC) meeting released on April 12 also indicated that the potential economic effects of the recent banking-sector developments would most likely result in the economy falling into a mild recession starting later this year. But given the underlying economic fundamentals, the participants saw this as short-term, with a recovery over the next two years.
Inflation and interest rate outlook
Inflation dropped from a high of 9.1% in June to 6.5% in December, but then slowed its pace of decline, easing only a half-percent to 6% over the course of the first two months of 2023. This slower pace did not impress the Federal Reserve, and so in spite of the banking crisis that was evolving during its March meeting, they raised the federal funds rate another 25 basis points.
However, the March numbers were more encouraging, with the CPI rising only 5% over the last 12 months, according to the April 12 release by the U.S. Bureau of Labor Statistics. This represents the smallest 12-month increase since the period ending May 2021, and shows that inflation is continuing to cool off in the wake of dramatic increases in interest rates.
More than half of respondents in Bankrate’s First-Quarter Economic Indicator poll said the all-important federal funds rate is likely to peak at 5-5.25%, indicating they believe the Fed will only raise rates one more time. Slowing inflation, the banking crisis, and recessionary indicators could all play into the Federal Reserve’s decision to put an end to rate hikes for the remainder of 2023.
In that same survey, more than 80 percent of respondents said the Fed was unlikely to make any move to cut interest rates until 2024, in an attempt to give the economy more time to cool down.
Lawrence Yun, chief economist of the National Association of Realtors, said he believed the Federal Reserve would take into account the banking crisis and its overall effect on the economy in considering further rate hikes, opining in an interview for Realtor Magazine, “The Silicon Valley Bank failure, along with a few other banks, means that the Federal Reserve cannot be so aggressive in raising its short-term interest rates. Therefore, mortgage rates will decline.”
In the final analysis
The economy has consistently reacted in non-traditional ways since the onset of the pandemic, constantly surprising pundits with its persistently healthy fundamentals. The unexpected strength in the employment sector in the first quarter of 2023 and the better-than-expected growth in GDP were acting together to moderate recessionary concerns until the March bank failures reawakened those fears.
The same can be said for the real estate industry. In spite of high mortgage rates, real estate sales showed some improvement in February, and homebuilder sentiment has been on the upswing with new permits on the rise.
But the banking crisis has added another element of uncertainty into the mortgage and real estate industry for the foreseeable future. While it could precipitate lower interest rates as Yun suggested, tightening lending standards could well offset any gains realized.
Only time will tell how all of this will play out as the industry continues to keep a watchful eye on how the Federal Reserve handles both the banking crisis and interest rates in the coming months.
Title agents across the country have seen an uptick in vacant lot scams over the past year, where criminals pose as the property owner and attempt to sell a property to unsuspecting buyers.
This is not a new scam, but it is once again on the rise, and we need to remain hypervigilant.
To help you identify and thwart these fraudulent property sales, we’ve pulled together information about how the schemes are conducted, red flags to be aware of, action steps you can take to verify property ownership, and documentation and proofs you need to verify the seller has the right to sell the property.
In January, ALTA issued an advisory outlining the scheme.
According to ALTA, these scams often begin with a fraudster searching public records to identify real estate that is free and clear of mortgages or other liens. They focus on property not occupied by the owner. This can include vacant lots, out of state ownership, or rental properties where the owner does not live on premises. In addition, elderly owners are often targeted.
After gathering the pertinent information from the public records, the fraudster, posing as the owner, contacts a real estate agent to list the property for sale.
The fraudster often lists the property below the current market value to realize a quick sale. Once the transaction is concluded, the funds are then transferred to the criminal. The ownership discrepancies are often not identified until the documents are filed with the county.
Fraudsters often use several tactics to keep the professionals handling the transaction at arm’s length from the seller. Here are a few potential red flags that may alert you to a fraudulent transaction:
Communications are conducted through email and digital means, never in person.
