Trust Account Fraud – How Can You Prevent It?

Trust Account fraud is not new to the industry, by any means, but that does not mean it is
widespread, so we raise this topic to create more awareness around the issue and not to
create unnecessary alarm. While there have been some recent cases of agents being
suspended and fined for wrongful use of trust monies, or in some cases simply having
non-compliant trust accounts (which we’ll make comment on later in this blog), it is worth
noting that these instances are still relatively infrequent, especially when represented as a
percentage of the real estate agencies across NSW and Australia.


TYPES OF FRAUD AND MISUSE OF TRUST MONIES


The cases of fraud most people (not working in the industry) have likely heard about will be
the ones to have received the greatest headlines, such as an agent who has accumulated
large gambling debts and uses trust money to pay his/her debts, or an agent who absconds
with all the funds from their trust account and virtually disappears. These instances are few
and far between. The more common cases of trust account fraud (and these are still by no
means ‘common’), or misuse of trust monies, fall into one of the following two categories:

1. In Property Management, there have been a number of cases where an agent pays a
fictitious contractor for works that never actually took place. In this instance,, they
have made up a fake entity to pay for work that was never needed, simply to disguise
the fact that they are siphoning your money to themselves.
● Our Tip: If you have any doubts about the authenticity of an account that has
been paid for your property, raise the query with your agent and ensure you are
satisfied with the response and advice they give you. Better still, if you can, do
your own independent research to verify the contractor is a legitimate entity (you
could search for publicly available information on the company, such as business
listings on pages like hi-pages and yellow pages, or that they are a registered
business – visit ABR.gov.au).

2. In Sales, there have been various instances of agents taking left over marketing
money for themselves. Many years ago, legislation was introduced to make this
strictly illegal. In short, an agent must be completely transparent in respect of all
marketing / promotional costs, so if you have paid marketing money based on an
agreed campaign, you should be provided with a statement of account at the end of
the transaction (or if you take your property off the market) accounting for every cent
of the marketing money you have paid. If there is any surplus in funds (perhaps due
to some of the marketing not having been needed, or being charged at a cheaper
than quoted rate), the agent must refund that to you, as it is your money, not theirs.
● Our Tip: When the sale of your property has settled (or if you decide to remove
your property from the market), make sure you check the paperwork and
statements that your agent issues to you and reference that against what you
agreed to pay to the agent for the marketing of the property. If there is a
discrepancy, raise the query with your agent to ensure you are satisfied.


TRUSTING YOUR AGENT


First off, let’s acknowledge the importance of trust in any relationship. It’s a key ingredient.
Trust, however, does not absolve you entirely of personal responsibility. That is not to say
that an agent should be able to do the wrong thing by you and it’s your fault if you didn’t
catch them doing the wrong thing. What we mean is that you are the backstop. Rely on your
own good judgement, awareness and checks to ensure you are comfortable that your agent
has acted in your best interest and not abused your trust (via one of the above noted means
or otherwise).

Choosing the right agent for you is a critical piece of the puzzle to have a successful
commercial real estate experience. You want to make sure you’re in the right hands and can
feel comfortable with your agent looking after you and your finances. There are many ways
to look for the right agent, such as client reviews, referrals and asking them some straight
questions to ensure any of your concerns are satisfied.

You may also consider researching your agent to see if they’ve been in any scandals (google
is always a good place to search for such information) or had any disciplinary action from
NSW Fair Trading. Research your agent by asking friends and colleagues if they have had
any experience or dealings with them, and check the reviews that have been left in the
public domain (such as google reviews) rather than just relying on the curated testimonials
that may be published by the agent on their websites or social media. See what this says
about their reputation and if you have any concerns or queries that come out of this
research, ask your agent about it to satisfy your concerns.

Depending on whether you have concerns about your agent, or even if you just want to go
the extra mile and understand how they manage these risks in their business, ask them
about their standard procedures and how they go about certain protocols to minimise the
chance of fraud or misuse of trust money. Do they go the extra mile to make you feel
secure? Arrange a one-to-one conversation. This is a great idea to meet in person and
discuss all the concerns you may have. Meeting people virtually vs in person is very
different, so it is smart to get a good idea of who you’re trusting with your money.


HOW TO KEEP YOUR MONEY SAFE


We’ve already made some notes around this in the above sections, but we thought we would
provide a quick check-list of items you can review, and queries you can raise, to make sure
your money is being handled properly and in a compliant manner.

● Does the agency have a current licence? (you can easily check on the services
NSW website)
● Does the agency have Professional Indemnity insurance?
● Does the agency have safe money handling policies in place, such as two part
authentication of bank details?
● Has the agency had their mandatory, external audit of trust accounts completed
in the required time? (this is lodged with NSW Fair Trading)
● Check what payments have been made on your behalf to ensure they are
genuine and correct (review notes above on this).
● How often does your agent reconcile their trust account? It should be every day!
● Does the Licensee-In-Charge have an auditing process as a system to reduce
the potential for fraud by their staff?


AUDITING AND WAYS IT CAN PROTECT YOU


Auditing should be completed using both internal and external measures.

External measures include the requirement for agents to have their trust account records
independently audited by 30 September each year with the auditor to lodge the findings with
NSW Fair Trading. Due to difficulties owing to the Covid-19 pandemic, NSW Fair Trading
has extended this deadline to 31 December for 2020 and 2021. The audit process from the
external accredited auditor is extensive and reviews a wide, but random, selection of trust
account transactions, as well as various trust account records and client files to ensure that
all money handling (as well as various other) processes are completed in a compliant
manner. If there are discrepancies found, those are recorded and reported to NSW Fair
Trading to action, as required.

Internal measures include that the Licensee-In-Charge is the ONLY person to authorise trust
account withdrawals. By this method, greater control should be achieved over how trust
money is released from the trust account to help reduce the incidence of potential fraud.
Additional measures include foundational structures for how trust accounting processes are
set up. For example, in our trust accounting software, if bank account details are changed by
any staff member, an alert is sent to the Licensee-In-Charge so they are aware of the
change and can audit the information and reason for the change. Coupled with this is a
policy that any bank account changes that are advised by a client require a second point of
verification, whereby the client is phoned to double check the accuracy of the information
they supplied. This eliminates the possibility of cyber-fraud (email hacking) and mistakes,
and is another great measure to prevent potential fraud.

Trust account fraud is an area that is taken very seriously by the vast majority of agents and
certainly by the industry body (REI NSW) and regulatory body (NSW Fair Trading) and
efforts are always being made to improve upon the systems and processes to prevent
potential fraud and to protect consumers.

Below we will also include some further resources if you would like further details and
information on this topic. We certainly take the matter very seriously and welcome and
queries you may have about our practises.


ADDITIONAL RESOURCES


You may like to read this article by industry software leaders, Console.

You can use this link to the Services NSW website to check the licence status of your agent.

You can use this link to the NSW Fair Trading website to review the trust account and audit
requirements for real estate agents.

You can use this link to the NSW Fair Trading website to understand how agents are
disciplined for fraud and misuse of trust money. Let’s look at the general ‘investor’ criteria first.