Wire Transfer Fraud Exposure for Private Investors – Update

As we noted in our prior post, angel, venture capital and private equity investors, along with the private companies and startups they invest in, have significant wire transfer fraud exposure (cyber theft of money) and should be cognizant of cyber crime exposures.

Large wire transfers occur between investors and portfolio companies at both a capital raise and at a liquidity event, and these transactions could be vulnerable to cyber crime theft.  Preventative steps should be automatic for all of these transfers.

Our prior post, Venture Investing, Cyber Crime & Wire Transfer Fraud, noted that data breach receives most of the media attention, but wire transfer fraud is a more significant exposure for the private investment community.  Wire transfer fraud, is also called BEC (business email compromise), social engineering fraud (SEF – see here), and consumer phishing.  You will likely have heard of phishing, which is often a key element in these scams.

Two recent developments highlight cyber crime exposures to startup and other private investing.

Law Firm Loses Proceeds of a Stock Sale:  In a classic cyber theft exploiting a phishing strategy, a law firm mistakenly wired the proceeds from a sale of stock, in excess of $3.0 million, to the wrong party, presumably the criminal, according to a lawsuit (here, here, here).  One of the plaintiffs in the suit is a foundation that invests in startups.  The funds have not been recovered.

No Coverage for Cyber Loss in a E&O Policy:  A law firm was denied coverage under its professional liability policy for loss of its client’s money from a wire transfer fraud incident (here).  While intending to wire a settlement to a bank on behalf of its client, the attorney sent the funds to the wrong party as a result of a fraudulent email (phishing) campaign.  The funds have not been recovered.

Wire transfer fraud, and other cyber exposures, are generally not intended to be coverage by professional liability insurance policies (errors & omissions or E&O).  Coverage can be found for wire transfer fraud losses in some cyber risk insurance policies.

As noted in our prior post, proactive steps combined with Cyber Risk Insurance can greatly reduce exposure to wire transfer fraud and should be required in all funds transfer processes.

Innovate Insurance – Innovation & Entrepreneurship in Insurance

Also, see the related Specialty Insurance Blog – News & Commentary on Specialty Insurance

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