Fraud

FinCEN warns that Russian bad actors seek to invest in U.S. commercial real estate

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Financial institutions have reporting obligations under the Bank Secrecy Act, and Financial Crimes Enforcement Network (FinCEN) published an alert on January 25 warning financial institutions to be alert to potential investments in commercial real estate by sanctioned Russian elites, oligarchs, their family members, and the entities through which they act.  Commercial real estate lawyers should also be alert to these dangers.

You can read the Alert in its entirety here.

Use this link for a list of sanctioned Russian elites and their proxies.

Commercial real estate transactions are particularly vulnerable to exploitation by bad actors because of the complex financing methods and opaque ownership vehicles routinely employed. Because commercial properties are so high in value, buyers and sellers seek to use these methods and vehicles to limit their legal, tax and financial liability. In addition, foreign investors are common in commercial real estate.

The Alert points to the following types of transactions and vehicles that are so common that protection against invasion into them by bad actors would be difficult at best. The green, italicized words are mine:

  • The use of pooled investment vehicles, including offshore funds, to avoid due diligence and beneficial ownership protocols established by financial institutions. In other words, a bad actor may attempt to reduce its ownership percentage in a property to avoid normal due diligence for owners with higher percentages.
  • The use of shell companies and trusts to conceal ownership interests.
  • Involvement of third parties to invest in behalf of a criminal or corrupt actor.
  • Inconspicuous investments that provide stable returns. The properties may not be high end. They may be multi-family housing, retail, office, industrial or hotels in small and mid-size urban areas.

Thankfully, FinCEN’s Alert provides several red flags to assist in these difficult determinations.

  • The use of a private investment vehicle that is based offshore to purchase commercial real estate and that includes politically exposed persons or other foreign nationals (particularly family members or close associates of sanctioned Russian elites and their proxies) as investors. I had to Google the term “politically exposed person”. It means a person who has been entrusted with a prominent public function. These individuals generally represent a higher risk for potential involvement in bribery and corruption by virtue of their positions and influence.
  • When asked questions about the ultimate beneficial owners or controllers of a legal entity or arrangement, customers decline to provide information. In my former life in which I represented developers, when I asked questions about the identity of the beneficial owners, I got answers. It is a red flag if you are unable to obtain those answers.
  • Multiple limited liability companies, corporations, partnerships, or trusts are involved in a transaction with ties to sanctioned Russian elites and their proxies, and the entities have slight name variations.
  • The use of legal entities or arrangements, such as trusts, to purchase commercial real estate that involves friends, associates, family members, or others with close connection to sanctioned Russian elites and their proxies.
  • Ownership of commercial real estate through legal entities in multiple jurisdictions (often involving a trust based outside the United States) without a clear business purpose. Again, if you can’t get good answers to your questions, this is a red flag.
  • Transfers of assets from a politically exposed person or Russian elite to a family member, business associate, or associated trust in close temporal proximity to a legal event such as an arrest or an OFAC designation of that person. Remember that we check the OFAC (Office of Foreign Assets Control) list for individuals in our transactions using links provided by title companies. If you have questions about how to perform this function, call your friendly title insurance company underwriter. You can use this link.
  • Implementation of legal instruments that are intended to transfer an interest in commercial real estate from a politically exposed person or Russian elite to a family member, business associate or associated trust following a legal event such as an arrest or an OFAC designation of that person.
  • Private investment funds or other companies that submit revised ownership disclosures to financial institutions showing sanctioned individuals or politically exposed persons that previously owned more than 50 percent of a fund changing their ownership to less than 50 percent.
  • There is a limited discernable business value in the investment, or the investment is outside of the client’s normal business operations.

This is the fourth FinCEN alert on potential Russian illicit activity since Russia’s invasion of Ukraine. The Federal government is serious about policing these activities. I recommend that you contact your favorite title insurance underwriter any time you determine that sanctioned persons or their proxies involved in your transactions. Be careful out there!

Texas Attorney General investigating Home Title Lock

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Several years ago, a prominent Myrtle Beach real estate lawyer called me to suggest that our (title insurance) company should develop a product like Home Title Lock. That company advertises that it alerts homeowners if fraudulent or forged deeds are recorded in their chains of title. I contacted corporate leaders to explore this idea, and it was quickly decided that the product was virtually meaningless.

Last week, another prominent Myrtle Beach-area lawyer emailed me with news that the Attorney General for Texas is investigating the company. Here the South Carolina dirt lawyer’s direct quote, “After the number of older clients I have had who come into a transaction confused and scared by the talking heads on conservative media who have been schilling for this company, I am glad to see law enforcement taking an interest.”

