Speaking in January about the top issues advisors face in SEC exams, Tom Giachetti, a securities attorney with Stark & Stark and Investment Advisor columnist, warned of the growing incidence of email fraud being perpetrated on advisors.
We interviewed Giachetti in mid-July to see how widespread the problem is and to get his advice on how advisors can protect clients and themselves from wire transfer fraud.
To begin, the problem is real, it is dangerous and it is too often overlooked, Giachetti said. He isn’t troubled so much about client unhappiness with market performance, but rather “what scares me the most is cyberfraud and cyberattacks,” he said before relating that just two weeks prior, an advisor client of his had a $500,000 wire fraud occur.
But aren’t the regulators and law enforcement officials aware of the problem and moving to stop or limit its effects? “There’s not a whole lot they can do about it,” he said. “If you talk to the FBI, they know it’s happening, but they can’t stop the criminals who are probably in another country” without much regulation. “The problem the advisor has is that they want to provide great service” in making sure a wire transfer happens quickly, but without the proper safeguards, “they might hear the next day or two” that the transfer was fraudulent.
So what are the proper safeguards? “Custodians have become aggressive” in identifying and preventing such frauds, but on the advisor’s end, Giachetti said he’s told all his clients to change their policies and procedures to include a policy that “no one should act on any written request for money, anywhere,” with perhaps one exception: when funds are transferred from the custodial account to the client’s bank account. Advisors “owe a fiduciary duty to the client in that respect.”
Giachetti’s recommended policies and procedures manual includes a section on wire fraud and encrypting communications with a client. “Advisors are not required to encrypt but should consider doing so with any client information,” which is especially true with “anything related to taxes,” he said.