Most people are familiar with the threat of identity theft, especially in the 21st century where data breaches seem commonplace. In 2016, Yahoo announced it was the victim of the biggest data breach in history. The breach was attributed to a “state-sponsored actor” and compromised the real names, email addresses, dates of birth and telephone numbers of 500 million users. It was later revealed that after an earlier attack from a different group of hackers, Yahoo estimates that in total 3 billion user accounts were compromised between 2013-2014!
As scary as that is for the average consumer, business owners also have to worry about LLC identity theft. This type of fraud is on the rise in the real estate world. Fortunately, there are some ways that real estate professionals who work in the commercial space can stop these scammers.
What is LLC identity theft?
LLC identity theft, also known as business, corporate or commercial identity theft, is when a criminal hijacks a businesses identity to establish lines of credit with banks or retailers or to take control of a legitimate company’s real property.
With the fake lines of credit available to the criminals, they are able to purchase an assortment of products ranging from commercial electronics, home improvement materials, gift cards and other items that can be bought and exchanged for cash or sold with relative ease.
This scam has evolved to also target commercial real estate companies who have interest in real property as well as unsuspecting consumers who are in default of their home loans.
What title companies and lenders need to know to stop business identity theft
The American Land Title Association published a fraud alert back in December of 2018 about the increase of this scam in real estate deals. In the past, a common foreclosure scheme involves criminals targeting vacant commercial and residential property facing default or already in foreclosure. The fraudsters then fabricate and record documents related to the loan in the land records. These false documents may transfer title to the perpetrators, which allows them to sell or refinance the property.
A typical LLC Identity theft scheme involves a criminal disguising themselves as the owner or operating manager of a legitimate LLC with real property. They use the Secretaries of State website to file fraudulent annual statements of information, present fraudulent operating agreements, and impersonate the managing members of the company with fake IDs. The criminals, with the help of unsuspecting real estate professionals, sell other people’s property that is free and clear and walk away with hard cash.
Criminals exploit government entity’s vulnerabilities
The success of these scams is a result of exploiting the vulnerabilities within government records. Anyone can file a document with their county’s land records unquestioned and many Secretaries of State do not review filings for validity. This leaves businesses and individuals open to more of these types of attacks.
Title agents can no longer rely solely on their Secretary of State’s information to confirm the identity of a company’s managing members.
Lenders should also be wary of this scam when approving an LLC for a loan. Criminals can leverage the good and often high credit limits of a business with this type of identity theft.
As a result, both title agents, agent-attorneys, and lenders should take extra precautions when working with an LLC to verify the identity of the managing partners. According to ALTA, agents should carefully review the entire SOS SI chain, compare the date of the operating agreement to when the business was incorporated and purchased the property and require, whenever possible for the lender and escrow agent to deal with the principals in person rather than over the phone or through email communications.
Red flags of an LLC Identity theft scam
Some red flags to watch out for include:
- Free and clear property
- Vacant land
- Cash out hard-money brokered loan
- The lender or loan broker never meets the principals in person
- LLC operating agreement not executed at time of incorporation or purchase of property
- The last managing member shown on a previous filing with the Secretary of State did not execute the newest one
- Loan documents are emailed to the borrower instead of delivered by a title company-approved notary service
- Typographical errors
- Non-matching signatures
- Unknown terms
If you notice any discrepancies or these red flags, be sure to slow down on the transaction and have the file reviewed by your underwriting or legal team.
Short sales are also ripe for LLC Identity Scams
Like any type of real estate scam, short sale scams take many forms. They can involve one unscrupulous individual or be a part of a large, well-organized fraud ring. Not only must homeowners who are facing foreclosure need to worry about fake businesses coming in with an offer, but they should also be aware of how scammers can impersonate a reputable company with LLC identity theft.
Sellers shouldn’t believe a deal that’s too good to be true. Yet, when you’re facing the prospect of losing your home which is often coupled with other hardships like loss of job, death of a loved one, divorce, or medical debt, it’s easy to be swindled.
