Know your client or face the prospect of imprisonment

The obligations placed on independent legal advisors as imposed by the Proceeds of Crime Act 2002, the Terrorism Act 200 and the Money Laundering Terrorist Financing and Transfer of Funds ( Information on Payer) Regulations 2017 ( ‘Regulations’) are far reaching, and come with some scary consequences for those who choose to ignore them.  There is no doubt that the focus of Government is now very much on making sure lawyers and other key movers in the business and financial world are not used unwittingly by criminals to further a criminal purpose.  

Money laundering and terrorist funding present a serious threat to society causing a loss of revenue and endangering life, and fuelling other criminal activity such as human trafficking.   This is very serious stuff and whether you are large or small provider of legal services covered by the Regulations, you would be extremely foolish to bury your head in the sand and do nothing. 

There is whole raft of sanctions both professional and criminal that can be imposed for failure to discharge obligations.  There is also the risk of civil action and damage to reputation and consequential  loss of business. The Regulations are complex and require more than a cursory glance.  There is no short cut.  There is need for the controllers of a business to obtain a clear and precise understanding of the requirements, and to make sure each and every member of staff shares a similar level of familiarity with the Regulations, in terms of the purpose they serve and how they are applied in practice.  This covers not only customer due diligence, which most professionals understand, but also carrying out a practice wide risk assessment, a policy for a risk based approach to assessing the risk level of each transaction retainer, the establishment of systems, polices and procedures to meet the obligations, training, reporting suspicions and the relationship between disclosure obligations and legal privilege. And that’s just for starters! 

As mentioned most lawyers have over the years got to grip with the need to carry out  customer due diligence before commencing work under a retainer.  Obtaining photographic evidence of identification and proof of address has become common place and is now often backed up by electronic  background checks to help identify politically exposed persons and the existence of financial sanctions and other restrictions.  However,  there is now much more to adopting a risk based approach to preventing money laundering.   If you are still in working in the age where a quick check on the source of funds to be used for say the purchase of a property would be sufficient, the time has now truly come to review your processes, as the emphasis has changed and changed quite dramatically.  The onus is now on ‘Knowing Your Client’.   Forget source of funds and enter the world of source of wealth investigation. 

So what does this involve?  In short, it means gathering information and documents which will help you to check that the client’s financial background fits the nature and purpose of the transaction you are handling.  This is very different from the erroneous belief that there is only a need to check the source of funds.

This difference is succinctly described in the Legal Sector Affinity Group’s draft Anti Money Laundering Guidance for the Legal Sector ( September 2017) as follows:

‘In addition, please note that source of funds is different from source of wealth. Source of funds relates to from where the client’s funds are received – a UK bank account for example. Source of wealth relates to how the client came to have the funds in question – via inheritance, house sale, or investment windfall for example. Source of wealth is fundamental to money laundering risk assessment. If you are clear about the legitimacy of a client’s source of wealth, the risk of money laundering is significantly reduced.’

In practice this places an obligation on a business to have a documented process in place to provide for the collection from each client of personal and financial information, as well as detail on the transaction.  This will include the age of the client, the client’s occupation and employer, the value of the transaction, the size of the contribution the client is making towards the purchase, the identity of the bank account(s) from which the funds are to be transferred, along with documents to substantiate the accumulation of the client’s wealth.  

Clearly without knowing more, a twenty five year old office cleaner purchasing a property for half of a million pounds without a mortgage should ring alarm bells and warrant further investigation.  There is nothing in the Proceed of Crime Act which prevents you from making normal enquiries about your clients instructions, and the proposed retainer, in order to remove concerns and to decide whether you wish to continue to act.  These enquiries will only constitute tipping off if a SAR has been made or that you are aware a money laundering investigation is underway or contemplated. 

So staying with this example, the high level of risk of proceeding with the transaction could be removed if on asking questions, it is discovered the client had recently inherited a substantial some of money.   There would be a need to obtain evidence of this, but if this was forthcoming the concern would  probably then  be  satisfactorily addressed. 

There would remain, however, a need to continue to monitor the transaction, and if keeping with the same example, you were to discover when it came to exchange of contracts that the client has transferred funds to you from a bank account which was different from the one disclosed, the level of risk could rise once again.  The concern may then turn to suspicion. Even though you do not have evidence that a money laundering offence has occurred, the suspicion may lead you to conclude that a SAR should be submitted. 