The fraudster seeks to push the sale through quickly.
Often, a preference for a cash close is indicated.
The scammers refuse to sign in person but demand a notary closing, often insisting on making those arrangement themselves with “their favorite notary.”
Sales proceeds are directed to be disbursed to someone other than the person in title.
Always follow your instincts if something seems unusual in a transaction involving vacant or unoccupied property and ask plenty of questions.
Jean E. Bailey, Vice President and Southwest Regional Underwriting Counsel for Alliant National, noted that the Texas Land Title Association has started a fraud task force after a single agent in the state reported several cases of fraudulent sellers, including one that involved a property worth $2.8 million.
“All the usual elements were there – only communication through email or text, no phone calls, or if there were phone calls, they were from burner phones,” she said. “They also included mail out closings or remote/e-closings, even if the owner resided in the same area as the property.”
An Ounce of Prevention
Agents can take steps to ensure a vacant land sale is legitimate, including making an effort to investigate the property, research the owner of record, and verify the identity of the seller and their forms of identification.
Investigate the Property
Early in the process, it’s a good practice to determine whether the property being sold is vacant. The preliminary title report will show if the property is mortgage and lien free. Contact the real estate agent to ascertain if they have been to the property or met with the owner in person.
Recently, a title agent became suspicious of a transaction and took the precaution to drive to the vacant property and interview neighbors. She discovered that the true owner was not trying to sell the property and reported the scam to the police.
In one reported case, the true owner discovered potential buyers walking through her vacant lot and inquired what they were doing. When they informed her they were buying the lot, the property owner assured them it was not for sale. If a property owner contacts you or the real estate agent about a suspected fraud, take the report seriously and conduct your own investigation.
Inspect Suspicious Deeds
Sophisticated fraudsters will sometimes record fraudulent deeds, transferring property to themselves or a shell company to maintain their anonymity. They often target property that is obviously not being maintained, left vacant or not properly transferred to heirs after the death of the owner.
Often the “new owner” will attempt to sell the property quickly, so a recently recorded deed is a predictable red flag in these transactions.
Establish Seller Identity
It’s worth the effort to independently research the identity of the seller, especially by trying to locate a picture of the owner of record or establishing the age of the seller.
One recently reported scam was discovered because the title agent working on the transaction identified the owner as an elderly woman, while the seller who had contacted the real estate agent was much younger, raising suspicions about the legitimacy of the seller.
An Alliant National agent in Ocala, Florida, became suspicious when asked to close a transaction for a half-acre plot of vacant land. They contacted the owner of record directly about the sale and instructed them to call their office if they were not, in fact, selling the property. The agency’s suspicions turned out to be correct, as the owner called back immediately, provided two valid forms of photo identification and scheduled a video conference call to discuss the matter. Conversely, the fraudulent seller was asked for the same items and never responded, putting an end to the transaction.
Review a purported seller’s signatures on all documents, including the listing agreement and disclosures, making sure they are consistent with documents of record.
If the seller is a foreign owner, and a passport is used for identification, check with the country’s passport agency to verify the legitimacy of the passport.
If you are suspicious, you may want to consider requiring a second form of identification when conducting the closing.
Manage All Notary Closings
Be wary of a request by a seller to choose their own notary. It’s a best practice to insist upon using your trusted closers or closing attorney. You may also want to consider requiring a remote online notarization. If the seller refuses to agree to this form of closing, that may raise a red flag as well.
Report Suspicions to Management and Underwriter
If you suspect a transaction is not legitimate you should contact your manager or agency owner immediately. Based on the facts of the transaction, they may determine it is appropriate to alert other closers and staff to make them aware of other possible schemes they may encounter.
Remember that while you may suspect fraud, until that is proven in a court of law it is only a suspicion and you should not share your concerns outside of the office.
Bailey said this is especially true when dealing with the real estate agent or lender handling the transaction.
