Internal fraud is as devastating as any external theft. Don't be the victim!

Posted by Tanya Wright on 5/10/18 2:00 PM
Tanya Wright
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Every day, we hear more and more stories about millions of dollars being stolen as a result of external fraud or hacker attacks. But often times, financial frauds result from someone internally misappropriating consumer funds and performing fraudulent transactions.

According to National Association of Insurance Commissioners "Title Escrow Theft and
Title Insurance Fraud" report, these problems can cost thousands and sometimes millions of dollars in consumer and title underwriters losses, including claims, auditing, and legal fees. In addition to financial losses, settlement agents can face enormous reputational damage and risk of losing business.

Of course, we all know that in any industry that involves financial transactions, there is always a chance for fraud to occur. 

As the NAIC Title Escrow Theft and Title Insurance Fraud report suggests, these are some common examples of escrow theft:

  • Misappropriation of closing funds for use other than as provided for in the closing instructions.
  • Failure to pay off existing mortgage loans in full, diverting closing funds for personal use while attempting to make periodic payments on the existing loans.
  • Misappropriation of title insurance premium with failure to report and issue title insurance policies.
  • Failure to perform all services specified in the closing instructions or U.S. Department of Housing and Urban Development (HUD) form.
  • Fraudulent activity by unlicensed or unauthorized entities.
  • Engaging in check-kiting or other banking-related fraudulent schemes with title agency accounts.
  • Acceptance of funds that are not “good funds” for the purpose of closing transactions.
  • Intentional or fraudulent misrepresentation of title defects or failure to disclose title defects with the intention of burdening the title underwriter with subsequent losses.

And when theft happens, all parties involved in the transaction, including underwriters, title insurance and settlement agents, have a responsibility to minimize the risk of escrow theft. Because underwriters bear the primary escrow theft risk, they have the responsibility to contract with agencies that are trustworthy and follow sound policies and procedures. "Additionally, some jurisdictions require underwriter or third-party certified public accountant (CPA) audits, which can help reduce the number of misappropriations by periodic or random audits of title and escrow agencies," states National Association of Insurance Commissioners Title Escrow Theft and Title Insurance Fraud report.

Is your organization always able to identify and prevent theft surrounding title insurance and closing service transactions?  Do you have your own enterprise risk management and auditing guidelines for preventing escrow and title insurance theft? Are you always prepared for an audit?

There are a number of industry resources available to get educated on policies and procedures to put in place for preventing internal fraud. For example, American Land Title Association created a checklist of several industry best practices to help you stay compliant and prevent fraud.

ALTA Best Practice # 2, in particular, states that you should adopt and maintain appropriate written procedures and controls for Escrow Trust Accounts allowing for electronic verification of reconciliation.

The good news is that by partnering with SoftPro and taking advantage of our daily or monthly reconciliation services, meeting this best practice gets a lot easier.

Here is what you can expect from our knowledgeable team to help you prevent internal fraud and stay compliant:

  • Reconciliation of your escrow trust account each month, preparing a three-way reconciliation, reconciling bank statement, book balance and trial balance
  • Preparing a trial balance for your escrow trust account, listing all open escrow balances each month
  • Prepare a listing of all outstanding checks and disbursements
  • Prepare a listing of all cleared bank transactions
  • On a daily basis reconcile receipts and disbursements reporting on any exception items
  • Support a segregation of duties of the processes of escrow trust accounting
  • Provide Positive Pay with reporting to bank at regular intervals throughout the day

Finally, there is a myth that outsourcing trust account reconciliation is expensive, but you may be surprised by how inexpensive it can be compared to potential financial losses and reputational damage as a result of internal fraud.

Simply fill out a quick form to get a quote. If you think of this as a long-term investment into your peace of mind and business longevity, using third-party reconciliation may be the best business investment you ever make.

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Tags: Best Practices, Reconciliation

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