Auditor's Corner

Entity Fraud Prevention Starts with You

Presented by Yolanda M. Lemus Flores | AVP | Agency Auditor | Project Manager & Bruce Weinstein | Agency Auditor

While it is relatively easy to identify the parties to a residential real estate transaction, and whether such parties have the authority to convey or encumber real estate, this is not often the situation with various entities. Such entities include, but are not limited to, corporations, business trusts, limited and general partnerships, and limited liability companies. For this type of transaction, a settlement agent should use all available ways to be sure that the entity exists and those with the powers to convey or encumber are properly identified.

The prevention of fraud can start immediately once the settlement agent, title underwriter, or attorney has been contacted to perform this type of transaction involving an entity. Upon receipt of a contract for purchase or lender request for a refinance, one can properly verify whether such an entity exists. The entities of the type listed above that were organized in Virginia must register with the State Corporation Commission. One way to verify that the entity in question exists, is in good standing and is properly organized is to look it up on the State Corporation Clerks Information System, available at  https://cis.scc.virginia.gov/.  Extra caution should always be given to a newly formed entity. Remember that an entity that does not exist cannot purchase property.

Determining who can sign on behalf of the entity, and does that person have the authority to do so is an important part in the role to prevent fraud. One must look at the entities organizational documents to determine who can sign. For example, Corporations will have articles of incorporation and bylaws; Business Trusts will have articles of the trust and other governing instruments; Limited Partnerships will have written agreements; and Limited Liability Companies will have articles of organization and written operating agreements. Be sure to examine each relevant document. Sometimes entities are owned by other entities. Continue to look at documents at each ownership level until an individual or individuals are properly identified as authorized signors.

In title insurance we also contend with FinCEN requirements for LLC entities purchasing properties without a traditional lender in various counties in Virginia, among other states. There are also various entities, individuals, and properties for which our Underwriters must be contacted as indicated in our Agency Underwriting Alerts. Prior notices are searchable in StarsLink.

Finally, title insurance commitment requirements vary by entity, please refer to the  Entity Requirements summary chart also found in StarsLink, which addresses questions that may arise for each type of entity. 

If you have any question or concerns about determining the entities or the parties to a transaction, reach out to our Virginia counsels via email at vaunderwriting@oldrepublictitle.com.