Ken Paxton, the Attorney General, apparently agrees. He issued a press release on January 24, stating, “I won’t tolerate false, misleading, or deceptive advertisements targeted to any Texas consumers—especially Texas seniors. If Home Title Lock is misrepresenting its services or the need for its services I will put a stop to its unlawful behavior.”

The AG announced an investigation of this company for potentially violating the Texas Deceptive Trade Practices Act by misleading consumers with deceptive statements concerning the prevalence of home title theft and the need for this company’s services.

The press release states that Home Title Lock is a California-based entity that claims to provide 24/7 monitoring of a consumer’s home title. (How could that even be done?) The press release states that the company has received scrutiny in recent months over questionable advertisements, including its claim that the FBI calls home title theft “one of the fastest growing white-collar cyber-crimes in America.” Apparently, Home Title Lock admits that it markets to “older customers.”                      

The Texas AG’s office issued a Civil Investigative Demand on December 15 ordering the company to make documents available substantiating the following, among other matters:

  • Any home title theft resolution services;
  • Representative samples of customer contracts;
  • The claim that the Company monitors the title of consumers 24/7;
  • The claim that the Company provides nationwide monitoring;
  • The claim that like other white-collar crimes, title fraud remains under reported with losses totaling more than $5 million in 2015;”
  • The claim that a victim is responsible for payments incurred due to a fraudulent home equity loan. (“Now thieves take out massive loans using your home’s equity-leaving you with the payments and mountains of legal bills;”) and
  • The claim that the company offers “complete protection – including up to $250,000 in legal fees and expense coverage.”

I’m so glad to see this investigation is starting, and I hope other states follow.

Cybersecurity Breach affects SC county offices

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Chicago Title’s South Carolina state office sent out a memorandum on December 29 announcing that Cott Systems, Inc. has suffered a cybersecurity breach. I wanted to make sure the readers of this blog have access to this important information.

Cott Systems provides many services to county offices, including electronic recording, record storage, online searching, and court case management. Chicago Title has been told that Cott Systems provides services to at least the following counties: Darlington, Florence, Marlboro, Oconee, and Union. Other counties may be involved.

Apparently, this company took its services offline upon discovery of the breach. As of December 29, the company was unable to estimate when service may be restored but reported that it is working diligently to address the problem. As of mid-day on January 4, we were told that at least two counties were back online. I hope all of them are up and running at this point.  

If title abstracting and recording services are ever unavailable in the counties where you do business, please contact your title insurance company for assistance. Your friendly underwriters should be able to talk with you to resolve your issues, depending on the dates of your prior title work, dates of closings, etc.  Please be careful out there!

Some (relatively) new scam tips

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If I told you how many articles I’ve written about fraud and scams, you’d think I’m much older than I am, so we won’t go there. But I am old enough to be retired. My husband and I both worked for large corporations who kept us current on scams of all kinds. In retirement, we must read numerous sources to make sure we keep ourselves safe online and otherwise.

The Washington Post, one of my favorite newspapers, published an article on September 6 entitled “Yes, it’s a scam; Simple tips to help you spot online fraud.” You can read it here.  

The first tip makes so much sense: “Have “the talk” with family members.” This is so important! Tell your aging parents, your teenagers who spend a considerable portion of their lives online, and everyone in between the tricks you learn from your practice and your title insurance company about safety online. As painful as it may be to assist your elderly family members with their computer issues, keeping them safe from scams will save you from having to unwind the problems. Tell your family members to come to you to “gut-check”, as the article advises, suspicious messages and phone calls.

The second tip involves social media. The article advises that privacy settings can make it significantly harder for cybercriminals to successfully target you and your family members. Read the article for the details.

The third tip is my mantra: stay current! Using current events for unjust enrichment is a prime strategy of scammers. The article reports that within 24 hours of President Biden’s announcement of the student loan forgiveness program, The Federal Trade Commission released a warning about student loan scams. Updates for all of us are available at Fraud.org, a project of the National Consumers League. Make one of your employees responsible for reviewing and reporting on the great information from that site. And make sure your family members know about it.

I love this one: “Assume that people or companies aren’t who they say they are.” As lawyers, we’re naturally and by education skeptical. Make sure those around you approach the internet and telephone as skeptically as you do.

This one is great: “Verify everything using a different channel.” Title insurance companies have been telling their agents for years (decades!) to verify wiring instructions by making a telephone call using a known and trusted telephone number. This advice can be used in other areas of online life. Use official customer service numbers and websites. Call your bank! Call or text a friend who asks for money via social media. The article advises the use of AARP’s free telephone service to ask about possible scams: 877-908-3360.

