DealShield | AI-Powered Due Diligence for Luxury Asset Brokers

Escrow protects both buyers and sellers by holding funds until transaction conditions are met. But fake escrow companies and compromised wire instructions have cost victims hundreds of millions. Verifying your escrow agent is as critical as verifying the transaction itself.

Why Escrow Verification Matters

Escrow fraud typically follows one of two patterns: fraudsters create fake escrow companies to steal funds directly, or they compromise legitimate transactions by providing altered wire instructions that redirect funds to criminal accounts.

Common Escrow Fraud Scenarios

Fake escrow company: Fraudster creates website and documentation for non-existent escrow company. Buyer wires funds thinking they're protected by escrow, but money goes directly to criminal account.
Compromised wire instructions: Fraudster intercepts email communications and sends modified wire instructions with their account details, claiming to be from legitimate escrow company.
Seller-controlled escrow: Seller insists on using specific escrow company that is actually their accomplice or under their control.
Offshore escrow scam: Use of obscure offshore escrow companies with no verifiable history or regulatory oversight.

Average loss per escrow fraud incident exceeds $2.8 million in luxury transactions. Unlike wire fraud that can sometimes be reversed if caught quickly, escrow fraud typically results in complete loss of funds.

How to Verify Escrow Companies

State Licensing Verification

Most states require escrow companies to be licensed and bonded. Verification starts with confirming the escrow company holds proper licenses in the jurisdictions where they operate.

License Verification Steps

1. Identify jurisdiction: Determine which state(s) regulate the escrow company based on their claimed location and where the transaction occurs.
2. Check state database: Search the state's Department of Financial Institutions or equivalent regulatory body database for the company's license.
3. Verify license status: Confirm license is active, not suspended or revoked. Check for any disciplinary actions or complaints.
4. Confirm bond coverage: Most states require escrow companies to maintain surety bonds. Verify bond is current and coverage amount is adequate.
5. Review financial reports: Some states require escrow companies to file financial statements. Review for signs of financial instability.

Professional Association Membership

Legitimate escrow companies often belong to industry associations that require members to meet standards and carry insurance.

Industry Associations to Check

American Escrow Association (AEA): Trade association for independent escrow companies
State-specific associations: Many states have escrow associations with membership directories
Industry-specific groups: Aviation escrow specialists, maritime escrow companies may belong to industry-specific organizations

Note: Membership doesn't guarantee legitimacy, but absence from relevant associations is a warning sign for established companies.

Physical Address Confirmation

Fake escrow companies often use virtual offices or non-existent addresses. Confirming physical presence is essential.

Verify physical office: Look up the address on Google Maps street view. Confirm it's an actual office building, not a residential address or mail drop.

Call the main number: Use phone numbers found independently through directory services or state licensing databases, not numbers provided by the seller or in escrow documents.

Request in-person meeting: For large transactions, consider visiting the escrow office in person or having local counsel verify their physical presence.

Cross-reference information: Address, phone, and company name should be consistent across state licenses, association directories, and independent searches.

Red Flags in Escrow Arrangements

Warning Signs to Never Ignore

Seller-provided escrow only: Seller insists on specific escrow company and refuses alternatives. Legitimate sellers accept mutually agreeable escrow agents.
Reluctance to use established firms: Resistance to using well-known, verifiable escrow companies without valid reason.
Offshore or unusual jurisdictions: Escrow company located in offshore jurisdiction with no clear reason for that location.
Pressure to wire before verification: Urgency to send funds before you've completed verification of escrow company credentials.
Changed wire instructions: Receiving modified wire instructions via email, especially if different from initial escrow agreement.
Personal or business accounts: Wire instructions showing personal account or general business account instead of properly designated escrow account.
Lack of escrow agreement: No formal written escrow agreement detailing terms, conditions, and release requirements.

Wire Transfer Security Protocols

Even with a verified escrow company, wire transfer execution requires strict protocols to prevent compromise at the final step.

Callback Verification

Mandatory Callback Protocol

1. Receive wire instructions: Get initial wire instructions in writing from escrow company.
2. Independent phone lookup: Find escrow company's phone number through independent sources (not from email or documents received).
3. Call and verify: Call the independently verified number and ask to speak with the specific person who should be handling your escrow.
4. Confirm all details: Read back the complete wire instructions including account number, routing number, beneficiary name, and reference number.
5. Document the call: Note date, time, person spoken with, and confirmation received. Save this documentation.
6. Any changes require new verification: If wire instructions change for any reason, restart this entire verification process.

Test Wire Procedures

For large transactions, sending a small test wire before the full amount provides an additional verification layer.