“We should not tell a real estate agent or lender that we think there may be fraud in the transaction, because that could result in a claim for slander,” she explained. “It may be sufficient for the underwriter to decline to insure and to have the agent then decline to insure. If a commitment has been issued, the agent should rescind all issued commitments.”
While you must avoid discussing suspicious situations you encounter with the real estate agent or lender, Bailey said you should immediately alert the underwriter.
“It is important to tell the underwriter all the details of the fraud, including the names of all parties and real estate agents, the property address, and any other pertinent information,” she advised. “In addition to alerting the underwriter on the specific transaction, it is advisable for the agent to contact all the underwriters on which they issue policies. The more people who are made aware of these transactions, the more likely fraud can be stopped.”
Bailey noted that the Alliant National underwriting counsel may be able to offer assistance in investigating the parties involved, to ascertain if they are active entities and if the persons purporting to be acting for the entity are actually involved with the entity.
“We may be able to perform credit checks or other searches on the parties that may yield additional information,” she said. “In addition, we may already have knowledge of the scheme, or the persons involved, and be able to inform the agent whether they are right to be suspicious. Sometimes we can even let them know that the transaction appears to be legitimate.”
If there is actual evidence of fraud, the agency owner or manager should contact local law enforcement, especially if fraud is active in their area or they have had more than one occurrence.
County Alert Systems
Vacant lot fraud has been particularly rampant in Florida and Texas. Many counties in those states have established property fraud alert systems, for example the Tarrant County, Texas, Property Fraud Alert, which encourages property owners to request notification from the county recorder if any documents are filed against their property. New deeds, liens or other legal documents would trigger an alert to the owner. As Tarrant County points out on their website, the system will not prevent fraud from happening, but does offer an early warning system that will allow property owners to take appropriate action should they believe fraudulent activity has occurred with their property.
In Florida, several counties have also implemented a similar fraud alert system. Check with the county in which the property is situated to see if this program is available. In addition, Florida is currently considering legislation that would make these alerts mandatory for all property owners.
Follow Your Instincts
Title agents are skilled at ferreting out fraud of all kinds in real estate transactions. Often, the number one indicator is your own instinct that something is off. It could be a buyer who is overjoyed at getting a phenomenal deal on a property that raises your suspicions. Sometimes it is the odd way in which a transaction is progressing. Anything out of the norm should be investigated to ensure the validity of the transaction.
At Alliant National, our underwriting team is here to assist you in thwarting any suspicious activity. Call us if you have any questions or uncertainty about a transaction so that we can work with you to verify the facts at issue.
For every type of insurance that you purchase, there are a variety of different coverages offered. For instance, if you buy homeowner’s insurance you may want to add extra coverage if you have valuable paintings or jewelry that may not be covered by the basic policy amounts.
The same is true for title insurance.
The standard Owner’s Title Insurance Policy affords basic protections against many title defects such as fraud, forgery, or matters in the public record. For example, the policy includes coverage for recorded liens, real property taxes, or legal documents within the transaction that were executed under an invalid or expired power of attorney.
The title agent’s intent is to research thoroughly the ownership rights of the property, as well as any judgments or liens that may exist that could affect your rights to the property. Then the agent clears or cures those issues to ensure that you have free and clear title to the property when you purchase it.
Although your title agent is diligent in searching out the facts about your property that are in the public record, not everything about your property is “of record.” Therefore, a standard title policy includes exceptions to coverage for certain matters that may be undiscoverable.
An Enhanced Owner’s Policy adds 22 new covered risks that are excepted in the standard policy. The enhanced policy is typically available to purchasers of an owner-occupied one-to-four family residence wherein each insured is a “Natural Person.” The term “Natural Person” is defined under the conditions of the title policy. With the enhanced policy, the policy insures against certain future activities and matters that would not be discoverable by the title agent’s search of the land records.
Coverage under an enhanced policy continues to be subject to the title policy’s conditions, exclusions and exceptions unless it is stated differently in the covered risk itself.
