Haven Exchange’s 1031 “Transparency”: Will This Model Prevent 1031 Exchange Fraud or Embezzlement In The Future?

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Haven Exchange, a Huntington Beach, California based 1031 Exchange services company, claims to have come up with the answer to potential fraud and security issues now plaguing the 1031 industry. Haven describes their new service as “breaking new ground by creating transparency for 1031 Exchange funds.” More to the point, Haven’s transparency program is centered around allowing the consumer to watch their funds during the entire exchange transaction. Is this the type of service that will prevent the Ed Okun 1031 Tax Group or Donald McGhan Southwest type disasters in the future?

Here is how it works according to Havenexchange.com/news: “The clients of Haven Exchange will now receive monthly statements directly from Union Bank, providing them with complete assurance that their funds are fully segregated in separately held, FDIC insured, totally liquid money market accounts. The statements reflect any and all activity, including interest earned, leaving no room for doubt about how the funds are invested and growth proceeds therefrom.”

My question is with the above statement: “The statements reflect any and all activity, including interest earned, leaving no room for doubt about how the funds are invested and growth proceeds therefrom.” Does that mean that your monthly statement and transaction are controlled by a joint signature account? An account where the exchanger must receive permission to withdraw any funds, for any transaction, from the consumer via their signature? Without a dual signature account set up, transparency becomes less effective. Total control in my opinion means two signatures: that of the consumer approving an investment and that of the QI making the investment.

Haven Exchange’s president Dorothy Zink stated “Even though we have worked closely in the planning stages with our banking partner, Union Bank of California, to provide this security for 1031 Exchanges, I am totally blown away by the results.” That is a noteworthy statement coming from a company president and one reason consumers may wish to investigate Haven Exchange before beginning their 1031 transaction.

Equally giddy was Union Bank V.P. John McShane “These accounts are managed by our Real Estate Escrow and Title Management Group, and provide state of the art ease of use for the Qualified Intermediary and the desired Transparency /Security for the consumer. We are very proud of it.”

In addition, Haven Exchange is a member of the Federation of Exchange Accommodators the Exchange industry’s lone professional association. The FEA regulates it’s membership through background checks and testing processes. Haven is a member of the FEA.

In a bold statement to fellow members of the FEA, Haven has challenged the industry leaders to match Haven and Union Bank’s transparency program. As Zink exclaimed, “It remains to be seen whether other FEA Members will put the taxpayer and the Industry ahead of its profit margin, as shortsighted as it may be to do otherwise. . . “

As always if you are a consumer investigating Qualified Intermediaries or Exchange services remember to perform your due diligence, compare multiple services, and check the FEA website member section for membership. Also follow up and check the insurance bond for each QI.

As William Exeter of Exeter advises, do not assume that the insurance rider for your QI is in effect. Ask your QI for their insurance information. Follow up with a direct phone call to the insurance company to make sure the insurance is in effect and what it actually covers in case of loss due to fraud.

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16 thoughts on “Haven Exchange’s 1031 “Transparency”: Will This Model Prevent 1031 Exchange Fraud or Embezzlement In The Future?

  1. There are several issues here: First, having the opportunity to view a monthly statement is only of limited utility in ensuring security. Second, this assumes that the client is willing to give up a higher yield, in return for having a segregated account. The dual signature account, or a qualified trust, work just as well, and provide better security. This really doesn’t accomplish anything other than a ‘sense’ that the funds are secure.

  2. Cecily,

    Thanks for the input. I too was questioning whether this was as important as what Haven claims it is to the consumer. My thought is that the two signature system is the first demand any consumer should make from their exchanger. Thank you again.

    Dean

  3. Dean

    I agree with Cecily that this “benefit” may be of little value, however, I disagree with her statement that segregated accounts will necessarily reduce the return.

    In order for any type of protection to be effective, completely segregated accounts are critical.

    The dual signature account, or the qualified trust each necessarily involve segregated accounts.

    As we have discussed before, usually only a QI will benefit from the increased return on a commingled account.

    They will earn more with the commingled funds and then pay the customers what they could earn with a segregated account.

    Many banks will allow a QI to establish one commingled account for all of their funds, with separate “subaccounts” for each exchanger.

    Monthly statements can be issued to these exchangers on this “sub-account” which is really only an accounting entry that separates it from the main commingled account, causing the exchangers to believe that their funds are held in a segregated account.

    These statements often show the exchanger the interest rate they are being paid, and not show the actual rate the QI is earning on the commingled funds.

    As I have said many times before, exchangers should first look for the protection only a dual signature account or qualified trust can provide.

    When they can be assured that the funds are completely safe they need then ask what they will “earn” on the funds held.

    Only then can they truly compare the actual cost a QI will charge for their exchange.

