According to the ACFE 2020 Report to the Nations, an average of 5% of an organization’s revenue is lost to fraud each year. Additionally, the FBI’s 2019 Internet Crime Report found that wire transfer fraud—a common threat to real estate transactions—led to $221 million in losses in 2019. Earlier this month, Qualia hosted a webinar on “How to Protect Your Business Against Fraud as You Scale,” focusing on fraud prevention strategies for title & escrow companies. As security threats continue to increase in the industry, real estate professionals can take steps to minimize the risk of escrow loss from fraud, theft, and error.
During the webinar, industry experts Toni Etheridge and Bryan Colbert joined us to discuss fraud prevention practices to help growing title & escrow companies mitigate the risk of fraud. Etheridge is an auditor at Fidelity National Title with over 20 years of experience in auditing, and before that, she performed closings at title companies. Colbert is the Reconciliations Quality Assurance Manager at Qualia, with over 20 years of experience auditing and reconciling escrow accounts.
Opening new bank accounts: when and why to do so
Colbert shared some key times when title companies should open new escrow accounts. First, if fraud has taken place in the account. Colbert explained that the underwriter or bank would likely require the title company to open a new escrow account after a fraud incident. Neglecting to do so may lead to fraud being committed again because account information may have been shared publicly during the attack. Colbert also recommended opening new accounts every few years even if fraud has not been committed as an extra precaution.
Another opportune time for opening a new account is when a business is changing its systems of record, such as moving from one title production software to another. Colbert advised that “when switching software, you would definitely want to open a new bank account so the information between the two systems doesn’t get lost in the accounting and reconciliations of those accounts.”
Depending on the system of record, businesses may prefer to take a multi-account approach. In this case, bank accounts may be broken out into different categories so that they are easier to track in the system of record. Colbert explained, “If the system of record can’t track fees properly, sometimes it does make sense to have that information in separate accounts so that information can be reported upon and sent to the correct people.”
There are some potential downsides to using multiple accounts. Colbert warned that there is a chance that funds get disbursed to the incorrect account. He recommended having proper training and processes in place to prevent these errors.
What title businesses can do today to mitigate the risk of fraud
Etheridge and Colbert provided recommendations for immediate changes title businesses can make to their reconciliation process to help prevent fraud.
Focus on employee training to reduce error
When hiring new employees and when growing into new states or regions, Etheridge encouraged businesses to properly train employees and establish clear processes. “It’s not good enough to train people once and be done with it. It’s important to consistently train your team and assess the risk of fraud,” she said. For tips on developing an effective employee training program, download our training eGuide here.
Encourage employees to voice their concerns
Colbert recommended that businesses establish an “if you see something, say something” culture within their teams. He explained that “if a file balance is off, or if there’s suspicious activity, if an email seems fishy, all of these things need to be brought to the attention of your manager or the owner.” Encouraging employees to come forward with potential inaccuracies can help prevent errors and catch fraudulent activity during the reconciliation process.
Establish the segregation of duties
Etheridge emphasized the importance of following an established process and that various accounting duties should be segregated from one another. “You want to make sure that the person that’s reconciling the account is not the same one that’s sending the money out, disbursing the files, or doing the closing,” she said, “You want to make sure that when they look at [the file], they’re looking at it from a clean standpoint.” For example, the employee who is receipting in wires should not write the checks. Separating the signatory from the reconciliation role and requiring duplicate signatories adds more layers of protection.
Take advantage of learning opportunities from underwriters and software providers
Etheridge recommended signing up for training sessions offered by underwriters and software providers to learn about the latest business growth opportunities, market trends, and regional insights. These trainings allow teams to learn about new procedures and regional requirements to inform their reconciliation process. Training can also ensure that a business maximizes its software tools by understanding key features and best practices. For example, Qualia customers can take advantage of webinars hosted by Qualia’s Customer Success team to learn more about how to use specific features as well as instructions on how to use recent features and product updates.
Increase awareness of the latest cyberthreats
Etheridge emphasized that “you have to be on your toes at all times. Regional trends tend to start in one area, and move up and down the coast or from state to state.” Understanding how bad actors are targeting businesses can help processors recognize what to look out for. Additionally, educating clients and other stakeholders can help prevent fraud throughout the entire real estate transaction.
Set up positive pay and reverse positive pay
Etheridge and Colbert also recommended setting up positive pay and reverse positive pay as an additional method of fraud detection. Both of these extra layers of fraud detection allow all reconciliation stakeholders to review and confirm payments to identify any red flags. Depending on the reconciliations software, parts of this process have the potential to be automated to help increase time savings and reduce human error.
Inspect reconciliations each month for errors
Etheridge recommended scrutinizing reconciliations each month to identify any mistakes or inaccuracies. She encouraged businesses to run through a checklist to identify errors such as shortages in ledgers, deposits that didn’t clear the bank, and duplicate checks that cleared. “[Reports] are a wonderful tool for you to use to make sure that nothing is happening in the account that could cause fraud to be committed or a big loss from the account,” Etheridge said.
Use reporting to assess risk and opportunities
Doubling down on reporting, Colbert recommended leveraging reporting to assess risk and opportunities for improvement. “It’s not good enough to simply have access to significant audit findings reports. You have to review them carefully and use them to identify errors,” he said. Qualia’s SAFER update (Significant Audit Findings Executive Report) is a helpful management tool that enables businesses to see where they are most at risk, every day.
Etheridge and Colbert encouraged businesses to document everything throughout the reconciliation process. “Unless you have the supporting documentation—it didn’t happen,” Colbert explained. By having fraud prevention strategies in place and processes for identifying and addressing fraud, businesses can help protect themselves as they grow.
To watch the full recording of the “How to Protect Your Business Against Fraud as You Scale” webinar, please click below.