Let’s take a look at the additional coverage offered with an Enhanced Owner’s Policy.
One of the most important benefits of an Enhanced Owner’s Policy is inflation coverage. The amount of insurance automatically increases by 10% of the policy amount each year for the first five years, up to 150% of the amount insured for your home. This occurs, without payment of any additional premium, to cover increases in the value of the insured property.
Building Permit Violation
When you purchase a home, you may not be aware that the former owner failed to obtain a legal permit from the proper government office to put in a swimming pool, add a wing to the house or construct an additional dwelling unit (ADU).
An enhanced policy protects you if you are forced to remove or remedy your existing home, or any part of it (other than boundary walls or fences) because any portion was built by a previous owner without obtaining a building permit. This coverage is subject to a deductible amount and a maximum dollar limit of liability, as shown in Schedule A of the title policy.
Covenants, Conditions and Restrictions
Covenants, Conditions & Restrictions (CC&Rs) list the rights and obligations of a homeowners’ association (HOA). This could include your maintenance obligations, property-use restrictions, assessments and insurance obligations, among others.
Without your knowledge, these CC&Rs may have been violated prior to your ownership, resulting in a financial obligation to the HOA or loss of title. An enhanced policy covers you if you are forced to correct or remedy the existing violation or if the title is lost or taken because of any covenant, condition or restriction, which occurred before you acquired your title, even if the covenant, condition or restriction is excepted in the policy.
If any structures on your new property are encroaching onto your neighbor’s property, for instance if the garage is built partially on the neighboring property, the enhanced policy provides coverage in the event you are forced to remove those structures due to the encroachment. If the encroaching structures are boundary walls or fences, this coverage is subject to a deductible amount and a maximum dollar limit of liability, as shown in Schedule A of the policy.
In addition, the policy provides coverage in the event your neighbor builds any structures, after the policy date, that encroaches onto your land (other than boundary walls and fences).
An enhanced policy insures you have actual pedestrian and vehicular access to your property.
Map and Address Inconsistencies
If a map is attached to your policy, the enhanced policy provides coverage if the map does not show the correct location of the land, according to the public records.
Sometimes a taxing authority may assess supplemental real estate taxes not previously assessed against the land but covering a period prior to your purchase. This could be due to new construction or a change of ownership that occurred before the policy date. An enhanced policy would cover this liability as well.
If a previous owner added structures to the property that violate zoning laws, an enhanced policy provides coverage to you if you are forced to remove or remedy your existing structures, or any part of them, due to those violations. If you are required to remedy existing structures, the amount of insurance is subject to a deductible amount and maximum dollar limit of liability, as shown in Schedule A of the title policy.
In addition, you are insured if it is determined your property cannot be used as a single-family residence because it violates existing zoning laws or zoning regulations.
Property ownership is often more complicated than we know, especially if you are purchasing property in an unusual situation, where property has been recently subdivided or where there has been recent construction. If you have any questions or concerns, it may be advisable to enlist the help of a real estate attorney to review all aspects of your purchase. We also invite you to contact a local title insurance agent to learn how the Enhanced Owner’s Title Policy can provide you additional protection for your homeownership rights.
The American Land Title Association has published its ALTA Best Practices Framework version 4.0, featuring several significant updates to Pillars 2, 3 and 4 in response to what the trade group identified as a changed environment, including new laws, increasing fraud threats, and more complex technology.
On a recent ALTA webinar explaining the changes, the association listed a litany of ways the industry has changed over the past decade, including earnest money apps, remote workers, an explosion of new technology, remote online notarization, more sophisticated fraud, real time payments, and a growing technology environment that includes a complex web of third-party integrations.
Because of the drastically different environment in which title agents are now working, ALTA has broadened its focus to address increasing complexity in operations, including safety, customer experience and efficiency.
