Our Colorado Litigation Lawyers’ Guide to Wire Fraud | Paying the Price

February 19, 2019 | Bill Henry

The ability to quickly transfer money to someone else’s bank account across town, in a different state, or even another country has made life easier. Wire transfers have accelerated the home buying process. Moving cash around has never been easier.

At most, a wire transfer takes a few days. If you sell a house in the U.S., for instance, you may see the proceeds appear in your checking account the same day the money’s wired to you. Overseas transactions take two, maybe three days to be completed.

In today’s world, these transfers can often be done without ever setting foot into a storefront, as more financial institutions and nonbank providers move more services online.

Wire transfers are conducive to modern society’s desire for immediacy. That’s why we use them. But in recent years, their convenience has wreaked havoc on many individuals and businesses.

“With the development of television, and the technical advance
which made it possible to receive and transmit simultaneously
on the same instrument, private life came to an end.”
– George Orwell, 1984

When Wire Transfers Go Wrong.

We’ve all heard about or seen emails asking for money to be wired to some offshore account. By now, most of us know not to do this.

While these emails still circulate, often victimizing the elderly, bad actors have refocused their efforts. They’ve honed in on business transactions, especially those involving real estate.

Why? The buying and selling of homes can involve large sums of money.

Home buyer almost falls victim to fraudulent wire instructions sent to his email

How the Scam Works.

The FBI calls it “E-mail Account Compromise” or EAC. This scam targets the general public and personnel who work at real estate agencies, law firms, and banks.

Fraudsters hack into the email accounts of people involved in real estate deals and other business projects that involve wiring money.

When a bad actor gets into an email account, they can to trick individuals into sending funds to the wrong account. Realtor commissions, down payments, and home sale proceeds have been lost to these scams.

Here’s an example of a common EAC real estate scam:

A fraudster hacks into a realtor’s email account. Scammers monitor the emails as home-buying processes advance. They’re waiting for just the right time to deploy a legitimate-looking message to the buyer from the real estate agent.

In the meantime, they steal client contact information. They duplicate the realtor’s email. They intercept the wiring instructions and make changes to them, rerouting the money to the scammer’s bank account.

Closing day approaches. An email is sent to the buyer noting, perhaps, “an update” in the wire transfer directions.

Completely unaware the realtor has been “spoofed,” the homebuyer completes the fraudulent wire instructions.

Funds often end up in an overseas account, but that’s not always the case.

Homebuyers have been known to lose six-figure down payments.

Escalation in Wire Fraud.

In July of 2018, the FBI released a public service announcement warning businesses and individuals about email compromises related to wire transfers. The PSA heavily focused on real estate companies and associated agencies and individuals, such as title companies, law firms, real estate agents, and buyers and sellers.

Startling Statistics

Computer hacker attempts to defraud real estate buyer

The FBI reports between October 2013 and May 2018, more than 41,000 people in the U.S. fell victim to email scams. The loss during that time period was nearly $3 billion.

According to the FBI, the number of email compromise victims associated with real estate transactions increased by 1,100 percent between 2015 and 2017. During that same time period, there was a 2,200 percent increase in monetary loss.

FBI Fact: In May 2018 there were more E-mail Account Compromise real estate victims since 2015.

Do I Have a Case?

Assigning Liability for the Loss

Courts have held a number of parties liable for losses incurred during real estate wiring scams. But it’s usually not the banks.

The federal law that governs wire transfers is Article 4A of the Uniform Commercial Code. It outlines responsibility, risks, and limited liability for parties involved in a wire transfer gone bad.

Generally, it’s the bank that bears the risk for unauthorized wire transfers. When it comes to real estate wire transfers, liability usually shifts to someone else – like the customer.

Here’s why: If the person giving the wire instructions to the bank is authorized to do so, then it is technically not an “unauthorized” transaction.

Unfortunately, in a wire scam, the authorized person/customer is using fake wiring instructions. How they obtained the instructions plays a role in deciding who should be held liable.

Here’s an example of how a homebuyer may be at fault for the loss:

Roger failed to take measures to ensure his computer was secure. Malware was installed, and a hacker gained access to his email. The hacker read that Roger is getting ready to buy a house. The fraudster stole the realtor’s contact information and sent fake wire transfer instructions to Roger at closing. If it can be proven the fraud began with Roger, he may be on the hook for the loss.

