Bulletin: WV000003

Dear Associates:

Enclosed is an Agency Bulletin by Steve J. Blizzard, Virginia State Auditor. Steve is a licensed Virginia Attorney and has been in the real estate field for many years. The bulletin is a frank description of unfortunate circumstances and it also states Stewart Title's minimum escrow requirements.

Agents are encouraged to be sure their escrow accounts are reconciled monthly and to take other steps as they feel necessary to ensure control over this area of responsibility.

The content of the bulletin is as follows:

In Virginia during the first three months of 1994, there have been two documented cases of defalcations from the bank accounts of appointed Stewart Title agents. To make crystal clear, "defalcation" is a polite word for stealing money.

In the first instance, a settlement office manager repeatedly transferred funds from the settlement escrow trust account into the agency operating account, then wrote checks from the operating account for personal use. Unfortunately, the ownership/management of the agency did not review the escrow or operating account bank statements closely, and sufficient account reconciliations were not done. The result of this defalcation was a large monetary loss, and closing of the agency, which was disastrous for the owners and employees.

In the second case, a receptionist obtained access to escrow and operating account checks and forged the signature of the only person of the agency authorized to sign checks; in addition, the individual discarded two months of bank statements to conceal the fraudulent activity. As in the first theft, the escrow and operating accounts of this agency were not reconciled monthly, and checks were not examined properly for payees or amounts.

The extent of any loss in the second case is as yet undetermined, and the perpetrator is cooperating with law enforcement officials at present. Both cases are being criminally prosecuted by the police and County Commonwealth's Attorney's offices, with the vigorous urging and complete approval of Stewart Title.

You are reminded that the care and custody of escrow funds is the primary fiduciary duty of an escrow agent. To put it bluntly, your customer's money is not your money! Although your agency does not represent Stewart Title Guaranty Company at settlement, the Company has a responsibility by virtue of the Insured Closing Services letter. Also, the agent has a duty to safeguard any title premiums that are due to Stewart Title for issued policies.

The following is a summation of the minimum requirements regarding bank accounts for Stewart Title agents in Virginia:

Complete bank account reconciliation. Every agency must reconcile all bank accounts every month. This complete reconciliation includes constructing a separate list of outstanding checks and outstanding deposits (checks and deposits not yet posted by the bank on the bank statement).

An "open file" list must be available, which is a listing of all cases where funds are being held, even short-term.

Management must investigate immediately negative balances, as well as checks returned for insufficient funds.

As part of the Stewart Title audit visit to an agency, a complete examination of the bank reconciliation will be done, and photocopies of the last two months' bank reconciliations, outstanding check and deposit list, and "open file" list will be obtained, along with the photo copy of the bank statement(s). Please observe the following safeguard requirements:

Checks are to be kept locked in a secure location of the agency.

Larger checks should require two signatures; wires should require a reconfirmation by a second employee.

No checks should ever be pre-signed, that is, signed before the check is made out completely.

All checks are to be pre-numbered when printed without alteration.

Reconciliations are to be performed by a person who does not have check signing authority, e.g., a bookkeeper or an outside accountant. Title agencies in Virginia who cannot or will not comply with these bare minimum accounting procedures run the risk of losing their appointment by Stewart Title Guaranty Company. Paragraph 3 (e) of the Stewart Agency Agreement also spells out these escrow accounting requirements.

In the two instances of theft this year, the owners of the companies did not believe they were at risk, and were embarrassed by the criminal acts committed under their noses. Any title agency that is so negligent and fails to thoroughly review their bank accounts is not safeguarding their client's funds or protecting the agency's or Stewart Title's interests.