“These revisions have been made with the specific objective of allowing agents and direct operations to continually improve their practices and procedures to ensure financial, data security and operational stability, and to provide lenders and other constituents with the assurances that their needs are being fulfilled by these efforts,” ALTA said in its official release of version 4.0 on January 23.
For Alliant National agents, it is important to note that the implementation date of May 23 will affect assessments and renewals, which if conducted after that date, must be based on the 4.0 framework.
Let’s take a look at some of the most significant changes.
Pillar 2: Escrow Accounting:
ALTA made several changes to Pillar 2, including updating the treatment of non-settled funds and outstanding file balances, use of fintech applications, escrow funds training, and wire transfers.
Loss of Funds
The Pillar 2 purpose section was updated to note that the loss of funds in a transaction may fall outside of E&O coverage and could become the responsibility of the title agency.
In addition to having policies and procedures in place that prohibit or control the use of ACH transactions and internal wire transfers, agents must also ensure procedures are in place for electronic/digital receipt of funds from web-based fintech applications.
When using a third-party earnest money deposit or disbursement platform that facilitates digital transfer of escrow account receipts and disbursements, the agent must ensure the platform meets good funds law requirements and is not subject to the Electronic Funds Transfer Act (EFTA), which would allow for reversal of consumer payments.
On the ALTA webinar, association representatives noted that one of the most important changes agents should pay attention to is the requirement that they carefully vet platforms they are using to receive incoming funds to make sure those platforms do not allow for reversal of funds.
Along those same lines, in the previous versions of the Best Practices, agents were absolutely prohibited from accepting and wiring out funds before they had cleared.
Recognizing that agents were sometimes taking this risk in extenuating circumstances, the new language provides some leeway, saying that agents should ensure that undue risk is not being undertaken for deposits that are not fully settled.
As an example, a title agent may accept a check after a closing for an inconsequential amount – $20 for example – but are prohibited from incurring the risk of accepting a substantial amount of money and wiring out before it has cleared. The level of risk should be commensurate with the amount of money being risked and the company’s size and ability to assume that risk, and that threshold must be determined by each company.
Given growing security concerns over the vulnerability of wire transfers, agents are now required to have documented procedures to verify wire transfer instructions independent of the initial communication, and those verification procedures should include multi-factor authentication (MFA). (See ALTAs Outgoing Wire Preparation Checklist)
Best practices were also updated to recommend the use of wire verification services, with the caveat that those providers should be vetted to assess risk of use, security protocols and the provider’s ability to protect consumer data.
ALTA pointed out during the webinar that companies can have the most sophisticated policies to protect themselves against wire fraud but may still find themselves exposed to risks due to human error. Wire verification services, where they are available, efficient and economical, should be used as another tool to prevent fraud.
While the original best practices required agents to get background checks only on employees who had access to customer funds, the updated procedures extend that requirement to all employees at the time of hire with updates every three years thereafter.
Aging Escrow Balances
Procedures are updated to require that managers review and approve any activity in aging escrow file balances.
Pillar 3: Privacy and Information Security Programs to protect NPI
ALTA made important updates to many aspects of an agent’s responsibility to protect NPI, including physical protection, cloud security, and the agent’s incident response plan.
Written Information Security Plan (WISP)
One of the most extensive changes to Pillar 3 is the requirement for a written information security plan (WISP) and a privacy plan to protect NPI as required by local, state and federal law. Specifics of the updated procedure include:
The use of MFA for access to systems containing NPI
A password management plan that requires unique login names and system passwords to access systems containing NPI
System passwords must meet minimum standards, which include:
reentry of the password after system idling
passwords that expire after a certain period of time
difficult-to-guess passwords that include upper- and lower-case letters, special characters and a minimum length of eight total characters
Timely software updates, which when left outdated, can result in data breaches, cyberattacks, ransomware attacks and other NPI exposure
One additional requirement is that access to the company’s information systems must be granted only to authorized employees and authorized service providers who have undergone background checks.
