The recent spate of 1031 disasters brings back memories of the wild west “Dodge City” days of the 1980’s when Savings and Loans like Lincohn S & L were being looted by crooks like Keating and his brethren. It also reminds one of 1980’s Miami, Florida where retirees soon found themselves trapped in a city under violent siege by cocaine cowboys and cartels looking to carve out their vision of the American dream.
Since the 1031 Tax Group and Southwest Exchange disasters, the media spotlight has shown harshly on an industry without state and federal legislative regulations. Anyone and “his brother” can start a 1031 exchange company and call themselves “Qualified Intermediaries.” According to victims who have commented on this blog, there is no fail safe formula for performing due diligence on a 1031 exchange company.
Many companies claim to have the answers to the “due diligence” investigative questions that every prospective investor should ask their Qualified Intermediary. Yet of all of these suggestions, claims, and postulations, not one company mentions the dire need for regulation of the 1031 exchange industry through “Get Tough” federal and state laws.
The industry remains “Dodge City” where the actions of very few can wreak havoc for the majority of honest forthright Qualified Intermediaries.
The following are examples from a sampling of 1031 exchange/Qualified Intermediaries who have Google search engine “juice.” That is to say that these companies showed up on my Google search with the query: “1031 Exchange embezzlement.” Here is what these experts had to say:
#1 Exeter of Irvine,CA “Choosing a SAFE 1031 Exchange Qualified Intermediary” This company recognizes and states that there is “no regulation within the industry.” It also states that “there is very little written or published guidance. . . regarding the safe and successful administrative practices for 1031 exchanges and/or protecting and safeguarding your 1031 exchange assets.” Yet Exeter titles their website piece “Choosing a SAFE 1031 Exchange Qualified Intermediary.”
Exeter calls the following points “Critical Risk Criteria”
1. Technical capability of the Qualified Intermediary
2. Internal processes and audit controls to safeguard your 1031 exchange
3. Protection from potential errors or omissions by the Qualified Intermediary
4. Protection from potential theft or embezzlement of 1031 exchange funds
Unfortunately I have had dozens of people claim to have taken all of these Risk factors into consideration; they have also retained attorneys, in some cases, to help in the due diligence process. The results were the same. They were victims of a 1031 rip off.
#3 All States 1031: They provide 5 “talking points” .
Will I have any control over the exchange funds?
Great question but often it does NOT mean that consumers can’t be embezzled
Are my funds segregated in a separate, identifiable account?
Another good question but again identifiable does not mean that the exchanger can’t embezzle and run with consumer monies
Where are my funds being held and are they invested in a cash account?
This one according to some victim’s comments has little effect in keeping cash from disappearing.
What is the reputation of the qualified intermediary and its owners?
This is the biggest disappointment as many reputable QI’s have left town with embezzled funds. Reputation will not always overcome the very human greed element involved in performing exchanges with large sums of cash.
Is the qualified intermediary bonded and insured?
According to a few victims this means zilch! Insurance companies do not wish to pay out until an exchanger is proven guilty of fraud or embezzlement. By the time the Insurance company is begrudgingly ready to pay up, the time frame for the exchange is usually long gone and the IRS is breathing down the victim’s neck for back taxes “owed.”
Consequently there are many more well meaning 1031 exchange companies adding their ideas on how to chose a solid Qualified Intermediary. The unfortunate problem is that consumers can not rely on this information to safeguard them from a rip off. The only true deterrent will be harsh penalties, by federal or state laws, landing the accused into one of this nation’s ugly penal institutions. I am not for punishment via prison but what alternatives will have enough of a deterrent impact to stop this crazy behavior?