What to watch out for and how to avoid being the next target

A lot has happened since E&O published the Watch out for social engineering fraud tip sheet on the risks of this type of fraud in the real estate and legal sectors.

Reliance on technology is at an all-time high, with many aspects of our lives shifting online over the past few years due to the pandemic. This shift, coupled with a volatile real estate market, has provided a hotbed for fraudsters to take advantage of unsuspecting licensees.

One notable area is the increase in title transfer frauds targeting homeowners who live abroad, with fraudsters posing as homeowners or agents of homeowners with power of attorney. The Lawyer’s Indemnity Fund (“LIF”) has also reported instances of money transfer frauds targeting lawyers, where fraudsters have hacked a lawyer’s or client’s email account and provided fictitious payment instructions.

Recent fraud schemes target lax identification verification

In the recent fraudulent BC title transfer attempts, fraudsters targeted homeowners who live abroad, using forged passports to present themselves as the homeowners or creating fraudulent power of attorney documents. They contacted licensees using phone numbers and email addresses that were different from those initially given by the homeowners, and had the homes listed for sale through these forms of communication. Unfortunately, one of the fraudsters was successful in selling the property and title was officially transferred.

When title is transferred to an innocent purchaser, the true homeowner cannot get the property returned and recourse is limited to title insurance claims, claims against Land Title Assurance Fund and claims against professionals involved in the transaction (ie. real estate agents, property managers, notaries and lawyers).

While it can be easy to treat the client identification process as a nuisance and merely something where you just check off boxes, it’s crucial that all professionals involved in a real estate transaction do their part to deter these fraudsters by using caution when verifying client identity and instruction.

In a world where the idea of a property being sold without the true owner’s knowledge was unimaginable, there seemed to be few consequences to the “check the boxes” approach. Now our world has shifted and the sophistication of modern cyber fraud requires diligence in all client identification steps.

Protecting licensees and clients takes attention to detail

BC professionals such as lawyers, notaries, real estate agents and property managers have also fallen victim to recent cyber fraud schemes, most notably with respect to money transfers. LIF recently published a notice detailing instances of money transfer fraud including:

• In March 2023, a BC law firm was the target of a cyber fraud that infiltrated a commercial refinancing transaction, resulting in the firm losing more than $1.7 million. The fraudster hacked the lender lawyer’s email account and sent a fraudulent payout statement to the borrower’s lawyer that, for all intents and purposes, was indistinguishable from an authentic payout statement. The borrower’s lawyer did not verify the authenticity of the payment instructions, so it wasn’t until the lender’s lawyer later advised they hadn’t received funds that the borrower’s lawyer realized what had happened.
• In another case, a BC lawyer was tricked into paying out settlement funds from a commercial litigation matter to a fraudster posing as the client. The fraudster hacked the client’s email account and sent payment instructions to the lawyer asking for the funds to be directed to a different bank account. The lawyer obliged without making a secondary verification of the payment instructions. Luckily, the client followed up with the lawyer a few days later and the bank was able to reverse the transfer and return the funds to the lawyer’s trust account.

With real estate brokerages responsible for holding and transferring significant funds, licensees can expect to be targets of these kinds of fraud attempts, likely sooner than later.

Red flags that may indicate fraud

As illustrated by the examples above, social engineering frauds are becoming increasingly nuanced and harder to spot. Whether you’re assisting a client with listing and selling their home, or facilitating a money transfer, here are some key signs to look out for that may indicate fraudulent activity:

• Changing communication channels: be wary of instructions from clients requesting changes to their communication methods (such as e-mail addresses and phone numbers) particularly if they live abroad.
• High degree of urgency: be cautious of clients who are looking for a quick sale, or who request unorthodox listing methods such as listing the property well below market value, not listing the property online, or not using “for sale” signs on a property.
• Brand new or scanned copies of client’s documents: pay special attention to clients providing you with brand new documentation or scanned copies of their documents. Always insist on seeing original forms of identification and check carefully for any inconsistencies in spelling, dates, or other document details.
• Using Power of Attorney: be very cautious when a power of attorney is being used for the authority to list and sell property. Recommend buying clients seek legal advice on the use of power of attorney by a seller and, if you’re acting for the seller through a power of attorney, consider whether further confirmation from the actual seller is possible. Be skeptical if there isn’t a good reason why such confirmation can’t be provided. It’s better to walk away from a listing that has red flags than be embroiled in litigation should a fraudulent transfer occur.

Further steps to preventing a fraudulent transfer from occurring

There are a number of precautions you can take to protect yourself and your clients from unrelenting fraudsters. In addition to those listed, always ensure you are exercising due diligence and abiding by the Real Estate Services Rules.

1) Know your client:

• Verify your client’s identity early in the relationship. Pursuant to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (“PCMLTFA”) you are required to collect and verify government-issued identification from your client (see also BCFSA Anti-Money Laundering Guidelines). Doing this early on will clarify what kinds of verification procedures your client can expect when it comes to payment instructions or changes in communication methods. By establishing strict, uniform verification procedures early in the relationship, fraudsters may be deterred from targeting you in the future.
• Verify your client’s current land ownership interests via a land title search on the LTSA website. This can confirm or refute a seller’s claim that they have legal title to a property and is a key way that Licensees can help prevent fraudulent real estate transactions.
• Get to know your clients by asking conversational questions, assessing their knowledge of the property and scrutinizing their documents for any inconsistencies.

2) Establish an Identity Verification Method:

• Upon opening a file, establish a password with your client and record it in the physical client file. Have the client disclose this password before fulfilling payment or listing instructions.
• Always verify instructions – whether from your client, a bank, a lawyer, or another real estate agent – in person or over the phone using a trusted phone number. DO NOT rely on the phone number listed in the instruction email or text.

3) Brokerages should consider referring to the “Funds Transfer Instructions Verification Checklist” provided by the Lawyer’s Indemnity Fund

• This checklist is a great resource recommending brokerages verify details such as:
  • name of the sender of the instructions to make sure it matches what’s in the agent’s file
  • method and/or contact information relied on to confirm the sender’s payment instructions
  • whether the instructions actually came from the verified sender.

If any part of the verification fails, the managing broker must be alerted.

Acknowledgement

E&O thanks the Lawyer’s Indemnity Fund, the BC Financial Services Authority, and the Land Title & Survey Authority of BC for providing information contained in this article.