This extends to physical access as well, with version 4.0 adding the caveat that only authorized employees and authorized service providers who have undergone background checks should be allowed access to desk, cabinets or storage areas where NPI is housed.
Other changes to Pillar 3 include:
Extending network security requirements to use of cloud systems, virtual equipment, data centers and third-party hosting
Updating the disaster recovery and business continuity plan to specifically include a compromise of systems or facilities
Adding language that notes the inclusion of continuity of operation for consumer settlements and timely notification to all parties in case of any delays due to a disaster
Noting that the written incident response plan should follow the recommendations of the ALTA Cybersecurity Incident Response Plan
Specifying that service provider policies are to be consistent with the company WISP – including IT consultants, outsourcing company employees and third-party software employees. Software tools and resources are also to be consistent with WISP
Pillar 4: Settlement
Pillar 4 updates increase an agent’s responsibility for vetting internal and external signing professionals and for selection of remote notarization platforms, as state law and underwriter guidelines have changed dramatically since the pandemic. As part of the new consumer focus, changes were also implemented related to staff training and consumer notifications.
Pillar 4 is updated to include training for staff to provide a framework for:
Enabling a timely response to concerns raised following a settlement
Addressing consumer complaints
This updated requirement for improved training calls for agents to created a formalized training program for every aspect of the title and escrow process. While it may have been sufficient in the past to ask a new hire to shadow another employee for a few days to learn the procedures, ALTA has now determined an informal approach can lead to inconsistencies and errors.
A formal training program can ensure everyone within the agency is handling each aspect of the process in exactly the same way. It also overrides the dangers of a new employee from going rogue and “doing it the way we did it at my previous agency.”
Most importantly, the updated Best Practices framework encourages agents to document every aspect of the training so that all managers within the agency follow the same protocols when training a new employee.
Remote Online Notarization (RON)
Agents whose employees will be notarizing documents via remote notarization are required to select a platform authorized by the state in which the notary is located and one that is approved by the agent’s title underwriter. Returning once again to the issue of NPI, the updates require the agent to ensure the platform is capable of meeting the minimum requirements of the state, including retention of the video and safeguarding NPI. This same level of oversight is required if the agent engages a third-party to notarize documents via RON.
As with RON oversight, responsibility is placed on the agent to verify signing professionals have state and contractually required licensing and insurance. In addition, agents must perform background checks for signing professionals employed by the company and ensure that third-party signing professionals have the required professional designation, insurance and bond.
Pillar 4 includes several other miscellaneous updates, including:
A requirement to provide an affiliated business relationship disclosure in compliance with state and federal law
Guidance for additional procedures to follow when using an e-recording vendor
New guidance in the payment of fees or tax for escrow trust accounts
Pillars 5, 6 and 7
Only one update was made to Pillar 6, which is a new mandate to review cyber, crime, and E&O coverage limits and exceptions annually.
No substantive changes were made to Pillars 5 and 7.
Alliant National agents are encouraged to carefully review current policies and procedures in light of these important best practices updates. This is especially critical for agents who are facing assessments after the May 23 implementation date.
Please contact your Alliant National underwriting counsel if you have any questions or concerns as you review and implement these new policies.
In a November report to Congress on business email compromise (BEC) and real estate wire fraud (REWF), the FBI announced enhanced efforts to put the brakes on what has become one of the most financially damaging crimes in the United States.
According to the FBI report, BEC has been the largest dollar loss by victim crime typology reported to IC3 in the past several years, with over $2.4 billion of losses in 2021.
“For comparison, the second highest dollar loss category reported to IC3 was investment fraud, with losses of approximately $1.45 billion,” the FBI reported. “In other words, dollar losses associated with BEC were over 65% more than dollar losses associated with investment fraud.”
The FBI noted in its report that criminals have been refining their exploitation of technology, especially the internet, to carry out financial crimes, logging substantial increases in internet-enabled financial frauds such as bank account takeovers, synthetic identity related frauds, money laundering through virtual currency, and BEC.
