Consumer Protection - ESCROW FRAUD

 

What´s Escrow Fraud?

 

Escrow is a legal arrangement in which an asset (often money, but sometimes other property such as art, a deed of title, website, or software source code) is delivered to a third party (called an escrow agent) to be held in trust pending a contingency or the fulfillment of a condition or conditions in a contract such as payment of a purchase price. Upon that event occurring, the escrow agent will deliver the asset to the proper recipient, otherwise the escrow agent is bound by his or her fiduciary duty to maintain the escrow account.

Not all escrow agreements impose the duties of a legal trustee on the escrow agent, and, in fact, in many such agreements, escrow agents are held to a mere gross negligence standard and benefit from indemnity and hold harmless provisions.

While escrow is best known in the United States in the context of real estate (specifically in mortgages where the mortgage company establishes an escrow account to pay property tax and insurance during the term of the mortgage), escrow companies are also commonly used in the transfer of high value personal and business property, like websites and businesses, and in the completion of person-to-person remote auctions (such as eBay).

Escrow is also known in the judicial context. So-called escrow funds are commonly used to distribute money from a cash settlement in a class action or environmental enforcement action. This way the defendant is not responsible for distribution of judgment monies to the individual plaintiffs or the court-determined use (such as environmental remediation or mitigation). The defendant pays the total amount of the judgment (or settlement) to the court-administered or appointed escrow fund, and the fund distributes the money (often reimbursing its expenses from the judgment funds).

In some jurisdictions, real estate brokers are considered to act as escrow agents when they accept deposits or earnest money for the purchase of real property. In many jurisdictions, the duties of such agents are codified.

Source code escrow agents hold source code of software in escrow just as other escrow companies hold cash. The highly valuable (and often secret) source code is only released by the agent to either party upon specific terms of the escrow agreement (such as failure to maintain the application, transfer of ownership of the intellectual property rights, or the liquidation of the owner of the source code).

Escrow is also used in the field of automated banking and vending equipment. One example is automated teller machines (ATMs), and is the function which allows the machine to hold the money deposited by the customer separately, and in case he or she challenges the counting result, the money is returned. Another example is a vending machine, where the customer's money is held in a separate escrow area pending successful completion of the transaction. If a problem occurs and the customer presses the refund button, the coins are returned from escrow; if no problem occurs, they fall into the coin vault.

Types of Escrow Service

The workflow of Escrow Services may vary according to the nature of specific industry. For instance, in electronic components industry, according to Hong Kong Inventory Limited, the escrow services are sub-divided by two types: normal Escrow Service and Escrow Service with Inspection (Escrow/i). Escrow Service with Inspection (Escrow/i) consists of a pre-shipment inspection process which has to be carried out before sending the goods to buyers. This is important in electronic components trading since there isn't any unified naming system in electronic components. Dispute always come from the difference in understanding with respect to a specific part number.

Escrow/i services are subdivided into two different levels. The standard Escrow/i service includes a visual inspection, known as Inspection Level 1. Inspection Level 2 involves intermediate physical inspection, including visual inspection along with decapsulation, radiography and solderability.

Escrow has just started in Dubai, United Arab Emirates. It will push more consumer confidence in the market.

Setting Up Escrow

Setting up or "opening escrow" involves simply visiting the office of the escrow or title company which you have selected and handing over the deposit monies and giving instructions for the transaction. That is all there is to opening escrow. It is something anyone who’s involved in the transaction may do - the buyer, the seller, the lender, or the real estate agent. It doesn’t matter who opens the escrow just so long as those involved in the transaction have designated someone to do it when they sign the final purchase agreement. If there is no real estate agent involved, the seller will typically be the one to start the escrow process, as she will be holding a deposit or good faith check from the buyer, together with the signed purchase agreement. In for sale-by-owner transactions, the buyer and the seller may both open escrow.


To open escrow, you will need to provide the escrow or closing agent with the following information:

- Purchase price, address and description of the property (this will all be contained in the purchase agreement)
- Seller’s name and address

Buyer’s name and address

Parties to whom the preliminary title report or the abstract of title are to be sent (generally they are the buyer, seller and lender).

