Real estate lawyers routinely hold millions of dollars in escrow for their clients, serving as trusted third parties to ensure funds are delivered and deals close properly. The attorneys safeguard the money for days, weeks and sometimes years.

But how strong are the regulations preventing lawyers from looting that lockbox? Not very, it turns out.

That’s exactly what happened in the case of New York real estate attorney Mitch Kossoff, at least 10 former clients contend. The multifamily landlords and real estate investors say Kossoff has failed to account for roughly $10 million of their money he held in escrow, The Real Deal first reported in April. Kossoff has been unreachable for weeks; the former clients are now suing in state and federal court with some trying to push his firm into bankruptcy. The Manhattan district attorney’s office is also said to be investigating.

The toughest laws, they said, are mostly punitive, not preventative.

Real Estate By the book

A federal law stipulates that banks consider attorneys — not their clients — the escrow account owners. The Financial Crimes Enforcement Network’s measure exempts banks from the “know your customer” mandate, which requires the financial institution determine the true owner and origin of money in most accounts.

Some rules do put up roadblocks, but experts say those aren’t enough. In Florida, law firms are required to have more than one person in the firm sign off on a withdrawal, attorney Dan Gonzalez of Meland Budwick said. In New York, law firms must audit their own escrow accounts but are not required to hire an outside firm, said Scott Bush, who has defended lawyers facing disciplinary action.

So while some protection exists for a client who has been wronged, “part of it is trust with respect to what the attorney is doing,” said Bush, of the firm Corrigan, McCoy & Bush. “Just like you trust your doctor.” He added, “The only way to get around it, technically, is to say, ‘Lawyers can’t hold any escrow funds.’”

Escrow accounts are difficult to audit because millions of dollars flow in and out as property owners and investors deposit and withdraw money, Aydiner said.

Widespread escrow fraud is rare, attorney Joe Pack said, with laws and professional ethics rules punishing such criminal behavior.

“It all eventually catches up,” he said. Pack, who has his own Miami practice, noted the allegations against Kossoff are “unfortunate” but not unheard of. “The house of cards will eventually fall. People always come back looking for their money.”

Aydiner, who has served on the New York Grievance Committee, which takes up disciplinary cases against lawyers, said he has “never seen” a case like the one involving Kossoff.

“Because now we are talking about bankruptcy hard on the heels of the attorney disappearing, hard on the heels of questions concerning what happened to the money in escrow, this is a major situation,” he said.

Boston Condos for Sale and the Bottom Line

And despite federal and state penalties for stealing funds from escrow accounts, the opportunity to commit the crime is there if a lawyer chooses, Bush said.