“The FBI has pivoted its approach to address this issue through gathering intelligence, utilizing advanced investigative techniques in conjunction with traditional financial crimes investigative techniques, using proactive public and private partnerships, and education and awareness campaigns,” the agency noted in the report.
Real estate wire fraud in the crosshairs
REWF is a sub-category of BEC, in which criminal actors target individuals or companies executing large wires related to real estate transactions. As our agents are aware, the criminals pose as parties to the transaction and directly communicate with the other parties to steal funds intended to pay for the real estate.
According to IC3 complaint data, victims participating at all levels of a real estate transaction have reported such activity, including title companies, law firms, real estate agents, buyers, and sellers. The FBI has specifically focused on addressing REWF due to its prevalence in the U. S. and the effect it can have on the individual victims of the REWF schemes, who may be home buyers wiring their life savings.
In its report to Congress, the FBI updated its preventative measures to include the following recommendations:
Use secondary channels or two-factor authentication to verify requests for changes in account information.
Ensure the URL in emails is associated with the business/individual it claims to be from.
Be alert to hyperlinks that may contain misspellings of the actual domain name.
Refrain from supplying login credentials or PII of any sort via email.
Verify the email address used to send emails, especially when using a mobile or handheld device, by ensuring the sender’s address appears to match who it is coming from.
Ensure the settings in employees’ computers are enabled to allow full email extensions to be viewed.
First published in 2017 and fully updated by Alliant National’s Compliance, Risk and Education teams, the paper provides information, tips and suggestions to help you better understand the current threat environment and create a comprehensive plan that addresses the realities we face in our industry.
Filling in the Gaps
The FBI has had considerable success in reclaiming lost funds through the IC3’s Recovery Asset Team (RAT) program, since its inception in 2018.
The RAT is designed to assist FBI field offices with the rapid recovery of funds for victims who made transfers to domestic accounts. In 2021, the RAT reported just over 1,700 incidents, with losses approaching $445 million. According to the FBI, the RAT was able to recover more than $328 million of the $445 million.
But there is more work to be done and the FBI has identified vulnerabilities which, if addressed, would bolster the ability of U.S. law enforcement to effectively address a wide range of threats, including BEC.
The first is getting access to beneficial ownership information to track funds that end up in accounts controlled by shell companies.
“The Corporate Transparency Act (CTA) provides for the creation of a national, non-public database of underlying beneficial ownership information for U.S.-registered businesses that meet specific criteria,” the FBI noted. “The data collected will be made available to U.S. law enforcement, subject to certain guardrails, offering a critical resource for identifying participants in a BEC scheme.”
On Sept. 29, the Financial Crimes Enforcement Network (FinCEN) issued the first of three rulemakings to implement the CTA, governing who must report and what information they must report to FinCEN. The final rule will take effect on January 1, 2024.
The effectiveness of this reporting requirement is as yet unknown, and there is some concern that the CTA exempts from its reporting requirements various types of entities, including trusts, which may affect efforts to identify the beneficial owners of trusts or other entities engaged in REWF.
The FBI is also recommending that UCC 4A-207 be redrafted to require banks to properly identify the name and number of the beneficiary and to determine they are in fact the same individual or entity. Currently, a bank may simply rely on the number as the identifier, without requiring a check to see if it is actually connected to the named beneficiary.
Cyber security #1 priority in 2023
As the threat from cyber criminals continues to escalate, it is imperative that our agents review their procedures for protecting client funds.
You can begin today to assess your systems and educate your staff to make sure every possible precaution has been put into place. We hope our Escrow Fraud/Social Engineering White Paper will be helpful in this work. Alliant National is committed to updating our agents to help you understand and respond to the current threat environment. Feel free to reach out to your agency representative, or any member of the Alliant National team if you have any concerns.
This blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on this blog.
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