The article advises all of us to memorize the signs that something is a scam:

  • You didn’t initiate the conversation.
  • You won something.
  • You are panicked:  scammers want to create a sense of urgency.
  • It involves fast payment methods: peer to peer payment apps, for example.
  • There are payment complications. For example, the scammer will offer to pay over an app like Zelle, say there’s a problem, then ask for your email address so they can send a fake email to get your information.
  • They want information.
  • Something doesn’t feel right.

Stay current, keep your office current, and keep your family members current!

Myrtle Beach article points to current fraud cases

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The Myrtle Beach Sun News published an article on September 5 entitled, “They were conned out of their dream beach home, lawsuit says. These are common SC scams.”  You can read the article here.

Those of us who have worked in the real estate industry for years have heard of (or been bitten by) various iterations of real estate fraud schemes. These schemes change routinely as the fraudsters become more sophisticated. Thankfully, we are becoming more informed and therefore more sophisticated ourselves. But this article is an excellent reminder.

The article recounts the tale of a North Carolina couple, Jeremy and Candice Pedley, who spent years saving before finally acting on their dream of owning a family vacation home in North Myrtle Beach. The Pedleys entered into a contract last November to purchase a condo in in a gated community for $380,000. Unfortunately, a third party hacked into the real estate agent’s emails, impersonated their closing attorney, and convinced he Pedleys so wire their funds to a bank account in Rock Hill.

The hacking effort requested the exact number the Pedleys were expecting to wire, $86,183.81. This fact convinced the Pedleys that the fraudulent instructions were legitimate. According to the article, they have been able to recover about $36,000 of the lost funds. They were unable to complete the purchase of their dream condominium.

Columbia attorney Dave Maxfield is representing the Pedleys in a lawsuit attempting to recover their funds. According to the article, Maxfield told the Sun News that banks should do a better job stopping fraudulent accounts from being used, and real estate agents and attorneys need to warn clients about the pitfalls of wiring funds.

The article then details a few other common scams outlined by The S.C. Department of Consumer Affairs.

One such scheme creates fake rental listings promising low rent, immediate availability, and great amenities. The goal is to trick renters into transferring funds before they are tipped off that the listings don’t exist.

Another scheme notifies consumers that they have won the lottery, requesting, of course, some sort of fee or tax to receive the alleged winnings. Pressure is applied to “act now”.

Finally, the article discussed fake debt collectors. Fraudsters impersonate government authorities and attempt to convince consumers to pay off debt. These schemes typically request the target to pay a fraction of the amount they owe in return for full debt forgiveness. Threats of arrest are often used to apply pressure.

Please keep yourself and your staff members educated about all the current schemes. Your title insurance company should be a great source of current information. And please give your staff members permission to slow down and use the time they need to think through the facts of your transactions. I believe time is the key. The very smart individuals you employ, if properly armed with the necessary information and education, should be able to thwart most of these schemes, if they are given sufficient time to analyze the communications that hit their inboxes daily.

Chicago Title identifies earnest money fraud scheme

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Chicago Title’s South Carolina state office sent a memorandum to its agents on July 26, entitled “Checks Drawn on Foreign Banks.”  I wanted to share this valuable information with all South Carolina practitioners even though this particular fraud scheme has not been reported in any South Carolina transactions. Knowledge is power! Let’s stop this scheme at our borders.

The memo points to buyers who tender counterfeit cashier’s checks from Canadian banks as earnest money deposits. The fraudster quickly backs out of the transaction and requests a refund. Because foreign checks can take more than thirty days to process, the refund requests are made before the checks can be negotiated.

The scheme has been used in at least nine Midwestern states. The common facts are:

  • The offer to purchase provides for an all-cash transaction.
  • The selling broker has never met the buyer.
  • The buyer has not physically viewed the property.
  • The buyer is located outside the United States.
  • The initial deposit exceeds the required earnest money deposit.
  • The deposit is in the form of a check drawn on a Canadian bank.
  • The buyer requests that the funds be returned by a wire to their account.

Chicago Title advises that its agents should not accept foreign checks at all. Instead, agents are advised to insist on wired funds. This is great advice which will assist you in working within our ethics rules and in protecting your trust accounts. You don’t want to be in the position of having to replace lost funds! Be careful out there!

Representing elder clients can be tricky

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Dirt lawyers may be in the best position to protect elders in real estate transactions

Elderly persons should be treasured, not abused! And, as real estate lawyers, we may be in a particular position to guard against abuses.

