How to Lose $225,000 in a Wire Transfer Fraud Scheme

by | BiggerPockets.com

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.

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.



Related: 4 Types of All-Too-Common Real Estate Scams Making Headlines

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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.

What Now?

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

OUCH.

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.

real-estate-investing-easy

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.

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!

About Author

Paul Moore

Paul is author of The Perfect Investment - Create Enduring Wealth from the Historic Shift to Multifamily Housing, leads Wellings Capital , a multifamily investment firm, and hosts the How to Lose Money podcast. Paul was 2-time Finalist for MI Entrepreneur of the Year, has flipped 60 homes and 30 waterfront lots, developed a subdivision, and appeared on HGTV. Paul's firm invests heavily to fight human trafficking and rescue its victims.

46 Comments

  1. Jeffrey Hare

    It’s not just wired funds, but phony cashier’s checks as well. Scammer, usually from overseas, contacts attorney or broker and says they want to purchase property in your area, but can’t get out in person right away. They send a large sum of money to be deposited in a trust account to cover the down payment, your fees or commission, and ask you to handle the transaction. The cashier’s check arrives — it looks legit — and you deposit it into your trust account. Scammer then contacts you to cancel the transaction, citing contingency, change in plans, whatever, and asks you to deduct your fees and/or commission, and return the balance. Very generous. If you do, you end up sending a Good check — for which you are 100% liable — only to find out a couple of weeks later was drawn on a deposit based on a Bad check. Several people have been hit with this scam.

  2. Kent Harris

    I always get nervous sending out wires for 6 figure transactions. I wired $120,000 yesterday and since it was my first wire for this amount of money, I looked up the bank routing number on the internet along with the account number and verified it was the Title Company (I called the Title Company every 30 minutes to ask if they received it yet). I much rather get a certified check which some Title companies are not accepting because of counterfeit certified checks. $225,000 would have wiped out all of my Real Estate investment money and I would have to go back to a day job!

  3. Joshua Howaniec

    I didn’t even open my email when I saw the title of the blog. I was so paranoid I actually checked this site instead to make sure that it wasn’t an ironic fraud that I was being tricked into.
    A serious warning to be sure especially since I am moving in this direction in the future. Thank you

  4. Mohammad (Asad) Asaduddin

    Thanks Paul for alerting us. I had a different kind of account hacking problem last year. There was a deposit of $2.23 into my business account followed by another deposit of some amount like $1.97. Then the same day there was a withdrawal of a fairly large amount which I had in my account. It took several days for Bank of America to investigate and advise me to close down that account and open a new one. Luckily they also gave me credit for the unauthorized transactions. I need suggestions on how to protect myself from this kind of hacking.

    • Paul Moore

      Asad, thanks for commenting. Glad your bank was able to take care of those transactions for you. As Deanna mentioned below, I would like to know more details about how the hacking occurred before suggesting solutions for the future…

  5. Deanna Opgenort

    Assad – I understand the purpose of the two small deposits (to confirm it was a legitimate account), but not how the withdrawals were accomplished. Was it an e-mail account that was hacked, or just the scammers knowing your account number (info easily available on every single check written to anyone).

  6. Jade S.

    This nearly happened to the seller of a new rental property I closed on about two weeks ago. She was in escrow for a new house in another state, and received “urgent” wiring instructions several days earlier than expected. Reason: email of her closing attorney’s office was hacked, and bogus wiring instructions sent out. She called the office to double check, and was able to dodge a bullet. Bastards are getting good at stealing money from many investors though.

    • Paul Moore

      Jade, thanks for sharing. Glad the seller was able to avoid that! While some business transactions are truly “urgent” or “time sensitive”, those are phrases fraudsters use to get people. They know if potential victims think through something long enough, they probably won’t fall for it.

  7. Christopher Smith

    This is the nightmare scenario I think most all of worry about. I’ve been wiring 6 figure amounts for a few years now, but I never really get too complacent about it. Due diligence is key, check and verify and then check and verify again, and most of all assume nothing. Put yourself in the scammers shoes and try to think like they think.

    Just the unfortunate new reality of the new virtual world we all live in these days.

  8. Gerald Marshall

    Wow, Thanks for the heads up. I just purchased a piece of property from an owner who lives in Amman Jordon, and was glad to see my banker instruct their wiring department to check the IBAN and Swift Codes authenticity before sending the funds. Great Article.

  9. Lev Rejanovinsky on

    I was targeted twice the thief cloned my realtors email address and sent me wire instructions to send the money for closing. of course i did not fall for it. however, the email was credible i can see some folks falling for it. great article and unfortunately very true.

  10. Thomas Guertin

    Great article Paul. I think you left out the most important part of the article, though. You mentioned “The FBI later explained how the email phishing scheme worked and pointed out a few telltale signs within the email that was transmitted.” However, you never said what the telltale signs are to look for in a phishing e-mail. It would have help the article to know what those were.

  11. What was the name of the Bank that alerted the client of the fraudulent Account? And, who were the 4 banks that allowed the funds to be transferred, without the fraud detection? Having a bank that has high level fraud prevention would be a nice secondary safety net.

  12. Kenneth Dai

    Great article, especially in this day and age where we rely more and more on the internet and e-mail to complete transactions. It’s a great tip to call and confirm wire instructions prior to hitting that ‘send’ button.

  13. Tony Wooldridge

    Thanks for bringing this article to light Paul! Very informative read. I am always amazed and disgusted at what the criminal mind is capable of doing. I am just glad that everyone was made whole again and are still able to successfully maintain a strong trusting relationship after such a horrible incident. I guess it is true what they say about RE, its all about establishing relationships! Thanks again Paul for sharing!

    • Paul Moore

      Tony, thanks for your comment. Over and over in my career I have found this to be true: relationships are so so so important. It’s so essential to take care of your relationships, and to do the right (ethical) thing even when it’s difficult.

  14. 4/1/17

    Dear Sir(s):

    When transferring funds to complete a closing a person could have their bank make the transfer.

    Most …(if not all banks have a HIGHLY SECURED transfer system.) … have funds transfered from one bank to another.

  15. Kate Howell

    It’s not just hackers going into your email account, the last two times I purchased properties within 6 months of each other, both times I went into Chase to wire the monies to the title co, and both times was serviced by the same Chase rep, and both times within 24 hours I had to change my password because of multiple attempts at someone trying to log into my account. Weird circumstance? Who knows but I will not be letting this same rep send my next wire.

    • Paul Moore

      Jason, as far as I know they never found out who the scammer was and they never recovered the money. Unfortunately criminals are getting smarter…but luckily there are so many ways to avoid this kind of thing!

  16. Angel Gutierrez

    I hear stories like this A LOT….. unfortunately .

    At the same time, I trust the title cos/title attorneys about as far as I can throw them…

    I almost got caught in a ripoff from this a-hole….

    https://www.google.com/amp/www.nbcdfw.com/news/local/Southlake-Title-Company-Owner-Arrested-368634201.html%3Famp%3Dy

    You should’nt trust them either.

    In the infamous worlds of JohnShaub to me….”NEVER leave your money with an escrow or exchanger .”

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