July 2011 Vol. 4, No. 6
 

Real Estate and Title Insurance News

Fraud

ACH Blocks on Your Escrow Accounts as a Deterrent to Fraud

Title agency escrow accounts are coming under attack from fraudsters at an increasingly alarming rate. One of the current scams being perpetrated against title agents is the fraudulent Automatic Clearing House (ACH) charge against the agent&€™s escrow account. All a fraudster needs to perpetrate this type of fraud is your bank account number and your bank routing number. Are you adequately protected from these types of scams and do you know what to do if you discover one?

Wire Transfers and ACH Transactions are Two Different Things
ACH is a secure private network that connects banks to one another via the Federal Reserve System. It enables electronic payments for such things as automatic payroll deposits and debit card purchases. The internet is the enabler of the ACH system. Banks like it because it is cheaper and faster than processing paper checks. Please remember that an ACH is not a wire transfer. Here are the differences between wires and ACHs:

 

A Wire Transfer An ACH
Processed through the Fed Processed through the Fed
Each transaction stands by itself Transactions processed in batches
Easily identifiable Not easily identifiable
Takes place immediately and is final Can take up to two days to settle
Has a higher transaction cost Relatively inexpensive transaction cost
Cannot be canceled once it leaves your bank Can be repudiated
Must have good funds to initiate Can bounce

 

Where ACHs are Used
The following are examples of where ACHs are used:

  • Direct deposit of payroll checks;
  • Use of a debit card;
  • Telecheck services at retail point of purchase locations;
  • Electronic bill payment;
  • Third-party payment services such as Pay Pal;
  • Business to business transactions; and
  • Tax payments and refunds, social security payments

 

Advantages and Disadvantages
While ACHs offer some distinct advantages for the user of those services, there are several serious disadvantages. First and foremost is the susceptibility to fraud if not properly controlled. Second, there is a very narrow window of time to report a fraud if you are a business. This window is only 48 hours for businesses, but it is 60 days for individuals. As a result your liability when fraud occurs is greater if you are not alert.

How to Detect Fraud
As mentioned in the first paragraph, all a fraudster needs to initiate a fraudulent transaction against your account is your bank account number and bank routing number. The fraudster will have phony businesses set up to initiate debits against your account without you knowing it. Even if you do not avail yourself of online banking services, you can still be hit. Given the narrow 48-hour window for repudiating a fraudulent charge, a typical bank customer who is not using online banking and waits for the receipt of your monthly bank statement, will find that it&€™s too late to take the appropriate action. Therefore, to catch this fraud within the time window, you would have to make use of your bank&€™s electronic banking services. You would then have to monitor you banking activity on a daily basis in order to detect this fraud. However, there is an easier way to do it.

Many banks today offer the service of ACH blocks for business accounts. This ACH block is not available for personal accounts. This is how the ACH block service works:

  • Your bank will block all ACH debits against your account and will either send you an email of any ACH debits trying to hit your account or require you to visit your bank&€™s website to view any ACH debits being presented. There is always the possibility that an ACH charge is a legitimate charge.
  • You will then have to notify your bank either via email or the bank's website that the charge is appropriate for item to transact. If you provide no response, the charge is automatically rejected by the bank. In this fashion all unwanted, unintended or fraudulent charges never will hit your account.
  • Please remember that if one does slip through, you will have 48 hours to report it to your bank. If you do so in that timeframe, the bank will reverse the charge with no questions asked. If outside the 48-hour window, you could be liable for the charge.
  • We advise you to review the fine print of your agreements with your bank to see if there are any other shifts of liability for fraudulent transaction from the bank to you.

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One Horror Story
Here is an example of what can happen if you do not have the proper controls in place and are not diligent in fraud prevention. A construction company in Sanford, Maine, had more than $600,000 of fraudulent ACH charges hit its account over a six-day period. The construction company did not have ACH blocks in place, nor did it use electronic banking to monitor transaction activity. When the company's bank statement arrived they spotted the fraudulent charges and asked the bank to reverse them. The bank told the company, sorry, you didn't properly notify us within the 48-hour window, and this absolves the bank of any liability. The company then sued the bank under the Uniform Commercial Code for banks that says banks must offer a commercially reasonable security to protect online customers from fraud. The bank argued that the company failed to take advantage of its ACH blocks, which is commercially reasonable, to protect against fraud. The case is still in the courts and the company is still out the money.

 

ACH Blocks Are Inexpensive, Effective
ACH blocks are cheap insurance against fraudulent attacks. Your bank will typically charge you a monthly fee between $5 and $15 for this service depending on your size. If your bank does not offer this service, you may want to consider finding a different bank. Please remember that the fraudsters are targeting title agent escrow accounts where the float and/or balances could be quite large. They are looking for the agent who does not look at its banking activity on a daily basis. Once they have you, they can clean you quickly. This monthly cost is worth the protection that it offers.

ATG offers fraud protection information through the following educational programs and articles:

We urge you to educate yourself and your employees about this problem. The fact that three ATG members (and hundreds of other attorneys) have been victimized by fraud in the last 18 months indicates how widespread it is. Please distribute this information to your employees and feel free to contact us if you have any questions or concerns. Thank you.

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[Last update: 7-13-11]

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