Elder abuse often happens at the hands of family members or “friends” who, because of the vulnerabilities associated with age, such as mental impairment, are able to employ methods such as theft, fraud, forgery, extortion and the wrongful use of powers of attorney to separate an elderly person from property or funds.

Reflect upon the numbers of stories you have heard in your community about elderly persons falling prey to telephone scams. Those same individuals would not have succumbed in their prime. Even with all mental facilities in place, they don’t hear as well, they don’t keep up with changes in technology, and they are unable to keep up with fraud trends we all hear about every day.

Here are some signs of elder financial abuse that you may be able to detect in your office:

  • Sudden changes in an elderly person’s estate planning documents;
  • Changes made in the title to properties in favor of a “friend;”
  • Home health aide, housekeeper or other person is added to the accounts of an elderly person or is receiving an assignment of proceeds;
  • Family members or trusted “friend” discourages or interferes with direct communications with an elderly person involved in a transaction;
  • The older person seems unable to comprehend the financial implications of the transaction;
  • The older person signs documents without seemingly knowing or understanding what is being signed;
  • A power of attorney is involved. I’ve told this story many times, but I know a wonderful claims attorney who called powers of attorney “instruments of the devil”. Powers of attorney are extremely useful tools in the real estate world, but we should always exercise caution when they are used, especially when an elderly person is involved;
  • Anyone seems to be forcing the elderly person to act;
  • Numerous unpaid bills may be a clue that someone is diverting the money designated for the daily living of the elderly person;
  • Promises of lifelong care in exchange for property;
  • The elderly person complains that he or she used to have money but doesn’t understand why the money is no longer available;
  • The caregiver is evasive about the specifics of the transaction in the presence of the elderly person;
  • The elderly person seems fearful or reticent to speak in front of a family member, friend, loan officer, real estate agent or anyone involved in the transaction.
  • The accompanying family member or caregiver attempts to prevent the elderly person from interacting with others.
  • The elderly person and the family member or caregiver give conflicting accounts of the transaction, the expenditures or the financial need.
  • The elderly person appears disheveled or without proper care even though he or she has adequate financial resources.

Be mindful of these common-sense suggestions when any of your real estate transactions involve elderly persons. Think of them as you would want someone to think of your parents or aunts and uncles. Be careful to protect their interests. Proceed with caution!

Elders may also be the victims of predatory lending. Elders who own their homes and have built up equity over time become targets of predatory loan originators who pressure them in to high-interest loans that they may not be able to repay. Older homeowners are often persuaded to borrow money through home equity loans for home repairs, debt consolidation or to pay health care costs. These loans may be sold as “miracle financial cures” and are often packed with excessive fees, costly mortgage insurance and balloon payments.

Always discuss transactions directly with your elderly clients. Ask them pointed questions to make sure they understand the transaction.

And, as always, employ your instincts and your common sense.

Beaufort County offers fraud alert for property owners

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Allstate’s “Mayhem”

Do you know the name Dean Gerard Winters? He’s the actor who plays the character “Mayhem” in Allstate commercials. The character acts out cringe-worthy scenes involving car accidents, fires, falls and other calamities and advises us to buy insurance to protect against “Mayhem like me”.

I’ll never forget the name of a character who created mayhem in the midlands title world several years ago. That name is Matthew Cox.

A telephone call tipped us off that we had a serious mortgage fraud situation in Columbia. Representatives of several closing offices were recording mortgages describing the same two residential properties in Blythewood, as if the properties had been refinanced multiple times in the same day by different closing offices.

At first, we thought our company and our attorney agent were in the clear because our mortgage got to record first. South Carolina is a race notice state and getting to record first matters. Later, we learned that deeds to the so-called borrower were forged, so there was no safety for anyone involved in this seedy scenario. Thousands of dollars were lost.

Next, we learned about the two fraudsters who had moved to Columbia from Florida through Atlanta to work their mischief here. The two names were Matthew Cox and Rebecca Hauck. We heard that Cox had been in the mortgage lending business in Florida, where he got into trouble for faking loan documents. He had the guts to write a novel about his antics when he lost his brokerage license and needed funds, but the novel was never published. With funds running low, Cox and his girlfriend, Hauck, moved to Atlanta and then Columbia to continue their mortgage fraud efforts.

We didn’t hear more from the pair until several years later, when we heard they had thankfully been arrested and sent to federal prison.

How do you protect against Mayhem like Matthew Cox? Beaufort County has found a way. My friend and excellent dirt lawyer, Sarah Robertson, who practices with Burr Forman in Bluffton recently sent out an article to her clients advising that Beaufort County has set up a program to allow property owners to register at no charge to receive alerts from the ROD regarding possible fraudulent activity involving their properties. Sarah’s article indicates some other counties are beginning to offer this service.