- Termite report information (who will do the inspection)
- Amount of deposit to be held in escrow
- Insurance agent for the buyer
- Financing information
- Any personal property involved in the sale
- Rent, if any
- Projected closing date


Your escrow officer or title attorney must have all of this information available to prepare your escrow instructions properly. If all the information is not available at the time you open escrow, you can provide it as soon as possible. The better informed he is, the faster he can process your purchase or sale.

Once your information has been received, your escrow officer will assign your file an escrow number. It is a good idea to try to always refer to this number when calling for information or status reports. Your escrow officer will deposit the earnest money into a separate escrow account and order the title search to be made.

Both buyer and seller will receive a copy of this report. If there is a lender involved in the transaction, he will see to it that the lender also receives a copy of the title report. He will work hand-in-hand with the lender, incorporating any loan fees, prepaid and pro-rata interest into the escrow instructions. The buyer will normally sign his loan documents together with his escrow instructions and the seller will normally sign the grant or warranty deed together with her escrow instructions. The lender and your escrow or closing officer will coordinate the simultaneous exchange of loan funds with the closing date of escrow, together with the disbursement of the sale proceeds to the seller.

Tips for Choosing and Using Online Escrow Services

Online auction fraud has skyrocketed: in 2002, auctions made up 90 percent of complaints made to the Internet Fraud Watch program. (www.fraud.org)

- Using an online escrow service gives you more protection. For a small fee, an online escrow service holds your payment until you confirm that you got what you were promised within an agreed upon inspection period. Only then does it forward the payment to the seller. If there is a dispute about the item, the escrow service may be willing to act as a referee.

- Know the difference between escrow services and other online payment services. With an escrow service, the seller doesn’t get paid until you’re satisfied. This is very important in online auction purchases, where there is no way of knowing in advance whether the goods really exist or they were described truthfully. Other types of online payment services may cost less, but since they transmit your payment to the seller immediately, you may have no protection if the goods are never delivered or were misrepresented.

- Determine how much you can afford to lose. If the item is relatively inexpensive, it may not be important to use an escrow service. Or you may be covered by insurance offered by the online auction site, the payment service you use, or both; check the limits and terms of insurance carefully. If you can’t afford to lose the amount of your purchase and there isn’t insurance to cover it, use an escrow service.

- Make sure your money is secure. Because you’re giving money to the escrow service to hold in trust, you want to make sure it’s safe. Look for information about whether the service is licensed and bonded and find out how you can confirm that with the appropriate agency. An escrow service is usually licensed in the state in which it is physically located.

Generally, licensing requires employee background checks, training, supervision, and bonding to ensure that consumers won’t lose their money.

- Beware of bogus online escrow services. Fake escrow services simply pocket your money and disappear. Sometimes they operate in connection with fraudulent sellers; in other cases both buyers and sellers may be victimized by bogus escrow services.

- Don’t always believe what you see. One common practice of fraudulent escrow services is to copy information from legitimate Web sites onto theirs. If the wording is identical to that of another escrow service, it’s a danger sign of fraud. Another danger sign is using the name of a well-known auction site as part of the escrow service’s name. Bogus escrow services may also forge graphics from trustmark programs such as “VeriSign” and “Trust-e” to make their sites seem safe. Click on these symbols to see whether they link to a fully operational site of the trustmark organization and check to confirm that the escrow service is listed as a member of that program.

Be suspicious of references to U.S. codes. Though escrow services are not regulated by federal law, some claim to comply with the “U.S. Financial and Business Code” in order to appear legitimate. There is no such code.

- Unprofessional looking Web sites can be a tip-off. Spelling and grammatical errors are commonly found on fraudulent sites.

- Get the business’ physical address. Be wary of escrow service sites that only provide an email address and offer no phone number and address. Without the address, you have no way of checking with state authorities to determine if the service is licensed.

