How to Lose $225,000 in a Wire Transfer Fraud Scheme
Don’t ignore this article. This could happen to you.
If you’re involved in real estate or if you move money around through banks or if you’re alive and have a pulse, this article should strike fear into your heart.
I hope it does. That's certainly my goal. That's precisely the effect this story had on me as a multifamily syndicator. I recently had a long talk with a friend and fellow multifamily real estate investor about his first year in business. Let's call him John.
John raises capital for a syndicator, and he’s really good at it. John left a high-paying job in a national company to raise money and work toward syndicating deals on his own. Like me, in mid-career, John discovered the powerful demographics that have led to the profitability and safety of multifamily investing.
If you haven't heard, raising capital for real estate deals can be hard. Very hard. Most of us only have so many friends and family—those who know, like, and trust us—that we can call on to invest when we're getting started. And it's especially challenging because at the very time that capital raisers need to be most credible before their potential investors, they have the least experience in their new field.
After we have experience, we can often move on to find larger or different investors we don’t know, and we will no longer need to rely on our circle of immediate influence. If you haven’t tried raising money yet, I predict you’ll have this same experience when you do.
I’ve seen new capital development folks who spend a few years spinning their wheels to only raise a small amount of capital. Many give up and try their hand at something different or co-invest with more established firms. I’ve known several investors who went down this path.
But John wasn’t one of them.
In his first opportunity to raise capital, John surprised himself and his syndicator/coach. He raised over a million dollars in a few weeks—certainly far above the norm.
Note: For you who are new to capital raising, know that there’s a big difference between having people interested in investing and actual investors. And there is even a difference between having committed investors and getting money in your bank account.
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Even investors who have signed all of the paperwork sometimes back out. This is widely known among capital development pros, but often comes as a surprise to those who are new to the game.
Pros know that you have to have a large funnel of serious interest to get the funds you actually need to close.
Where Things Went Wrong
Are you old enough to remember what you were doing when Kennedy was shot?
Or when Elvis died?
Or when the space shuttle crashed?
Or if you’re really young, when you heard that Trump was elected President?
Most of us remember exactly where we were when shocking news hits the airwaves.
John remembers his fateful moment. It is burned in his brain forever.
His investors had signed a PPM (private placement memorandum), and they were ready to invest. His syndication partner had sent John a simple email with the subject line “wire instructions.” John had forwarded that email to 13 investors who were about to invest a total of the $1 million they had committed. This was a Thursday afternoon.
On Monday morning, the moment came that will be forever etched in John’s memory. He was walking across his office, when the phone rang. It was one of his investors, a friend who he had a mutual trusting relationship with.
“I got a call from the Global Security Department of my bank. They said the account I tried to wire funds to was a fraudulent account.”
This was John’s “Elvis moment.” He turned pale white. His insides wanted to be on his outside (but he resisted the urge).
If this was really a bogus account, a dozen other people had these same wire instructions.
John quickly emailed the group and instructed them to not wire their funds if they hadn’t already. “I’ll have some new instructions for you soon.”
After taking a moment to catch his breath, he dialed the Global Security Officer. He learned that something was very wrong.
It turns out that “only four” of the 13 investors had wired their funds. But these four represented $225,000 in investor funds.
What Went Wrong?
If I was John, I would have certainly wondered about the credibility of my syndicator. But John knew him well and trusted him. Still, the fact remained that his syndicator friend had sent him an email with wire instructions to a fraudulent account.
What the heck was going on?
BiggerPockets readers are pretty smart. So you may have already guessed what John found out next.
The syndicator’s email had been fraudulently intercepted and directed to John’s spam filter. The fraudsters had made a nearly exact copy of that email, using their fraudulent bank account, and sent it to John’s inbox.
No one examining the email would have guessed. The FBI later explained how the email phishing scheme worked and pointed out a few telltale signs within the email that was transmitted.
But the funds were gone. Forever. The fraudsters had immediately withdrawn them from the major New York bank account as they arrived from the four investors.
Of course, they immediately turned to the FDIC—the Federal Deposit Insurance Corporation. But they were no help. The government doesn’t insure wire transfers, just bank accounts.
The deal was about to close, and this loss wasn’t the fault of the investors—or the syndicators. But it was the capital-raiser and syndicator’s responsibility. So the capital-raiser and syndicator promptly coughed up the $225,000 and moved on to closing.
Related: 10 Glaring Red Flags That Indicate Your “Great Deal” May Be a Costly Scam
John and his syndicator are good guys. Their investors came out unscathed. In fact, all four investors knew the full story and reinvested with John in their most recent deal a few months back.
How Do You Protect Yourself?
John and their team immediately set up new processes to protect themselves and investors. You can learn from what they did.
First of all, they set up a written process—a guaranteed plan to be sure that wire instructions are never sent outside of the guidelines they’ve established, with one point of contact that transmits all information.
Second, they will never send out wire instructions through regular email again—not in the body of an email, not in an attachment. All wire instructions and other sensitive financial information are sent out via secure encrypted processes like DocuSign or SignNow.
Third, they have their investors and bankers call them to verbally confirm wire information. John tells investors to call him anytime. He’ll take that call.
This disaster could have been worse:
- All $1 million could have been wired to the fraudsters.
- The syndicators, capital-raiser, and investors could have blame-shifted and pointed fingers.
- John and the syndicator could have not had the funds to replace lost investor cash before closing.
In the process of writing this article, I learned that this type of scheme is more common than I thought. There are many articles about it online.
I called Perry Underwood, a friend who owns Choice Title Company in Ringgold, GA, near Chattanooga. He told me about someone at another firm in town who just lost $300,000 to a similar scam—and another in Nashville who lost $800,000.
These fraudsters are especially targeting title companies, so make sure yours is compliant.
[Editor’s Note: We are republishing this article to help out our newer readers.]
So now I have a question for you: What do you do to protect your sensitive financial information from fraudsters?
Let me know with a comment!