Ideas mooted for better trust account security

While trust account fraud has been an issue in the real estate industry for some time, a recent spate of incidences in NSW – including one involving more than $1 million in unaccounted funds – has stimulated debate around the topic.

Leanne Pilkington, general manager at NSW-based Laing+Simmons, which has more than 40 offices, said while managing trust accounts isn’t complicated, the temptation for fraud remains.

She said the usual reasons were behind the misappropriation of trust account funds – gambling habits was one in particular – as to whom might be the most likely person in an agency office to take the funds, she said “it can be your best friend.”

She said it’s good practice for the licensee or principal to check the accounts on a random basis, to ensure staff that are engaged in fraud aren’t in a position to cover their tracks. Laing+Simmons provided its franchisees with a fraud prevention checklist, she added, along with regular business training courses.

One suggestion Ms Pilkington said had been mooted within the company was the idea of having one, central trust account for all franchisees to deposit into.

This was the process that was already in place at McGrath Estate Agents’ seven company-owned offices, according to partner and general manager of sales at the group's company-owned offices, Matt Lahood.

“It’s actually not a bad idea,” he told Real Estate Business. “A small operator in particular would like a franchisor that helped with this.” It could remove some of the administrative responsibilities that some principals didn’t like, he said.

But he acknowledged principals within larger real estate groups might struggle with having to use one central trust account.

Mr Lahood said it’s usually the property management trust account that triggers an investigation, when a landlord doesn’t get paid.

“With sales trust accounts, the money is allocated more quickly,” he said. “There’s a settlement almost every day, money goes to three parties, so a discrepancy would come up quicker.”

He said McGrath Estate Agents undertakes regular checks of their franchisees’ accounts.

“We conduct spot checks on our franchises, and we’ll ask them for their audit certificate,” he said. “We reserve the right to check their books and trust account.”

Nicholas Efrossynis, director and licensee at Laing+Simmons Kingsford, can’t see why a franchisor would want to take over the running of their franchisees’ trust accounts. “There is no money in it for them, just extra work,” he said.

“[Moreover], the demands on an agent who may or may not be a franchisee are immense. Quite often an owner will arrive unannounced at an agency and ask for a cheque to be drawn on the spot to pay a tradesperson, an insurance bill or a mortgage shortfall.

“It just wouldn’t work for someone else to control the reins,” he continued. “Most franchisors insist that their franchisees submit a clear audit certificate annually and seek proof of that and also carry out their audits of the agents trust account annually.”

One area that could be changed, however, was how rental bond deposits are handled, he said.

“I have noticed over many years that where a major real estate trust account misappropriation or fraud has happened, that much of the missing funds have been from rental bonds not lodged, and not just from rents not forwarded.

“Quite often there are not enough checks in regard to bonds not lodged, and it would need tenants to be aware that they had not received a lodgment advice to realise that their bond had not been lodged.

Mr Efrossynis said agents normally ask tenants to pay a bond in one of two ways.

“Some ask for cash only to be deposited into their trust account. Others who do not want to double handle quite often ask the tenant to present a bank cheque or money order made in favour of the [NSW] Rental Bond Board to their office on signing the tenancy agreement, and they attach the tenants payment to a lodgment form which is forwarded to the Rental Bond Board. 

“Bond fraud takes a lot longer to detect that rent fraud as the landlord keeps receiving their rent monthly without any indication that anything is wrong until a tenant vacates and seeks a bond refund.”

Mr Efrossynis said tenancy bonds should be handled in the same way compulsory motor vehicle insurance is currently handled in NSW.

“It would remove all exposure to trust account fraud from non lodgment of bonds. Once a tenant was approved for tenancy he or she could then go to an Australia Post office or an approved bank and purchase a ‘Rental Bond (RBB) slip’ of equal value to the money paid.

“This slip can then be taken to the agency or landlord who would simply attach it to the signed tenancy agreement and it would form part of that agreement. The Post Office or bank could then lodge directly into the Rental Bond Board. This method takes the agent out of the lodgment and receipting process altogether.

“Bond refunds would still be handled in the same manner in which they are currently being handled because the bond fraud seems to be happening by non lodgment rather than false claiming.”