- Get references for which escrow services to use. Some online auction sites have links to escrow services that they recommend. There are also private anti-fraud Web sites that list what they believe to be legitimate and fraudulent sites. Simply type the phrase “list of fraudulent escrow sites” into any popular search engine to find these references.

- Be wary of escrow recommendations from sellers. They may have ulterior motives for steering you to certain fraudulent sites. Always check the escrow service out yourself.

How to Spot a Fraud Site

We encourage you to always use Escrow.com to protect your online transactions. Fraudsters often use a variety of excuses for why they cannot use Escrow.com. If you do choose to use a different escrow service, the following points may help keep you from becoming a victim:

• Fraud sites often claim they are associated with Escrow.com. However, Escrow.com is not associated with or affiliated with any other escrow site.

• Many sites claim their escrow services are provided by Internet Escrow Services (IES). This is because IES can be verified to be an independent escrow company licensed in California. However, Internet Escrow Services (IES) is a wholly owned subsidiary of Escrow.com and only provides escrow services to www.Escrow.com.

• If a site looks similar to Escrow.com, it is likely fraudulent. A legitimate company will spend the time and effort to create their own brand and will not steal the work of other companies.

• Fraud sites often claim they are recommended by eBay, eBay Motors, or Yahoo! Auctions. You may see the list of sites eBay actually recommends by http://pages.ebay.com/help/tp/payment-escrow.html clicking here.

• You should call the customer support number (if any) on the site. If there is no phone number on the site, or if you can’t reach the company, it could indicate the site is fraudulent. Consider whether you want to entrust your transaction to a company you can’t reach on the phone.

• Do a search for the company name on http://www.google.com/search?hl=en&ie=UTF-8&oe=UTF-8&q=escrow Google (or similar search engine). Established companies will generally be listed. Fly-by-night companies will not generally be in the list.

• See if the web address of the escrow site is registered with the Better Business Bureau by entering it in their http://search.bbb.org/searchform.aspx search form.

• Determining the date that a domain name was registered can often give clues that a site is fraudulent. Many fraudulent sites claim that they have been in operation for several years, but their domain names have only been registered for a few days or weeks. To determine the date a domain name was registered, you can use the “whois” tool found at most domain name registrars.

• If a site uses person-to-person money transfers such as Western Union, it is probably fraudulent. See what Western Union says about fraudulent escrow services by http://www.westernunion.com/info/faqSecurity.asp#faq6 clicking here.

• If the escrow site requests payment to an individual (or "agent") instead of a corporate entity, it is fraudulent.

• If a site only accepts wire transfers, e-currency, and other similar untraceable (or difficult to recover) payment mechanisms, it may be fraudulent. However, just because a site accepts credit cards does not mean it is legitimate – the site may be set up simply to steal credit card information. If you wire money to an escrow service, ask your bank to tell you where the wire transfer is being sent.

• If the site does not use SSL to protect user sign-in information, it is not a secure site and is most likely fraudulent. Most browsers display a padlock or similar symbol in their status bar to show you when your information is being protected by SSL. However, having a SSL certificate is no evidence that a site is legitimate.

• Be wary of sites that have escrow fees that are unreasonably low. It is unlikely that a site that charges as little as $2.00, for example, can legitimately perform these services and still stay in business.

• Being licensed as an independent escrow company is not a trivial procedure. Licensing is required by the laws of several US states in order to perform transactions in those states. One of the key states requiring licensing is California. If a site does not clearly state how it is licensed, it is probably not licensed.


If a site lists licensing information, it should list the licensing authority. Contact the licensing authorities listed on the site and verify the site is actually licensed by those authorities. Be cautious on the validation. Several fraud sites have in the past given out the legitimate license number of Internet Escrow Services (the wholly owned subsidiary of www.Escrow.com).

• Spelling errors, grammar problems, broken links, and inconsistent information (such as the location of the escrow company) are usually additional indicators the site is fraudulent.

• www.escrow-fraud.com keeps an updated list of the escrow scam sites and legitimate sites. Visiting this site will help you better protect yourself when transacting on the Internet.

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