Revisiting conveyancing fraud

By Hayley Bruce and Katherine Thorpe

A recent news article highlighted the horrific effects of fraud in residential property and conveyancing transactions. Reverend Mike Hall returned from a work trip to find new owners living in his house. The fraudsters had impersonated Reverend Hall and had sold the property without the true owner’s knowledge. More worryingly, the fraudsters must have received inside knowledge that the Reverend would be absent for the time in which the fraud took place.

It is little wonder that the story ran widely in the media and has focused the industry once again on the risks of fraud in residential property transactions and the steps practitioners should be taking to mitigate their liability. 

Fraudsters’ methods are becoming increasingly sophisticated. The fraud can occur in different shapes and forms from the fraudster impersonating the registered owners to hijacking the lawyers’ email accounts. There seems to be no end to the creativity in thinking up new ways to create havoc in the world of conveyancing.

Conveyancing Fraud Cases

Conveyancing fraud is nothing new and is worth revisiting some of the key cases alongside the guiding principles which they created.

Lloyds TSB Bank v Markandan & Uddin: 

The facts on the case are a classic example of solicitor impersonation fraud. Mr Davies instructed Markandan & Uddin to act for him and his mortgage lender in connection with a residential property. They were contacted by Deen Solicitors who allegedly acted for the sellers, Mr and Mrs Green. The solicitor was acting out of a branch office in Holland Park, but the firm’s registered office was in Luton. Markandan & Uddin, without even exchanging contracts, sent the mortgage advance to Deen Solicitors. The solicitors were a fraud, the office did not exist and the Greens had no knowledge of the sale.

The lender took action against Markandan & Uddin claiming breach of trust for releasing the funds not only prior to completion, but without completion having ever occurred. Markandan & Uddin argued that once the mortgage documentation was completed, they were entitled to pay the monies over. This could be argued to be sensible, as a seller would not complete without the full funds and the full funds could not be provided if the mortgage funds were not included.

However, the Court rejected both these arguments. It found that a lender’s solicitors were authorised to release funds prior to completion but only when they had either the documents necessary for registration or a solicitor’s undertaking for the same. Accordingly, Markandan & Uddin were in breach of trust. They sought relief under section 61 of the Trustee Act 1925, which requires trustees to act honestly and reasonably. The Court rejected the claim: although they had acted honestly, their actions were unreasonable as:

• They had not taken steps to establish that the solicitors were genuine.
• They had completed without the necessary documentation (or solicitor’s undertaking to provide the documents) for the registration.

Following this case, law firms have set up procedures to check the solicitors acting for other parties. The move towards digital communication has created increased risks of the misuse of a firm’s information. When most communication is through email, technological advances allow a firm’s logo and letterheads to be easily replicated. Property lawyers must be on their guard. This case also serves as a reminder not to be hurried into progressing a transaction which is not ready and the duty a solicitor acts to their lender client and well as the buyer.

Dreamvar

It would be impossible to write this article without referring to the Dreamvar case which is perhaps the best-known property fraud case in modern times. Dreamvar was a joint case heard alongside P&P Property Ltd v Owen White & Catlin LLP.

The facts of the case were as follows; Dreamvar, an investment company, was purchasing a vacant unencumbered property and instructed Mishcon de Reya to act on their behalf. They did not require a mortgage. MMS Solicitors acted on the sale, but failed to adequately identify the seller, who was a fraudster using fake documents. On completion the funds were paid to the fraudster who could not be traced.

The question was who was liable? Mishcon had acted honestly and relied upon MMS Solicitors to identify their client.

The Court of Appeal exercised its discretion under section 61 of the Trustee Act 1925 and found both firms in breach of trust. Mention was given (quite unfairly in most people’s view) to the professional indemnity insurance held by Mishcon placing them in a better place to absorb the liability.

As far as the seller’s solicitors were concerned, the Code for Completion by post, which sets out the undertakings between the parties given on completion, provides that the seller’s solicitor has authority and undertakes to release funds only to the true owner.

Although the result was somewhat disappointing for solicitors acting for buyer who acted correctly, the decision did balance the liability for fraudulent transactions between the seller and the buyer’s solicitors.