Applying a risk based approached means the level and degree of investigation will vary from one transaction to another.  There is therefore no set criteria for detecting and assessing the risk of money laundering.    If in this example, for instance, you have had no face too face contact with this client, and you find, after forwarding to you a deposit without prior request, the client decides to withdraw from the transaction without good reason, this could change the complexion of the transaction, and give rise to a concern, and probably a reportable suspicion.  

As can be seen, there is a need to be alert throughout the transaction, and to have a process in place to monitor the clients conduct, and to assess this against the background information gathered at the outset.  You need to know your client, since without this knowledge, an assessment of the risk of money laundering will simply not be possible,  with the consequence you will exposing yourself and your business to possible enforcement action. 

Remember customer due diligence per se does not constitute knowing your client. Nor is it safe to assume that as the funds to be transferred originate from a UK based account the risk of money laundering is low.  

Not only when scrutinising a clients bank account do you need to satisfy yourself on source of wealth, but you also need to be on the look out for any unusual  cash deposits which fall outside your client’s known financial standing, and which could suggest tax evasion.  You need to be wary with money or property where you suspect that either is being transferred to avoid the attention of HMRC or a law enforcement agency. 

The reality is that once you are exposed to bank statements and other financial information you do take on the responsibility for looking for any sign of criminality, and the consequential obligation to report your suspicions.  The more you dig the more responsibility is assumed.   

Here are some practical tips:

Review your initial client questionnaires and make sure these are re-designed to collect sufficient information on the client and the transaction to be able to put together a client  transaction profile.  This can then be used when checking source of wealth.  In our office this has been addressed through modifying our case management initial electronic questionnaire and producing a client profile tab. 

Make sure all of your staff, including reception and other support personnel, are made aware of the legislative requirements, and know what to look out for, and what to do if a concern arises.  All staff should be able to name your Money Laundering Reporting Officer. 

Ensure clients are made aware on your website, and in all new business communication, that they will be made the subject of these inquires, and to warn that without cooperation, there could be a delay in the completion of the transaction, and also the possibility of you having to terminate the retainer.  Don’t be afraid of telling your clients that you take your legislative responsibilities seriously.  This could also help to act as a deterrent to those who may be looking for a business to be used as a vehicle for the furtherance of criminality. 

Have a separate file to record and retain CDD results, red flags and all discussions that might take place over concerns.  Remember the importance of making sure SAR reports and associated communication are kept of the transaction file and retained separately.  This will help to avoid possible tipping off offences.  In our office all concern and discussion is recorded on a risk register within our case management systems and this is monitored centrally. 

Adopt a similar approach to where funds are to to paid by a third party.  For example, a gift.  The donor’s wealth should be scrutinised in exactly the same way. 

Don’t be put off from adopting a risk adverse policy towards financial crime.  We have decided not to accept instructions from corporate clients, those who are politically exposed, and to undertake anything other than straight forward residential transactions.  We also do not accept instructions where funds are to be transferred to us from a non UK bank account.  Nor do we transfer funds to oversee accounts. 

It may run against the grain, yet to say no to a client when you have concerns should be part and parcel of an effective AML policy.  In nearly all of the cases in which we have submitted SARs we have decided, following the granting of consent, to terminate the retainer.   Why run a risk when it is within your power to end your exposure.  

Finally, there is a good case for being over cautious, and to always report when the general consensus is that something is not quite right.  Its far better to be safe than sorry. 

As lawyers we are not trained to be criminal investigators, yet we have had imposed on us some of the most stringent regulations currently in force. The consequence is that we are now all running a very high risk of exposure to serious and career ending sanctions, and as mentioned the time to wake up and smell the coffee has without doubt arrived with some vengeance.  

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com

The misunderstood decision in Dreamvar (UK) Limited and Mischon De Reya and Mary Monson Solicitors Limited [2016]

The decision of Mr David Railton QC in Dreamvar (UK) Limited and Mischon De Reya and Mary Monson Solicitors Limited [2016] EWHC 3316 (Ch) has caused a major stir within the conveyancing industry and has led to a number of conveyancers questioning their exposure to liability on completing transactions on behalf of their clients.  

The facts are pretty straightforward.  

