Entity Hijacking

By: Ben Smaglick, Agency Representative

In today’s digital age, anyone with a computer can create entity documents and file them with the Secretary of State or similar regulatory agency without the need to confirm their authority or authenticity.

A fraudster can “hijack” an entity by entering phony filings with the Secretary of State (or similar state body) and fabricating operating agreements or resolutions just before the sale or refinance of the property to drain the equity from a property or sell it for their benefit.

If you are asked to insure a transaction involving an entity in any capacity (borrower, seller, lender, etc.), always be certain to review the following documents to confirm the validity of the entity and the authority of the signor on any mortgage or deed.

Here are just a few items to be vigilant when reviewing:

1. Incorporating/Formation Documents (e.g. Articles of Organization, Articles of Incorporation, etc.)
   These governing documents are usually necessary to create the entity and may dictate limitations on its business activities. In many states such as Wisconsin, reviewing these documents can assist with identifying the signatures required for the transfer deed or mortgage.

2. Operating Documents (e.g. Operating Agreement, Partnership Agreement, Corporate By-Laws, Certificate of Incumbency, etc.)
   These documents govern who can sign on behalf of the entity in question. It is important to review these documents and any amendments thereto to verify we’re dealing with the correct individuals, their authorization to conduct business on behalf of the entity, and when they have authority.

3. Certificate of Good Standings
   The Secretary of State may provide a certificate of good standing or similar document to confirm that the entity is up-to-date. Any pending actions or compliance issues should be resolved before closing.

Consider these questions when reviewing an entity:

1. Are there any recent changes to the ownership of the entity?
   Recent changes just before a property transfer or encumbrance such as the admission of new or the departure of existing members or partners are highly suspicious and warrant additional questions or independent verification.

2. Were any signors recently changed in the authority documents, or was there a recent amendment?
   New signors to any authority documents shortly before an entity purchase or transfer could prompt follow-up questions.

3. Is there any inconsistency in the signing authorities named in the documents filed with the State and unfiled operating documents presented to us for review?
   While changes in signors are not unheard of, it may be worth reviewing that they had the appropriate authority to do so at the time the documents were signed and notarized.

4. Do the previous signatures of the entity members match and are the signatures consistent?
   Inconsistent signatures are a red flag in any transaction. If you encounter a situation where you believe fraudulent activity may be at hand, reach out to your First American Underwriters for guidance. 

Are you interested in obtaining customizable marketing materials you can distribute to your customers concerning how they can become more informed of the risks our industries face surrounding fraud? 

There are over 30 ready-to-use marketing pieces discussing fraud available in Agent Print Pro. Should you need any assistance accessing Agent Print Pro, please reach out to Ben Smaglick, your local Wisconsin Agency Representative, to find out more:  bsmaglick@firstam.com