Test Wire Best Practices

Send small amount first: Wire $100-500 to the escrow account using the provided instructions
Confirm receipt: Have escrow company confirm receipt and provide written confirmation
Verify account details: Confirm the confirmation comes from the legitimate escrow company through independent contact
Wait before full wire: Allow test wire to fully clear (24-48 hours) before sending full amount
Use same instructions: Wire full amount using identical instructions as test wire (no changes)

Industry-Specific Escrow Requirements

Different transaction types have industry-specific escrow practices and specialized escrow companies.

Real Estate Escrow

Title companies typically handle escrow: In many states, title insurance companies provide escrow services. Verify title company is licensed and insured.

State-specific regulations: Real estate escrow requirements vary significantly by state. Ensure escrow agent complies with local regulations.

Earnest money deposits: Verify earnest money goes into properly designated escrow account, not general operating account.

Aircraft Escrow

Aviation-specific escrow companies: Use escrow agents experienced with aircraft transactions. They understand FAA requirements, lien releases, and registration transfers.

Inspection contingencies: Escrow agreement should clearly specify conditions for fund release, including pre-purchase inspection results and title clearance.

International considerations: Cross-border aircraft sales require escrow agents familiar with export/import requirements and foreign registration processes.

Yacht and Maritime Escrow

Marine survey requirements: Escrow should be contingent on satisfactory marine survey and sea trial results.

Flag state transfer: Escrow agent should understand yacht registration and flag state transfer requirements.

Lien release coordination: Maritime liens can be complex. Escrow agent should coordinate with maritime attorneys for proper lien releases.

Business Acquisition Escrow

Holdback provisions: Portion of purchase price typically held in escrow for 6-18 months to cover potential indemnification claims.

Earn-out escrow: If purchase price includes earn-out provisions, escrow agent manages calculation and distribution.

Working capital adjustments: Escrow may hold funds pending final working capital calculation and adjustment.

Escrow Agreement Essentials

The escrow agreement is the legal document governing how funds are held and distributed. Understanding key provisions protects both parties.

Critical Escrow Agreement Terms

Release conditions: Specific, objective conditions that trigger fund release. Avoid vague terms like "satisfactory completion" without defining what that means.
Dispute resolution: Process for resolving disagreements about whether release conditions have been met. Should specify arbitration or mediation procedures.
Fee structure: Clear statement of escrow fees, who pays them, and when they're due. Typical escrow fees range from 0.5% to 2% of transaction value.
Timeline requirements: Deadlines for due diligence, inspections, and other contingencies. What happens if deadlines aren't met.
Termination provisions: How either party can terminate the agreement and under what circumstances funds are returned.
Interest on funds: Whether escrow funds earn interest and how that interest is distributed.

What to Do If You Suspect Fraud

If you notice red flags or suspect escrow fraud, immediate action can prevent loss or potentially recover funds.

Immediate Actions

1. Stop all wire transfers immediately: Do not send any additional funds. If a wire is pending, contact your bank immediately to attempt recall.
2. Contact your bank: Report suspected fraud to your bank's fraud department. They may be able to freeze or reverse the wire transfer if caught quickly.
3. Contact the legitimate escrow company: If you suspect compromised wire instructions, contact the real escrow company using independently verified contact information.
4. File police report: Report the fraud to local law enforcement and obtain a report number for bank and insurance purposes.
5. Report to FBI IC3: File a complaint with the FBI's Internet Crime Complaint Center at ic3.gov.
6. Notify other parties: Alert the other party to the transaction (buyer or seller) about the suspected fraud.
7. Engage legal counsel: Consult with an attorney experienced in wire fraud for advice on recovery options.

Time is critical in wire fraud cases. The faster you act, the better your chances of fund recovery. Most successful recoveries occur within 24-48 hours of the fraudulent wire transfer.

Key Takeaways

•Never use seller-recommended escrow without independent verification. Insist on mutually agreeable escrow company and verify their credentials thoroughly.
•Always verify wire instructions via independent phone call. Use phone numbers found through your own research, never from emails or documents you received.
•Test wires provide additional security. For transactions over $500,000, sending a small test wire first is prudent risk management.
•Escrow agreements should be detailed and specific. Vague terms create disputes. Ensure all conditions and timelines are clearly defined.
•Industry-specific escrow agents add value. Their specialized knowledge reduces transaction risk and smooths the closing process.

Escrow verification takes minimal time and costs nothing compared to the millions protected. Every verification step—license checks, callback confirmation, test wires—is a small investment in transaction security. The moment you skip these steps to save time, you expose yourself to fraud that can cost everything.

Escrow Agent Verification: A Critical Step