Mischon (MdR) acted for the Dreamvar in the purchase of a property from an imposter purporting to be the registered owner of the property.  The seller was represented by Mary Monson Solicitors Limited (MMS).  Upon completion, MdR on behalf of the purchaser, transferred the purchase monies to MMS, who in turn passed the money on to their client, the imposter.  By the time the fraud was discovered the fraudster could no longer be found. 

The case against the buyers solicitor (MdR) 

Dreamvar was left significantly out of pocket and commenced action against its solicitors (MdR), as well as the sellers solicitors (MMS).   

The claim against MdR was for negligence and for breach of trust. It claimed, in the first instance, MdR had failed to advise on the risk of fraud given a failure to identify certain ‘red flags’ which should have alerted MdR to the possibility of fraud. Later, and at the start of the trial, the Claimant alleged that MdR was also negligent in failing to seek from MMS an undertaking to the effect it had taken reasonable steps to establish the seller’s true identity.   In reply, MdR argued that there were not any features which pointed to an increased risk of fraud or that it was under any obligation to advise the Claimant of the risk. 

In addition, and in the alternative, Dreamvar alleged breach of trust on the part of its solicitors on the ground that MdR only had authority to release the purchase funds to MMS in connection with a ‘genuine’ as opposed to a fraudulent completion.  MdR argued in defence of this allegation that the money was released in exchange for undertakings given in accordance with standard conveyancing practice and therefore there was no such breach.   MdR also argued that if there was breach it should be able to avail itself of the relief offered under s61 Trustee Act 1925 on the basis it acted honestly and reasonably. 

The case against the sellers solicitors ( MMS) 

To begin with, the Claimant argued that MMS was liable for breach of warranty.  By confirming to the buyer’s solicitor that it was acting for the seller, it was, so the Claimant argued, giving a warranty that the seller was in fact the registered owner.  It also argued by giving such a warranty it had provided a secondary warranty that it had exercised reasonable care and skill in establishing the seller’s identity. 

MMS argued there was no warranty other than a warranty that it had a client for whom it was acting and that this was not broken because it had a client even though the client was not the registered owner. 

In answer to the other allegation MMS admitted that it did not undertake such identity checks as would have been undertaken by a competent solicitor.   It argued however that no such warranty was given and had reasonable care been exercised the chances were that the fraud would have still occurred. 

The breach of trust claim against MMS was based on the contention that upon completion it should not have released the funds to the fraudster as it was only authorised to do so in the case of a genuine completion which this was not.  

In reply MMS argued that that it did not receive the purchase monies on trust and even if it did it was not wrong to release the monies even though the completion was not as the Claimant asserted ‘genuine’.  In support of its defence MMS relied heavily in the Law Society’s Code for Completion by Post ( 2011 Edition ) ( Code).   MMS did not seek relief under s61 Trustee’s Act due to its admission that it had not carried out the checks it should have performed. 

The next limb of the Claimant’s case against MMS was based on an alleged breach of the undertaking  that forms part of paragraph 7 (i) of the Code.   This it was argued, allowed the Claimant when transferring the funds to safely assume that MMS had authority from the true owner  of the property, as opposed to the fraudster,  to accept the funds.  MMS argued that the Code refers to the seller solicitor’s ‘client’ only and this does not, nor should it, imply that the client is the registered owner of the property. 

The Seller’s Solicitor’s admission 

The seller’s solicitors admitted that its identification checks were not sufficient.  They relied on a driving license and TV license .  The driving license had only just been issued and was limited for just three years.  These features which were unusual were not challenged.

Furthermore, the TV license was accepted as proof of address when it ought to have been clear that this was not a source of proof recognised in the Law Society’s Anti Money Laundering Practice. No other checks were undertaken. Interestingly MMS conceded that they should have called the client into the office with proof of identity and address.  

The claim in negligence against the buyer’s solicitors  ( MdR) 

The Claimant did not assert that a competent solicitor acting for a buyer should in every case advise a client of the theoretical risk of fraud however remote, though it was interesting that the Judge noted that it was possible that some competent solicitors would inform their clients. 

In this case the agreement advanced was that there exists a duty to advise the client of the risks of identity fraud if there is ‘’some unusual feature of the case which would ring alarm bells in the mind of a reasonably prudent conveyancer.''   

MdR accepted this proposition, but argued that the ‘unusual features’ were not present in this case.  