This is a great service for clients that could be championed by real estate lawyers in other locations to protect against Mayhem like Matthew Cox!

New fraud warning from Chicago Title

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It goes without saying that one of the most important partnerships for a real estate lawyer is a great title insurance company. I am biased, but in my opinion, there is no better title insurance company doing business in South Carolina than Chicago Title.

This week, a warning was issued from Chicago Title about a new and very specific fraud scheme that I want to share with all South Carolina practitioners.

Chicago Title received two reports last week of fraudsters apparently operating out of Houston. The fraudsters posed as owners of South Carolina properties and listed the properties for sale on Zillow. Mail away cash closings were scheduled with local real estate lawyers. In both cases, the fraudsters provided presumably fake identification and deeds to closing attorneys.

In the first case, the closing attorney very astutely foiled the scheme when he determined the signatures on the deed appeared suspicious. He contacted the New York notary who purportedly notarized the deed. She reported her seal had been stolen and used in at least one successful fraudulent scheme. The lawyer also learned from Federal Express that the deed had been sent from Houston rather than New York, where the seller was purportedly located. The transaction was stopped.

Unfortunately, the second transaction was not stopped.  This seller package also originated in Houston. The fraudster’s telephone number appears on Zillow listing for properties in multiple states. Houston law enforcement has been notified and is opening an investigation.

Any mail away closings should be particularly scrutinized. If you conduct a closing with an unfamiliar seller, you should be especially vigilant in confirming the identities of the parties. Use more than one set of eyes in your office! Anything that appears unusual should be examined carefully. Give your staff the flexibility to slow down and carefully examine each document. Tell them to bring any unusual document to you. Check behind your staff! A great real estate paralegal is invaluable, but we spent three years in law school learning to spot issues. Use those issue-spotting skills to foil these fraudsters!

Be careful and good luck out there!

Wire fraud continues to be a significant problem

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My preacher has suffered several email hacking schemes that prey on church members with kind hearts.

He has sent out a written notification and has announced from the pulpit more than once that church members have reported to him that they sent money because of his very touching email requests about persons in need…email requests that he never made. He assured his congregation that if he needs specific funds for specific needs, he will make phone calls. He shared that preacher friends of his have reported similar schemes. The fake emails always report that he is unavailable to take phone calls but that the need is urgent and immediate.

Phone calls may be the key to fraud prevention!

A lawyer friend of mine called me this week to ask an opinion on a potential client’s case. Help me answer the question: Does a closing attorney have a duty to make a telephone call to clients who may need to wire funds in connection with a closing to warn about the dangers of wire fraud and how to prevent the loss of closing funds?

I don’t know the answer to that question. My gut reaction is that the standard in our communities in South Carolina is that lawyers should provide very specific instructions on wiring instructions and engagement letters to prevent this type of fraud. I’ve seen several excellent examples of red-letter, bolded warnings.

Chicago Title in South Carolina continues to see a rise in the amount of fraud and attempted fraud in connection with real estate closings. The most recent memorandum was sent out to agents on February 2. Most of these incidents involve hacked emails where a party to the transaction fails to maintain strong computer or email security.

Unfortunately, law firms with significant security measures in place have also been victims of these schemes. The hackers typically submit altered payoff letters or wiring instructions to divert the funds. Like the emails that have plagued my preacher, the forged emails, wiring instructions and payoff letters look very similar to legitimate documents.

Here is the current advice on preventing these disasters in your law firms:

  1. Obtain payoff information and wiring instructions early in the transaction so that there is ample time to review them and confirm their authenticity.
  2. Review every payoff and wiring instruction to determine whether it appears authentic on its face. Many fraudsters are excellent at spoofing letterheads and logos, but sometimes, you may see tell-tale signs.
  3. Compare each payoff letter and wiring instruction to prior instructions to determine whether account numbers have been changed.
  4. If the wire is going to an entity to which you have previously sent wires, compare the new information with the prior transaction. If you save wiring instructions in your systems, make sure that repository is secure and cannot be easily shared.
  5. Verify every wiring instruction verbally using a known and trusted telephone number. Do not use telephone numbers provided in the instructions themselves unless you can verify its validity.
  6. If you cannot verify the instructions verbally or have doubts about the transaction, consider mailing, overnighting or even hand delivering a check to a confirmed address instead of using a wire.

Chicago Title has developed an excellent APP for your cell phone that contains the information you will need in the event your law firm or your clients become victims of fraud. As always, I highly recommend Chicago Title!