    All too often customers look only at the published fees overlooking the all important growth factor.

  4. Rob,

    Those are considerations I never thought to ask and I am sure many consumers would be very interested in understanding.

    Do you run a seminar on 1031 exchanges for consumers looking for detailed information as a preventative measure during their due diligence?

    I would be very interested in attending a seminar if you provide one to the public.

    Dean

  5. Elizabeth,

    How are you? Thank you so much for your continued contributions and readership. I hope things are well for you. Please stay in touch and thank you so much for this link! I will highlight this in a soon to be article.

    Dean

  6. Pingback: Sitemeter A Blogger’s “Bloodhound”: Union Bank of California-Haven Exchange Scenario A Case Study For Blogger Analytics « DeansGuide

  7. It can only be with great joy and relief that you receive the news that each one of Haven Exchange’s segregated exchange accounts ARE dual signature, qualified escrow accounts. Our customer’s signature IS required prior to any release of funds.

    The monthly statements are important because they prove the existance of the segregated accounts. Additionally, Fidelity Bond policies contain a “per occurrance” clause, and segreated accounts extend full bond coverage to each account.

    Since any difference in earnings paid to a commingled account seldom make it into the pocket of the Taxpayer, but are retained by the Qualified Intermediary, its mention by the Qualified Intermediary is rather misleading. Our customer’s monthly statements reflect the interest rate paid along with the amount. Transparency is beautiful.

    To quote Mark Twain, “We specialize in the return OF your principle, rather than the return ON your principle.”

  8. Pingback: Update–Haven Exchange President Dorothy Zink Sets The Record Straitght: “Our Customer’s Signature IS Required Prior To Any Release of Funds” « DeansGuide

  9. This is a great discussion. I’m happy to have found this blog. As a banker supporting this industry, I have also relied on totally segregated accounts to assure the taxpayer that his/her funds are not being comingled. Further, we continue to split the interest between the taxpayer and our client according to the specific instruction from our client. My question is with the dual signatures: Once we give fiduciary authority to a signer OTHER than our client, we are required to comply with Patriot Act regulations which entail a list of additional identification criteria that need to be obtained prior to opening this dual signature account. By “dual signature”, are you referring to a bank officer who will sign with the bank’s client for each outgoing transaction, or are you bringing your taxpayer into the account as a signer?

  10. Merrily,

    Thank you for such kind words! Would you write back and tell us what bank you work with currently, your position, and anything else you might wish to let people know about your organization?

    I can not answer your question Merrily. Rob and other readers most likely could answer it for me if they are following this thread.

    The question: “Once we give fiduciary authority to a signer OTHER than our client, we are required to comply with Patriot Act regulations which entail a list of additional identification criteria that need to be obtained prior to opening this dual signature account. By “dual signature are you referring to a bank officer who will sin with the bank’s client for each outgoing transaction, or are you bringing your taxpayer into the acount as a signer?

    I might just ask this question in a post if nobody steps up to help us.

    Thank you for participating and your readership!

    dean

  11. As a settlement agent here in FL I am continually marketed by 1031 exchange companies. While I am sure they are reputable, I have had a few 1031’s that were selected pre title order that have phoned 1) looking for money 2) looking for documents months after these funded and closed. Now, seeing as you have the identification process and several hundreds of thousand dollars floating around that you cant account for give me unholy chills, I always reccomend my clients use 1031 from my title insurer. Stewart Title Guarranty has and excellent 1031 company, the security is there. There is another large underwritter out there I would run from. I have yet to have an excellent experience with these little 1031 companies. Stewart is the best I have seen. They are really tough on auditing and accountablility.

  12. You endanger the exchange if the taxpayer is a co-signer on the account holding their exchange funds. It is boldly stated in the 1031 regulations that the taxpayer must not have constructive receipt of the funds during the exchange. However, this issue may be resolved by adding the security measure with your banking partner of requiring the taxpayer’s signature on an internal request for funds faxed to the bank prior to any release. After that, dual signatures and a constantly changing digital password add the needed security, totalling four signatures.

  13. If I understand Ms. Zink correctly the two signatures required to release funds from the bank are that of a bank officer and of someone from Haven Exchange, and Haven Exchange has an internal requirement that before it authorizes an officer to sign such a release it must have a signature from its client as well as a Haven Exchange officer. Now this may indeed be necessary to prevent the clent from having constructive receipt of the funds… but who says that if the client does not have constructive receipt of his funds that the Union Bank account thus created qualifies for an individual $250,000 FDIC guarantee? Has the FDIC issued an opinion letter to that effect? Again, if the client does not have constructive receipt of the funds, who says that the funds are not available for any bankruptcy proceeding or tort against Haven? I understand Haven says so, but who else stands behind that assertion?

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