In response the Claimant highlighted what it considered to be ten ‘red flags’ which ought to have alerted MdR and prompted them into warning of the risk of fraud.  These included,  the high value of the transaction and the fact the property was unencumbered and unoccupied. The fact that the seller’s address was not the same as that of the property was also mentioned. 

The Judge was, on hearing the evidence from the solicitor at MdR who handled the case,  satisfied that  a sufficient risk assessment taking into account these factors had been carried out, that there was ‘…nothing in the conduct of the transaction which suggested to MdE that MMS was not competent’. It therefore followed that there was no need for MdR to warn the Claimant of the risk of fraud. 

The other claim in negligence arose out of the alleged failure on the part of MdR to seek an undertaking from MMS to make sure it had taken reasonable steps to establish its clients identity. It was argued that this should have been done in every case, even where there was no indicators of possible fraud. 

Interestingly, the Claimant accepted that there was no requirement in practice at the time which obliged a buyer’ solicitor to seek an undertaking of this sort, but contended notwithstanding this fact, that in the absence of other measures to protect a purchaser or steps ‘…. which a competent solicitor should take to guard against the risk for his client suffering loss of this type….’ ,then the profession should be expected to depart from normal practice and take other action to protect the client. 

The Judge was not prepared however to be persuaded by this argument and found that this situation was not one where it would be right to say that the practice of the profession in not seeking an undertaking is ‘….unreasonable or illogical’.  This was partly based on the Claimant’a admission that seeking an undertaking from a vendor’s solicitor in this regard had not been regarded as necessary or appropriate. 

The sting in the tail however, was that the Judge did not rule out that an undertaking of this sort might not be regarded as such, if the protection provided by fraud risk assessment, the holding of money on trust and the Code undertaking was not held to be adequate.

The Claim for breach of trust against MdR 

There was no doubt that the money paid by the Claimant to MdR were held on trust by MdR for the Claimant. 

In handing these monies over to the seller’s solicitors on a completion which was not a genuine one, irrespective of the fact that completion took place in accordance with the Code, MdR had acted in breach of its trustee’s obligations and was therefore liable to the Claimant subject to the s61 relief argument. 

The reasoning behind this is that the Judge held that the implied authority contained within MdR’s retainer only allowed MdR to release the completion monies to the seller in the context of a genuine and not fraudulent completion.

The Claim for breach of trust against MMS

The breach of trust claim against MMS was based on the contention that upon completion it should not have released the funds to the fraudster as it was only authorised to do so in the case of a genuine completion which this was not.

Looking at this from the seller’s angle the Judge had no contactual relationship to consider as with the buyer’s solicitors, and therefore had to look at the Code and the exclusions this contained.  He was also heavily influenced by the findings of Mr Dicker QC in Purrunsing v A’ Court [2016] EWHC 789 (ch). 

He found there was no breach on the basis that the provisions of paragraph 3 of the Code state that the obligation to act as agent for the purchaser’s solicitors on completion do not require the seller’s solicitors to investigate or take responsibility for any breach of the seller’s obligations.   

Breach of Undertaking by MMS

This relates to the undertaking which MdR relied on as contained in paragraph 7(i) of the Code requiring the seller’s solicitors to have the seller’s authority to receive the purchase money. 

The question which the Judge needed to consider was whether ‘the seller’ was referring to the seller’s solicitor’s client or the registered proprietor of the property.  If the latter then as MMS did not have the authority to accept the money from the true owner they had acted in breach of the undertaking. 

On hearing the evidence of the buyer’s solicitors, the Judge held the general understanding within the profession is that a seller’s solicitors would not give, and would not be expected to give, an undertaking to the effect that the seller was indeed the registered owner of the property. 

He further found that if its right that there is no implied warranty by the vendor’s solicitors which extends to the identity of the vendor as the registered owner, it is ‘likely’ that the references to ‘seller’ in the Code relate to the person purporting to sell, and not to the registered owner. It is fair to say that the Judge found this conclusion a difficult one to reach. 

Breach of warranty by MSS

MMS accepted that it held itself out as the solicitors for the seller, but not that the seller was the registered owner. 

The Judge found that the evidence of the buyer’s solicitors was fatal to the Claimant’s argument.  The solicitor accepted in evidence that she did not expect a seller’s solicitor to accept a contractual obligation that its client was who he said he was.  Nor did she expect any warranty to this effect. Indeed she expressly stated that she did not rely on any warranty. 