Following the Dreamvar decision, the Code of Completion by Post 2019 clarified the obligation of the seller’s solicitors to verify the identity of their client and offered further protection to buyers who find themselves victims of fraud.

Patel v Freddy’s Ltd 

There have been many cases relating to the obligations and duty of care owed by the conveyancer whether acting for the buyer or the seller. In this case, the courts were asked to consider if the buyer’s solicitors are under an obligation to certify that their client has the power to sell the property.

The fraudsters impersonated the registered owner and thus sold property to an individual which was later transferred to a third party. The claimant asked the courts if the title could be restored and rectified before the fraud occurred. The claimant argued that the buyer’s solicitors did not take sufficient steps to verify the identity of the seller which led to the fraudulent sale completing. However, the courts dismissed this case.

The courts highlighted that conveyancing is a risky area and each matter is based on a risk assessment. It is not usual practice for the buyers’ solicitors to repeat due diligence that should have been undertaken by the seller’s solicitors. The courts went on to say that there is no reason why the buyer’s solicitors should have stepped away from normal conveyancing procedures to verify the identity of the seller.  The High Court refused rectification of the title.

Whilst the above case did not find the buyer’s solicitors liable, it is worth considering who really is at fault when this fraud occurs. Should the blame fall solely on the seller’s solicitors? Should the buyer’s solicitors be making further enquiries and asking for warranties from the seller’s solicitors? It appears that many solicitors have been liable for the fraud and as a consequence have been bound to pay damages to their client and also the other side. Firms have demonstrated their due diligence procedures, yet despite acting in good faith, they have been a victim of unwelcoming publicity, paying insurance excesses and paying compensation to the victims.

Purrunsing v A’Court (a firm) and another

This 2016 case had similarities with Dreamvar. The seller was a fraudster, who using false documents instructed solicitors, A’Court. As per a usual conveyancing transaction, the buyer’s solicitors released funds to the A’Court who in turn released it to the fraudster seller. The buyer’s solicitors asked the A’Court to confirm whether they were familiar with the seller and completed the appropriate identification checks. A’Court responded that had no personal knowledge of the seller, who was currently abroad, but had met him, seen his passport and utility bills. The utility bills showed an address which was not the address of the property or the address for service at the Land Registry. The buyer’s solicitors did not inform their client that they had raised this enquiry or of the response they had received.

Both parties’ solicitors were found to be in breach of trust. Neither of the solicitors were permitted to be excused of the breach of trust on the basis that they had acted ‘honestly and reasonably’ under section 61 of the Trustee Act 1925. The buyer’s solicitors had not acted reasonably because they had not informed the client of the of the response they had received about the identity of the seller, a fact which also found the solicitors to be in breach of contract/duty. Insofar as A’Court, their failings were multiple; they had not carried out sufficient risk assessment or client due diligence. The property was unoccupied and not subject to a mortgage, the value was high, there was an urgency to complete within a week, the address for the seller was different to the property and the address for service at the Land Registry, suspicions had been raised in connection with an earlier transaction and the seller was located abroad without the intention of returning. All of these were red flags which should have prompted A’Court to make further investigations.

What should professionals be doing? 

Client Due Diligence

Due diligence should never be considered as a tick box exercise. All professionals involved in the transaction should take great care to verify their client’s identity. Whilst it can be awkward to ask a client for source of funds and wealth, it is a fundamental check that should not be overlooked

From the outset, solicitors should be asking clients to provide their full names, permanent address and date of birth. This information should be supported by certified documentation. Source of funds and wealth should also be established from the outset.

Prior to the pandemic, clients would visit the office to meet the conveyancer and to verify their identity, however times have changes. This is not a luxury that all conveyancers or clients have and therefore additional steps should be taken to verify identification. The influx of using video call is a practical way to meet your client, speak to them and verify their identification. It would not be rude for you to compare identification on the call.

Checking Solicitors Details

Confirming the other sides’ solicitors are genuine can be completed through various means. The Law Society ‘Find a Solicitor’ search can be used as a simple means of confirming the existence of a firm and address details. Although it does not provide absolute safety it should be used to confirm the office addresses of the firms and alert solicitors if a party is operating out of an unknown office, as in the Markandan and Uddin case.

