Wire Fraud and Funds Safety: A 1031 Advisor Checklist

Why 1031 Exchanges Are High-Value Targets

Wire fraud in real estate cost victims more than $8 billion in 2023, according to the FBI. A 1031 exchange sits squarely in the crosshairs. The dollar amounts are large, often $500,000 to $5 million or more. The cast is crowded: seller, buyer, the qualified intermediary (QI) that holds the proceeds between the sale and the replacement purchase, title company, lender, attorneys. And the clock is always running.

The classic theft is simple. Someone impersonates the QI, sends wiring instructions that look right, and the money leaves for an account a criminal controls. Your job is to be the circuit breaker: verify instructions before anyone acts on them. A few minutes on the phone can save hundreds of thousands of dollars.

How the Business Email Compromise Works

The most common attack is a business email compromise, and it follows one script. The fraudster studies the deal first - who the QI is, which title company is involved, the buyer, the seller. Then they get inside the QI's email account, or register a lookalike address one letter off from the real one. A polished email goes out with altered wiring instructions and a reason to hurry: wire today so closing stays on schedule. The taxpayer or advisor wires the money without picking up the phone. The fraud surfaces only later, when the real QI asks why the proceeds never arrived.

The Pre-Close Protocol

Step 1: Establish Approved Contacts

Before the exchange begins, capture the QI's real contact details and lock them down.

• Get the QI's direct phone number in person, through a trusted referral, or from a professional association directory
  
• Record the QI's verified email address
  
• Store both somewhere secure
  
• Never use a phone number pulled from an email you received later
  
• Never use a phone number from a website you found through a search engine
  

Step 2: Get Wiring Instructions Early

• Ask for the QI's bank name, routing number, and account number early in the exchange
  
• Save that information somewhere other than email
  
• When wiring instructions arrive by email later, compare them against what you saved
  
• If any detail has changed, call the QI before wiring
  

Step 3: Confirm Every Wire by Voice

For any transfer of $25,000 or more:

• The QI sends wiring instructions by email
  
• Before wiring, call the QI at the number from Step 1
  
• Read back the account number, routing number, and amount
  
• Wait for the QI to confirm out loud: "Yes, that is correct"
  
• Only then start the wire
  
• Log the call: date, time, and who you spoke to
  

Put it in writing, in the QI agreement or a side letter: "For any wire transfer over $25,000, the advisor will call the QI at [phone number] to verbally confirm wiring instructions before initiating the transfer."

Step 4: Treat "Updated Instructions" as a Warning

An email that says "Updated wiring instructions attached" is the moment to slow down.

• Do not act on the new instructions from the email alone
  
• Call the QI using your saved phone number
  
• Ask directly: "I received an email with updated wiring instructions. Can you verify this is from you?"
  
• Wire only after verbal confirmation
  

Step 5: Send Sensitive Documents Encrypted

• Use encrypted email or a secure file transfer service for wiring instructions, settlement statements, and other sensitive documents
  
• Options include services like Tresorit, 1Password, or your firm's encrypted platform
  
• An unencrypted email can be intercepted in transit
  

Step 6: Pin Down the Closing Timeline

• Confirm the expected wiring date and time with both the QI and the title company
  
• Be skeptical of instructions that arrive earlier than expected
  
• Fraudsters sometimes send instructions days before the real closing, betting on confusion
  

Step 7: Know the Email Red Flags

Any one of these should stop a wire cold, and the response to all of them is the same: do not act, and verify by phone.

Step 8: Arm Your Client with a One-Page Warning

Send a short written memo before closing.

WIRE FRAUD ALERT

During your 1031 exchange, you may receive an email with wiring instructions. Before you wire any funds:

1. Do NOT click any links in the email
2. Do NOT wire any funds yet
3. Call the QI at [known phone number] and confirm the instructions
4. Only wire after verbal confirmation

If you suspect fraud, contact your bank immediately and call the advisor.

Step 9: Vet the QI's Security Practices

When selecting a QI, ask:

Step 10: Verify the QI's Insurance

• Request the E&O carrier name, policy number, limit, and deductible
  
• Request the fidelity bond carrier name, bond number, and limit
  
• Ask whether the policies cover wire fraud committed by a third party impersonating the QI
  
• Do not assume insurance will recover the funds; coverage varies and often has exclusions
  

If You Suspect Fraud: Incident Response

If a fraudulent wire is in progress or already out the door, speed is everything.

Step 1: Contact the Bank (Within 24 Hours)

• Call the bank that issued the wire immediately
  
• Explain that the wire was based on fraudulent instructions
  
• Provide the wire reference number, receiving bank, and account number
  
• Request a reversal or block if it has not yet processed
  
• Banks can sometimes claw back a wire within the first 24 hours; after that, recovery is nearly impossible
  

Step 2: File an FBI Complaint

• File at ic3.gov, the FBI's Internet Crime Complaint Center
  
• Provide your contact info, the impersonated party's name, the fraudulent email and wiring instructions, the fraudster's bank account, the amount, and the date
  

Step 3: Notify the Impersonated Party

• Contact the QI or title company immediately
  
• Provide a copy of the fraudulent email
  
• They may confirm whether their email was compromised and help with the investigation
  

Step 4: Notify Your Client

• Tell the client immediately and transparently
  
• Explain what happened, the steps taken, and the likelihood of recovery
  
• Lay out next steps (law enforcement, insurance claims)
  

Step 5: Consult an Attorney

For losses exceeding $100,000:

• Engage an attorney or forensic accountant
  
• Investigate how the fraud occurred
  
• Evaluate legal claims against the QI (if negligence contributed)
  
• Coordinate with law enforcement
  
• File insurance claims
  

Reverse Exchanges: Additional Precautions

A reverse exchange, where the replacement property is acquired before the old one is sold, involves more wiring activity and more chances for fraud. Apply the same verification to each new point of exposure:

• Funding the exchange accommodation titleholder (EAT), the entity that temporarily holds title in a reverse exchange
  
• QI wiring instructions for the replacement property purchase
  
• QI authorization to acquire on the taxpayer's behalf
  

Confirm the QI's specific reverse-exchange experience and security practices before you rely on them.

The Bottom Line

Wire fraud prevention comes down to two moves:

1. Verify wiring instructions by phone using a number you already have, before acting
2. Educate your client about the risk before closing

A familiar regret after a fraudulent wire is a single sentence: "I wish I had verified the instructions by phone." That regret is entirely preventable. Build verification into your closing process.