For similar reasons the second part of this allegation that MSS had failed to exercise reasonable care and skill in establishing the seller’s identity, also failed to impress the Judge.   He found again relying on the buyer’s solicitors evidence that the buyer had not promised the buyer to exercise reasonable care, nor had the buyer’s solicitor relied on any such promise. 

In the absence of any duty in tort, the judge also found that it would be ‘inappropriate’ to imply an assumption of contractual responsibility to exercise reasonable care. 

The Section 61 claim for relief 

The first hurdle for MdR was to demonstrate that it had acted honestly and reasonably. 

In the light of the Judge’s finding of no negligence he was satisfied that MdR had discharged its onus of proving that its conduct was reasonable.   There was no question of any dishonesty. 

The next hurdle at which MdR failed was whether the Judge felt that MdR ought fairly to be excused for the breach, and if so, whether the Court should grant or refuse the relief. 

Balancing the ‘relative effects or consequences’  of the breach the judge held:

‘While, as I have held, it was not unreasonable for MdR not to have advised Dreamvar about the risk of fraud, or to have sought greater protection for Dreamvar against that risk (such as further undertakings), it is also not irrelevant that MdR was necessarily far better placed to consider, and as far as possible achieve (a matter not in the event tested), greater protection for Dreamvar against the risk which in fact occurred. As I have already found, Dreamvar has no recourse against MMS, and (it appears) no practical likelihood of either tracing or making any recovery from the fraudster. As a result, the only practical remedy it has is against MdR. 

For these reasons, I conclude that MdR ought not fairly to be excused for the breach of trust, and that I should in any event, in my discretion, decline the relief sought. I would however add that if, contrary to my conclusions above, MMS were liable to Dreamvar, I would have exercised my discretion to relieve MdR of its liability for breach of trust to the extent of the liability found against MMS.’ 

Practical Implications 

The knee jerk reaction within the conveyancing community has been that this case is authority for seeking, on each and every transaction, an undertaking from the seller’s solicitors to confirm that all reasonable efforts have been taken to identify the seller.  

On close examination this is not correct.  Indeed, as can be seen, the Judge accepted the buyer’s solicitor’s evidence that such an undertaking would not normally be regarded as appropriate or indeed essential. 

It is perhaps helpful to note here what that buyer’s solicitor told the Judge in evidence:

‘I would find it hard to believe that any law firm would give an undertaking that they verify their client. It would be watered down -- sorry to interrupt you. It would be watered down. It would say "We have verified our client to the best of our ability" or, you know, "We have satisfied ourselves as to our client's identity but ..." and it will have the big caveat on it that every law firm puts on it, which says, you know "This confirmation will not have any fallback on this firm or its partners". It would be worthless, in my opinion.’

The Judge did not rule out the possibility that in the absence of other forms of protection that such an undertaking might be regarded as appropriate.  He suggested that the Buyer’s solicitors were however better placed than their client to consider ways of providing better protection, but did not spell out what more could have been done, or more importantly, when such an undertaking might be regarded as essential. 

Clearly had there been other ways to protect the client which the buyer’ solicitors had failed to implement, and a consequential finding of negligence,  then we may have had some clues on what more is required of buyer solicitors when faced with these circumstances.  

The conclusions to be drawn are as follows:

• If there are ‘red flags’ suggesting the risk of fraud then there is a duty on the buyer’s solicitor to make these known to the client.  In this case the Judge found on the facts that had the solicitor warned the client of the risk of fraud it would have probably withdrawn from the transaction. 

• So this means nothing has changed  - always make sure a proper risk assessment is carried out, and clients are made aware of what you are doing, and of any concerns. There is an argument that we should perhaps be warning all clients of the risk of fraud. The Judge in this case did in fact infer that this was something which some conveyancers may already be doing. 

• In this case even though the seller’s solicitors had failed to carry our adequate checks the Judge still found that there was no avenue of redress for the buyer. The seller’s solicitors were lucky and it is clear that had the positions been reversed the seller’s solicitors would not have escaped liability.  The Judgment contains some useful guidance of the type of checks that a competent solicitor should undertake and it is clear that using a TV licence as proof of address is not acceptable. 

