Who's Holding Your Money?

If you feel uneasy about sending a large check to a total stranger for something you bought at an online auction, you're smart and not alone. Of the thousands of online fraud complaints fielded by the National Consumers League last year, 87 percent concerned Internet auctions.

Enter online escrow services--neutral third parties that are supposed to make online transactions safer by acting as an intermediary between buyer and seller. Online escrow services are particularly attractive if you're buying or selling an expensive or irreplaceable item and want some added security. But not all these services are created equal. As we discovered in our research, many of these outfits aren't licensed or regulated.

Authorities Take Notice

California, one of the first states to address the licensing issue, passed a law that took effect January 1 and holds Internet escrow companies to the same regulatory standards as their offline counterparts. The results so far have been modest: Only 2 of 22 escrow companies known to be doing business in the state are licensed, and 3 have applied for licenses. The others have either refused to comply or haven't responded to the state's demands.

At press time, neither California officials nor representatives from the National Consumers League had received any reports of fraudulent online escrow companies. But the potential for abuse is there. "If you are dealing with someone who isn't regulated, how can you trust them?" says Louisa Broudy, an assistant commissioner at California's Department of Corporations.

But not all online escrow sites agree. "Their laws aren't a good fit for escrow companies outside of California, and I think they're overly strict," says Ken Thompson, president of SecureTrades.com, an escrow business based in Michigan. "They're trying to apply a law written for real estate escrow companies in California to any Internet escrow company based outside California."