David Anderson is principal of David Anderson & Associates, a Philadelphia forensic accounting firm that provides a full range of fraud investigation, forensic accounting and marital dissolution services in Philadelphia and the Delaware Valley.

My next two blogs will discuss trust and escrow account fraud.  For purposes of this discussion, I will include IOLTA (Interest on Lawyer Trust Accounts) issues as well.

First, some definitions:

• A trust account is a legal arrangement through which funds or assets are held by a third party (the trustee) for the benefit of another party (the beneficiary).
• An escrow account is an account where funds are held in trust while two or more parties complete a transaction.
• An IOLTA account means a pooled interest- or dividend-bearing attorney’s client trust account, established with an eligible financial institution, for the deposit of nominal or short-term funds of clients or third persons, and from which funds may be withdrawn upon request as soon as permitted by law.

In each of the above instances, the beneficiary of the account funds or assets depends upon the trustworthiness of the party who is in control of the account or assets.  Trust and escrow account fraud can occur in two primary ways:

• If the party who is in control of the account or assets (“Trusted Party”) commits fraud through misappropriation or self-dealing; or
• If a third party fraudulently induces the Trusted Party to improperly disburse funds or sign over assets. This week’s blog will discuss the first type of fraud, and my subsequent blog will discuss the second type of fraud.

A Trusted Party can be appointed to take control of the bank accounts, investment accounts, or other assets of one or more beneficiaries in a variety of ways:

• A trust document can designate the Trusted Party (“Trustee”);
• A will can designate the Trusted Party (“Executor/Executrix”);
• A court can appoint the Trusted Party (“Trustee”, “Guardian” or other);
• A title insurance company or other party can be designated to hold funds in escrow for a real estate transaction (“Escrowee”);
• An attorney can be designated to receive, hold, and disburse funds related to legal settlements or court orders.

In each case, the Trusted Party has a fiduciary responsibility to act in the best interest of the beneficiary or beneficiaries.  Fraud occurs when the Trusted Party misappropriates the funds or assets or engages in self-dealing to the detriment of the beneficiaries.  The following are examples of frauds which I have investigated, or which have been in the recent news:

• An Executrix who was also a real estate broker arranged the sale of her grandmother’s house as part of the settlement of the estate. She collected an excessive broker’s fee (10 percent) for the transaction as well as arranged a set aside of $15,000 from the sale proceeds to pay for repairs to the house.  However, no repairs were ever made.  Instead, she split the $15,000 with the buyers.  The fraud was discovered when one of the estate beneficiaries complained about the lack of estate proceeds, and the court ordered a forensic investigation of the estate transactions.
• A title insurance company held real estate funds in escrow accounts on certain transactions for which the real estate taxes were under appeal. The accounting manager of the title insurance company improperly transferred funds to the title insurance company’s operating account and then made payments of those amounts to companies which he controlled (and which never performed any services for the title insurance company).  The fraud was discovered when one real estate tax matter was settled, and payment of escrow funds was requested while the accounting manager was on vacation. When senior management authorized payment from the corresponding escrow fund, they found that there were no funds left in that escrow account.
• Funds from a trust were invested with a broker who, contrary to the directions of the trust, invested the funds in risky (and ultimately money-losing) investments which paid high commissions. Additionally ,the broker engaged in frequent transactions meant to generate additional commissions (“churning”).  The fraud was discovered when the beneficiary requested funds to pay off certain medical bills and learned the trust account balance was less than 5 percent of the original amount invested just five years earlier.
• Gloria Byars of Delaware County, PA operated a firm which served as court-appointed guardian for elderly and disabled beneficiaries. Over several years, Byars stole funds and assets of beneficiaries by writing checks from guardian accounts to companies which she and co-conspirators controlled (and which never performed any services for the beneficiaries).  Additionally, Byars stole Krugerrands from the safe deposit box of a beneficiary.  Byars’ fraud was discovered when authorities began investigating complaints that beneficiaries’ medical bills weren’t being paid.
• Alex Murdaugh, the South Carolina attorney whose wife and son were murdered, and who allegedly hired a “hitman” to kill him so that his remaining son could collect on his life insurance policy, has also been the news recently because he secretly negotiated a settlement in the death of his housekeeper, and diverted several million dollars of that settlement from his firm’s IOLTA account to a company under his control. The fraud was apparently discovered when the housekeeper’s estate’s attorneys found out about the secret settlement and demanded payment for the beneficiaries.

Each of the above frauds was facilitated by the relative lack of oversight of the Trusted Parties.  Had there been stronger oversight, such frauds may have been deterred.

It also behooves the beneficiaries or some additional person acting on behalf of the beneficiaries to demand regular accounting from the Trusted Parties.  Forensic accountants can provide the additional oversight and accounting analysis which can help protect beneficiaries from trust and escrow account fraud.

If you require a forensic accounting expert in Philadelphia and the Delaware Valley, please contact the Philadelphia forensic accounting firm of David Anderson & Associates by calling David Anderson at 267-207-3597 or emailing him at david@davidandersonassociates.com.

About David Anderson & Associates

David Anderson & Associates is a Philadelphia forensic accounting firm that provides a full range of forensic accounting services in Philadelphia and the Delaware Valley.  The experienced professionals at David Anderson & Associates provide forensic accounting, business valuation, fraud investigation, fraud deterrence, litigation support, economic damage analysis, business consulting and outsourced CFO services.  Company principal David Anderson is a forensic accounting expert in Philadelphia with more than 30 years of experience in financial and operational leadership positions. He is a Certified Public Accountant, a Certified Fraud Examiner, and a Certified Valuation Analyst.