There are other tools available in the market, which a practice may consider to further verify a firm of solicitors or conveyancers using their bank details.

Simple steps can also be used, such as calling a firm’s switchboard at least once during the transaction to confirm the solicitor is known and operating out of the office they claim.

Another form of fraud includes fraudulent emails, which inform either the solicitor or their client that there has been a change of bank details. Checking bank details is an important step in preparation for completion and this now normally done by means of a phone call on the day of completion. Conveyancers may need to stand firm if their client evade these calls, perhaps claiming the stress of a busy moving day. 

Ongoing Risk Assessments and Red Flags

Once a client is set up and an initial risk assessment is completed, the obligations regarding fraud prevention are not extinguished. Risk assessment must be ongoing as the client relationship develops. The Law Society Practice Note on Mortgage Fraud sets out a list of warning signs which are relevant to both mortgage and conveyancing fraud. This includes back-to-back transactions, unusual behaviour of the client, a desire to complete a transaction quickly for no reason, vague knowledge of the property or unusual instructions outside of the usual market or geographical location for the firm. These elements are perhaps more common during multiple conversations with the client and may not be known at the outset. They must be investigated, and solicitors and conveyancers must take care to raise and monitor red flags and be satisfied before proceeding with the transaction, even if this requires in-depth conversation or awkward questions to the client.

Training Staff

 A law firm must train their staff to be aware of the potential risks and procedural steps they have in place to reduce them. There are multiple resources available to meet this requirement. Staff dealing with residential property and conveyancing should regularly read and be aware of the Law Society Practice Notes on Mortgage Fraud and Property and Registration Fraud. Reading widely about the current fraud attempts will assist in adapting internal processes. 

Protecting clients after completion

Property fraud is not just a risk during a transaction. A client may be a victim of identity fraud at any time. It is important that solicitors educate their clients as to the potential risks, particularly if the client is vulnerable, the property is to be unoccupied for a substantial time or there is no mortgage.

At the end of the transaction, you should make your client aware of the Land Registry Property Alerts. This free service allows a property owner to be notified if there are any transactions registered on their property. Although this may be a little late, as the transaction would have already completed, it does allow a faster reaction on behalf of the property owner and this in turn can increase the chances of catching the fraudster.

Addresses for service at the Land Registry should also be kept up to date and further measures may be considered for highly vulnerable clients, such as putting a restriction on the title.

The future of conveyancing fraud and the proposed reforms

The Law Commission wrote a report in 2019 with recommendations to update the Land Registration Act 2002. In particular, the Law Commission recommended that conveyancers should be statutory bound to confirm their client’s identification. The new rules recognise that fraudsters are there and will not go away and hence are targeting a complex, high risk area of law. Law firms and the conveyancers should always be on alert and report suspicious activity. The introduction to these recommendations will protect conveyancers, the firm and most importantly the client’s trust in the process.

The Government has responded to this report and accepts the Law Commissioner’s proposals. The Government notes the recommendation would allow Land Registry to take specify steps to establish the identity of the parties.

Recently the Land Registry also announced a new standard of digital due diligence and we are beginning to see technology companies rising to the challenge. This new standard includes the use of biometric and cryptographic technology in confirming an individual’s identity and if met, will provide a ‘safe harbour’ to solicitors. This means the Land Registry will not pursue any claim on the grounds that identity checks were inadequate. However, this does not mean clients or other parties cannot make claims for breach of trust or negligence. Although this may seem less reassurance than perhaps the industry would like, it is hoped that it will improve the standard and robustness of identity checks and make life a little more difficult for the fraudsters.

We can never guarantee that our clients and our businesses will not be victims of fraud, but we can put in place the processes, train our staff and educate our clients to reduce the risk when dealing with residential property.

Hayley Bruce is a Practice Development Lawyer and Katherine Thorpe is a paralegal in Irwin Mitchell’s Residential Property Team

A version of this article recently appeared in Property Law Journal.