Bank Safety Responsibility

The UCC requires banks to have “commercially reasonable” security procedures. But the federal government doesn’t specifically define “commercially reasonable.” It is often decided by what other similarly situated banks have in place.

Most states have adopted some portion of the UCC.

Colorado Law

State law only requires banks to ensure the person giving the transfer instructions has the authorization. Banks are not required to check any other information.

Now, that doesn’t mean banks in Colorado haven’t implemented their own safety protocols; many have created internal wire fraud protection procedures.

  • If you can prove some or all of the federal, state, or bank procedures were not followed to ensure the transfer was legitimate, you may have a case.

Liability can be difficult to prove in real estate wire fraud, but it’s not impossible. If you’ve been a victim of wire fraud, get an astute, assertive litigator who specializes in fraud and real estate.

Wire fraud victims could nearly fill Mile High Stadium

Real Wire Fraud Case Examples

Unfortunately, much of the money sent in a fraudulent wire transfer is never recovered. When this happens, some victims will turn to litigation.

Real Estate Licensee Found Liable

In Kansas, a court upheld a jury verdict that found a real estate broker was 85 percent responsible for a homebuyer’s losses in a wire fraud scam.

In Bain v. Platinum Realty, LLC, a U.S. District Court affirmed a jury’s verdict that the broker was liable for $167,129 in losses experienced by the buyer.

What Happened:

A buyer received wiring instructions from who he thought was his real estate agent. Unbeknownst to him, the real estate agent’s unsecured email had been hacked. The wiring instructions the buyer received were from the hacker. The buyer’s $196,622 was redirected to a bank in New York.

In court, the broker argued she did not email the wiring instructions and, therefore, was not responsible for the loss.

While a jury found the buyer held some responsibility, the courts concluded the broker had a duty to verify whether the email was authentic.

Escrow Company Found Liable

Let’s look at a case in which an escrow company was on the hook for a customer’s nearly half-million-dollar loss.

In Choice Escrow & Land Title, LLC v BancorpSouth Bank, the Eighth Circuit Court of Appeals found the escrow company was liable for its customer’s loss.

What Happened:

An escrow company employee had their email hacked. As a result of the breach, the bank processed a $440,000 fraudulent wire transfer request that used the escrow company’s stolen account, password, and username. The escrow company had opted out of an extra security procedure that could have prevented the fraud.

The appellate court found that the bank’s security procedures were “commercially reasonable, ” it “acted in good faith,” and it complied with federal guidelines.

The escrow company’s declining the bank’s offer for added protection carried significant weight in the court’s decision.

The Flip Side of Choice Escrow v BancorpSouth Bank

While BancorpSouth celebrated this victory, it does not mean banks have no responsibility in these types of online scams.

In Choice Escrow v BancorpSouth, the court said customers must have a hand in mitigating wire fraud since they, too, are targeted by hackers. The court underscored that customers must assume there are risks to bypassing additional security measures in the name of convenience. When they do, the customer cannot shift the loss to the bank if the transaction goes awry.

But… In order for banks to dodge liability, they must educate customers about the risks of online banking.

Security Options: Opt-In or Opt-Out

How banks present the extra security measures to customers will be important in wire fraud cases.

Opt-Out

Let’s go back to Choice Escrow v BancorpSouth. BancorpSouth Bank offered additional security measures for customers who utilized wire transfers.

The bank cannot make the customer go through a multi-step process to reduce wire fraud. Customers who wished to sidestep the extra security procedures were required to “opt-out.”

And that’s what Choice Escrow elected to do. The bank had the escrow company acknowledge it was made aware of the risks.

This became an important piece of information during the trial.

Opt-In

Unlike the opt-out option at BancorpSouth, some banks require customers to opt-in to added security procedures. That has backfired for at least one bank, and it has caused some industry leaders to encourage banks to reconsider how they offer fraud protection.

In a case brought against a Maine bank, a construction company successfully argued it didn’t know there were added security procedures available to it because the security was in an opt-in format.

You have rights.

If are the victim of wire fraud and believe it occurred due to someone else’s negligence we may be able to help. You shouldn’t lose your dreams because someone else dropped the ball. Call 303-688-0944 to set up your free case assessment.

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