California takes aim at online escrow companies

The Associated Press
Thursday September 14, 2000

SACRAMENTO — The state is asking online escrow companies that hold consumers’ money until goods ordered online are delivered to get licensed by the state or stop doing business in California. 

State Department of Corporations officials say the companies can offer an extra layer of protection for cautious online buyers. 

But they can also victimize both vendors and consumers if not properly regulated, said Bill McDonald, spokesman for the department. 

“This tries to add another layer of protection for the consumer against fraud, to give some hope to the customer that if the products aren’t delivered, their money won’t be given to the seller,” McDonald said.  

“We don’t want the customer to be doubly victimized.” 

Escrow companies are trusted to release the payment after the products have been delivered, an increasingly necessary service as Internet sales grow, said Russell Stearn, who heads Escrow.com. 

“If the business is unknown, especially if it’s overseas, and you want to buy something, you might be reluctant to just send them your money,” said Stearn, whose Santa Ana-based company mainly assists businesses buying goods online. 

The state wants to make sure the companies can be trusted to deliver the money to the vendor once the goods are delivered, or back to the consumer if the deal falls through, said McDonald. 

Escrow companies doing business in California have long been required to be licensed; the state is just starting to apply that law to online companies. 

“If they’re licensed by the state of California, at least the consumer knows that they’ve had a background check, that they’ve set up proper trusts,” McDonald said.  

“It’s an important protection for consumers.” 

The Internet Fraud Complaint Center, a division of the FBI, reported that since they began tracking Internet complaints in May, 48.8 percent concerned online auctions and 19.2 percent were related to non-delivery of goods. 

Of the 27 U.S.-based escrow companies identified by the state, all but three have either obtained licenses, pulled their websites or put disclaimers on their Internet sites advising that their services aren’t available in California, McDonald said.  

Six of the 27 are based in California, he said. 

Eight companies in Canada, Mexico and Australia have also been asked to comply with the California law, he said. 

McDonald acknowledges that there isn’t much the state can do to force companies from complying with California regulations.