IDENTITY THEFT - HIJACKING A CORPORATION OR LLC
In our ongoing efforts to keep approved providers, agents, and other partners informed of potential threats to their business, we distribute fraud alerts so that you are aware of potential threats and can take the necessary steps to guard against them.
We have distributed numerous alerts, newsletters, and other communications regarding the epidemic of fraud in our industry. While we know that you are actively combatting this ever-growing problem, the fraudsters’ techniques have continued to evolve in response to the industry’s diligent efforts to frustrate their schemes.
Number One Rule – “Know Your Customer”
“Know your customer (or your client)” is a good rule of thumb regardless of your business. A professional can best serve their customer or client when they understand the people involved and their respective strengths, weaknesses, and goals. In a world increasingly driven by desire for speed and reliance on technology, however, human interaction often loses its perceived importance. Those influences do not diminish the need for due diligence and confirmation with a living person.
For example, take non-personal entities such as corporations and limited liability companies (“LLCs”): by their very nature, they are not living people; however, they would not exist or operate if there were not living people behind the wheel. The lack of interaction with the people behind these non-personal entities is being exploited by fraudsters to defraud both the rightful owners and the creditors of these entities.
Evolving Fraud Scams Victimizing Corporations and LLCs
In the past, we have warned of real estate frauds involving non-personal entities. Often, fraudsters target vacant property because fraudsters believe that they have a longer window to perpetrate a fraud since no one is on the land to report their fraudulent activities to the rightful owner. Where the property is owned by a non-personal entity (which may be financially distressed), there is even more distance between the property and its rightful owner. The fraudster may do one or more of the following:
- Create fraudulent documents in the chain of title that convey property or satisfy an encumbrance on the property.
- Form a new entity with a very similar name, borrow money secured by the property or sell the property, and hope that no one finds out until they have escaped with the money. (The changing of the name is very similar to scamming an email address.)
- Re-form an entity that still held title to real property with the same name of an entity that had been dissolved (administratively or otherwise).
Latest Fraud – Identity Theft Victimizing Corporations and LLCs
Title practitioners have always felt that they could rely on the most recent Secretary of State Statement / Annual Report (“Annual Report”) to identify the rightful officers of corporations or managers of LLCs. Recently, fraudsters have been going to the Secretary of State websites and filing fraudulent Annual Reports, changing the names of the officers or managers respectively. If the title examiner only looked at the most recent annual report, they only saw the name of the fraudster or their alias.
In today’s world, there is so much emphasis on the value of the collateral and the associated ratios – and not the borrower – that loans might be approved without meeting the individuals behind the borrower. Combine that with desire for speed and reliance on technology, these loan transactions may get closed online or through the mail without ever even talking to the principals behind the entity. Impersonating a non-personal entity seller can be even easier, since it is even rarer for the seller to appear at closing. As technology makes the world smaller, this form of loan and title fraud can be committed from anywhere in the world.
Red Flags
- Property free and clear of debt
- Unimproved / unoccupied property
- Cash-out hard money brokered loan
- Loan broker/lender does not meet with principals of the company
- Latest Secretary of State Statement / Annual Report is not executed by last managing member shown on previous filing
- LLC operating agreement not executed at the time of formation or purchase of the property
- Mail-away transaction
- Typographical errors
- Different looking signatures
- Entity formed after acquisition of the property
- Entity formed with an online filing service
A review of the above “Red Flags” may prompt one to think, “I handle a lot of transactions that have one or more of these red flags. I can’t stop handling transactions involving non-personal entities.” First,
no one is suggesting that you stop
; however, if one or more of these red flags exist, you should slow down and investigate them to be certain that the people behind the entity are legitimate, involved in, and aware of the transaction. In many cases, you already know the entity and the individuals behind it. These situations certainly provide you with a higher comfort level. There are times, however, when you do not know anything about the entity, and you may be the last chance to stop a fraudster from stealing the property or its equity.
What could be done differently to stop these frauds?
Here are some things you can do to protect yourself and your clients:
- Look at the entire Secretary of State filing history of the non-personal entity – all the way back to creation. If there are changes or discrepancies, investigate.
- Contact the individuals listed on the Secretary of State’s website to confirm that they are involved with and aware of the transaction.
- Request a copy of the organizational documents (Operating Agreement Bylaws, etc.) and review dates, authority, and signatures.
- Contact the attorney that assisted the property owner in forming the non-personal entity for confirmation.
Fundamentally, this process is no different than asking to see state-issued official identification. No one wants to be asked, “Why didn’t you ask for ID?” Similarly, no one wants to tell their client, “I did not know anything about the LLC (or corporation) and I did not check it out.” Transactions involving non-personal entities are generally totally legitimate and happen all of the time – but this fact is also true of most real estate transactions. The fraudsters are counting on you seeing them as “routine” and not investigating the red flags to thwart their criminal schemes.
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We are interested in alerting our approved providers, agents, and other partners in the real estate business of any and all external and internal threats and fraud scams. In the event that you become the target of a fraud scam, please share that experience with us so that we may alert others. You may email the facts about the attempted fraud scam to
[email protected]
.
This fraud alert is a service of
Investors Title
. If you have any questions about this alert, please feel free to contact Jonathan Biggs, vice president of risk management and education at
[email protected]
.