Real Estate Agents could be targeted for their leads
While it’s easy to see how the average homeowners could be taken in by their promises when they are under duress, real estate professionals are in an important position to stop these con artists. Homeowners aren’t the only ones who can be played by fraudsters. Real estate agents, appraisers, mortgage lenders, escrow companies, title insurers, and others involved in the transaction are vulnerable.
Some real estate agents and other service providers are used as pawns by the scam artist, intentionally targeted because their participation may facilitate or lend legitimacy to the fraudulent schemes.
Real estate agents are often pulled into a scheme specifically for their leads as they are the first point of contact for a homeowner in distress in a short sale scam. For a scam involving LLC identity theft and a property that’s clear of liens, they’re listing services are needed.
There’s no easy way to spot a short sale scam, but some of the red flags include:
- An offer that sounds too good to be true
- Unqualified promises like stopping foreclosure, obtaining short sale approval or other assurances
- Represents that the buyer is an entity (such as a trust or LLC) rather than an individual
- Asks for something to be done immediately
- Asks for payment of money in the form of cash or cashier’s check or wire transfer
- Asks for payment of services up front
- Refuses to provide written confirmation of an oral promise
- Instructs the seller, listing agent, escrow officer, or someone else not to contact the short sale lender
- Pressures you to sign documents without careful review
- Asks for transfer of title or an interest in property outside of escrow
- Creates more than one sales contract for the same property
- Promise to expedite a process that typically takes many months
Many scammers are well kempt and smooth talking. It doesn’t help that they can take advantage of people’s lack of knowledge regarding government-subsidized programs to engender trust. When representing a fake or real company, oftentimes, they may pretend to offer a short sale under the U.S. Treasury’s Home Affordable Foreclosure Alternatives (HAFA) program.
As with county land recording and the Secretary of State, this program is vulnerable to even more scammers since an amendment in 2011 allows loan servicers to approve a short sale to a non-profit organization for the purpose of renting or reselling the property to the borrower. This has given rise to unscrupulous entities posing as non-profits to take advantage of homeowners and even recruit real estate agents to pay for certification or membership with their organizations in exchange for leads or listings.
How business owners can protect themselves from LLC identity theft
While real estate professionals should keep these red flags in mind with every deal, there are some ways in which a business can protect themselves from LLC identity theft. Every Secretary of State is different in their requirements for business filings and options available to monitor criminal activity involving their company, so some of these suggestions may not be available to you depending on the state you do business in.
Prevention Checklist:
- Create and follow a security strategy in your business plan
- Designate a top-level manager to execute the plan if your company is a victim
- If you need help in creating a plan, reach out to an expert
- Protect your business records on file with your state’s Secretary of State by doing the following:
- Assign a trusted individual in your organization with the task of maintaining and monitoring your business record in with the Secretary of State
- Sign up for email notification regarding changes to your business record if it’s an option with your Secretary of State
- Take advantage of Secure Business Filing options that allow you to control who can make changes to your records with a password
- Add your renewal/reporting dates to your business calendar and file on time
- Check your business details on your Secretary of State periodically for any fraudulent activity
- Report any changes made without your permission immediately.
- Officially dissolve your business on the Secretary of State if you decide to no longer do business in that state
- Do not unsubscribe from email notifications after dissolving in order to monitor the business record for unauthorized activity
- Create and follow a policy for carrying, using, and reporting lost or stolen business credit cards.
- Report any lost credit cards immediately to law enforcement and the credit card company
- Protect your EIN (Employer Identification Number), account numbers, and other personal information
- Inventory documents that you must maintain
- Store only documents that you must keep
- Store those documents in a safe and secure location
- Shred documents you no longer need using a cross cut or “confetti” shredder
- Store employee information in a secure location and limit the number of people who can access it
- Use passwords with at least 8 characters to protect sensitive information
- Avoid having a “master” user who has complete access to all sensitive information
Check with your Secretary of State regarding what their checklist for victims involves. There’s no easy way to prevent real estate scams including those using LLC identity theft. The best way to stop it is for everyone to remain vigilant. Watch for the red flags mentioned. Don’t be afraid to ask questions and probe principals in a real estate transaction when something seems off.
