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 previous blog discussed trust and escrow account fraud perpetrated by the Trusted Party who is in control of the account or assets held for the beneficiaries.  This blog will discuss fraud perpetrated by third parties who fraudulently induce the Trusted Party to improperly disburse funds or sign over assets.

As a reminder, 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.

There are several ways in which the Trusted Party can be induced to improperly disburse funds or sign over asset.  These include:

• Coercion or improper influence
• Identity theft or spoofing
• Counterfeit check scams
• Forged or fake trust account checks

Coercion or improper influence can occur when a Trusted Party is pressured into improperly disbursing funds.  A recent case in South Jersey highlights this. An elderly, cognitively impaired mother was the trustee for her child’s special needs trust.  An acquaintance convinced her to grant him power of attorney which he then used to gain access to the trust’s bank accounts.  This was compounded by the fact that the notary who notarized the power of attorney never witnessed either the trustee or the acquaintance sign the power of attorney.  The acquaintance then used his access to embezzle more than $350,000 from the trust’s bank accounts.

Identity theft or spoofing can occur in a variety of ways.  If the identity of a beneficiary has been stolen, the fraudster can e-mail the Trusted Party and request that funds be wired or sent to him/her.  Upon receipt the funds, the fraudster drains the receiving bank account.  Spoofing can occur, particularly with real estate transactions, when a fraudster obtains sufficient information to allow him or her to pose as the seller.  He or she then e-mails the escrowee and provides wiring instructions for a bank account under his or her control.  As with identity theft, the fraudster drains the receiving bank account upon receipt of the fund.

Counterfeit check scams typically target attorneys, usually those involved in commercial debt collection.  Under this type of scam, the fraudster e-mails the attorney and engages him or her to collect some type of debt. The fraudster may even provide fraudulent documentation of the alleged debt. The attorney will draft and send a demand letter to the debtor and will then receive a letter and certified bank check from the debtor for some or all the alleged debt. The attorney will deposit the funds into the trust account, and, usually within 24 hours of the deposit, the client will demand payment of the funds via wire. Since the funds were paid via certified bank check, the attorney will usually wire the funds (net of collection costs) immediately. Several days later, the attorney’s bank will contact him or her, advise that the check was counterfeit, and remove the funds from the attorney’s trust account.  Of course, the fraudster has already drained the wired funds from his or her bank account and disappeared.

Fraudsters also can obtain trust account information (account number and routing number) via fraudulent means and use the information to create fake checks payable to cash.  In one instance, an executor was notified by phone that the estate was due a security deposit refund by a fraudster posing as the employee of a local utility. The fraudster stated that the utility was required to send the funds via ACH (Automated Clearing House) and persuaded the executor to give him the estate account’s number and routing number.  The fraudster then used the information to create a fake check, forged the executor’s signature and cashed the check at a local check cashing service. Although the executor eventually recovered the stolen funds from the bank, the estate had to open a new estate bank account, and deal with the fund shortage until the funds were received from the bank.

None of the above frauds resulted from Trusted Party misconduct or knowing breach of fiduciary duty, but rather because sophisticated fraudsters were able to exploit the trust of the Trusted Parties.  The solutions to deterring or preventing fraud in these cases depend on the specifics of each case:

• In the case of potential coercion or improper influence, there may have been other family members or professionals who may have noticed that something improper was occurring and could have acted to at least question it. For example, the accountant who prepared the trust’s tax returns, and could have noticed the unusual account activity.  Or the bank relationship manager who could have noticed the unusual account activity.
• In the case of identity theft or spoofing, the Trusted Party should refuse to rely just upon e-mail but should seek to contact the beneficiary or the seller using the phone information in the Trusted Party’s files. This should also apply if the Trusted Party is contacted via phone by someone claiming to be the beneficiary or the seller. The Trusted Party should at least confirm that the contacting phone number matches that in his/her files.
• Attorneys can reduce the likelihood of losses from counterfeit check scams by adding one or more of the following procedures:
  • Verifying the identity of the client and the debtor before accepting the engagement;
  • Establishing a policy of holding payments for at least some period (within the bounds of regulations) to allow sufficient time for the certified check to clear the bank process (and informing the client of this policy); and/or
  • Contacting the issuing bank to verify the validity of the certified check.
• Trusted parties can minimize the likelihood of being victimized by forged or fake trust account checks by more carefully guarding bank account information and by frequently reviewing bank account transactions. In the example presented above, the executor should have asked the phone caller to provide a phone number so that he could call back.  He should then have compared that phone number with the one shown on the utility bill.  If they were not the same number, he should then have called the utility at the number shown on the bill and inquired about the refund.  He would then have found out that the original caller was a fraudster.

Forensic accountants can help Trusted Parties establish policies and procedures that can reduce or eliminate the likelihood of them being victimized by fraudsters. 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.