Bank Scares and Boogeymen - How to Keep Your Exchange Secure

Posted by Lucas Ecklund-Baker | Wed, Mar 22, 2023

There are so many ways to lose money. Scares from bank failures this month have put this in focus. So, how can you keep your exchange funds secure? Real estate in a 1031 exchange is often a client’s largest asset outside of their personal residence, so the safety of client exchange funds and sensitive information is a critical consideration when selecting a Qualified Intermediary (QI). A missed deadline can derail a 1031 exchange, but scammers, wire fraud, bank failure, QI insolvency, and plain errors or omissions can leave an exchange taxpayer high and dry. A reputable QI should hold client safety as paramount in their responsibilities in the exchange process.  

The consequences of a QI’s lax security with the safety of clients’ information and exchange funds are dire. Sadly, true stories of heartbreak are a part of tax history. One end of these stories includes scammers and the failure of safety procedures—a scammer impersonation resulted in fraudulent wire instructions or lax IT security exposed an opportunity for cybercriminals to reroute funds or steal sensitive information. QI policies, like pooled exchange funds, have left not enough money in the pot. As we saw this month, banks occasionally fail, leaving the possibility of exchange funds over the FDIC insurance limit to evaporate. At the other extreme, and most egregious, are stories of a criminal QI absconding with client funds. Each of these horror stories among tax professionals have resulted in the loss of client funds and exposure to further damage. 

Client safety includes planning for risk management, knowledge of the exchange process, vigilant observation as an exchange progresses, verification procedures, secure systems, and transparency. As a potential exchanger, you need to trust that your QI is doing everything possible to make you feel comfortable with the process. 

Thankfully, the 1031 industry has developed best practices that reduce the exposure an exchange taxpayer faces during the 1031 exchange process. The Federation for Exchange Accommodators (FEA), the professional association for Qualified Intermediaries, is a leading authority.  

1031 CORP., a long-time member of FEA, follows these guidelines and goes much further. We hold the safety of your exchange funds and personal information as the highest concern to any part of an exchange. Knowledge of the exchange process includes awareness of deviations that raise red flags. The responsibility for client safety is paramount and falls on every team member.  

1031 CORP. has established protections in the exchange process to keep you and your assets safe:  

  • Know Your Customer policies and procedures 
  • Deep knowledge of the exchange process, and awareness of deviations 
  • Multiple checks and balances to confirm that withdrawal meets 1031 requirements
  •  Segregated accounts for each exchange transaction
  • No pooling of client funds 
  • Telephone verification of wire instructions and account changes 
  • Multiple signers on all withdrawals of exchange funds 
  • Ongoing monitor of bank stability 
  • A dedicated banking team
  • Options for structured accounts to ensure FDIC insurance coverage
  • High standards for cybersecurity
  • Errors & omissions insurance, fidelity bond, and professional liability insurance
  • 24/7 client visibility of exchange funds balances and activity on the bank's website 
  • Monthly statements sent directly from the bank

When considering a 1031 exchange, consider the security of your assets as most important. Handing over property, cash, and sensitive information to an independent third party should make anyone consider the safety of their interests—a QI is no different. Careful consideration of a QI and their security protections can help mitigate the risk to keep both your assets safe and your exchange experience top-notch. 

1031 CORP. strives for an exceptional exchange experience, ensuring you are comfortable not only with the process but also that you can trust us to keep you safe. We make the exchange easy and secure. Discuss your goals with our Exchange Team at (800) 828-1031. We look forward to a great conversation.

Topics: 1031 CORP., 1031 Exchange, Live, Security of exchange funds

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