Interestingly, the more important issue which arises from this case, is the one relating to implied authority and on how this only covers the release of completion funds when there is a ‘genuine’ completion. 

I would suggest that retainers should be reviewed and an express authority added which makes it clear that the buyer client is giving authority to you to release funds received from the client on the basis that you as the buyer’ solicitor are unable to guarantee that the seller is in fact the registered proprietor.  You would add to ensure the term could be viewed as fair that you will do everything expected to identify fraud and to alert the client of any concerns before any funds are released. 

This is an interesting case and its a pity that the significance of the decision  has  in certain quarters been misunderstood.   

David Pett
Solicitor and Conveyancer at MJP Conveyancing Limited 

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com

Are conveyancers moving closer to a 'strict liability' regime for property related fraud?

Are conveyancers now looking to be held strictly liable for all identity related fraud stemming from conveyancing transactions?

Though we might not be there quite yet, it seems we have moved one step closer with the news that solicitors Mishcon de Reya have been found liable for breach of trust after its client was duped into buying a London property from a tenant posing as the owner.

I have not seen the transcript of the judgment but from what I have read it seems the claimant, the purchaser client, was left out of pocket to the tune of £1m when it came to light that the seller was not the legal owner of the property, but rather the tenant purporting to be the owner.

The deputy High Court judge David Railton QC found in favour of the claimant in action brought against Mishcon de Reya based on a breach of trust.   The judge found that Mishcon, presumably as the trustee of its client’s money, should have obtained an ‘undertaking’ from the sellers solicitors that it had taken all reasonable steps to establish its clients identity.

This differs from the cause of action in the similar case of P&P Property Ltd v Owen White & Catlin LLP & Anor, where the buyer failed in claims for breach of warranty of authority and negligence against its solicitors and estate agent.

The decision must be viewed as extremely worrying for conveyancers and, though it is likely to be appealed, it has clearly left practitioners in a state of flux.

Until clarity arrives what should a prudent conveyancer do?

Acting for the seller

To begin with, it will be important to always check the title documentation carefully and to identify transactions where the seller is shown to be living at a different address than the property address.  Practitioners should also be alert to situations where the correspondence address for the seller is different from that shown on the title document for the property or the seller’s correspondence address.

I would suggest these transactions once identified should be brought to the attention of the compliance officer/partner/director and marked as a high risk transaction.

I also suggest an added level of client ID checking is undertaken.  There is a need to make sure the client can show that he or she is connected to the ownership of the property.  In our office we now ask in these situations for the client to provide us with details of the solicitors who acted on the purchase of the property and to provide documentation relating to the instruction of those solicitors if available.   Our reasoning is that an imposter is unlikely to know the identity of the solicitors who acted.  It will also be open to us to contact those solicitors and make appropriate inquiries if necessary.

If we were asked for an ‘undertaking’ or a warranty as to true identity of a client, the best advise will always be to say ‘no’ irrespective of  the Mishcon de Reya decision.  All that one should say, is that we have undertaken those checks which are required of us by legislation and professional regulation.  It is clearly down to those who set these rules and requirements to issue further guidance and all one can do in the meantime is to follow and abide by what is currently in place.

Acting for the buyer

As above, when checking title and identify, those cases which could present the potential for fraud should be brought to the attention of the compliance officer, partner or director.

You can always ask the sellers solicitors to warrant that the seller is the true owner of the property or to provide an ‘undertaking’, though as I say above, I expect the seller’s solicitor will not be minded to assist.

You could also ask in the additional enquires for evidence linking the seller to the property to be produced  - e.g. stamp duty return when the property was purchased or some other document only the true owner could produce.   I suspect the seller’s solicitors may argue that this is not an appropriate enquiry to raise and refuse to answer.

What happens if the seller is not prepared to play ball?

The buyer client should be informed of the risk and advised in very strong terms not to proceed with the transaction without first seeing evidence of this type.  If the client says notwithstanding this advice he or she still wishes to proceed then a written disclaimer should be sought from the client.

Conclusion

The judge in Mishcon de Reya decision is reported to have said that it was only fair for the claimant to make a recovery, as in his view, by finding in favour of the claimant this was the only ‘practical remedy’ in the light of the fact that the defendant had insurance.   This reminds me of the days of Lord Denning when decisions were based not on the law and good practice, but rather on the equity of the situation.    This is all well and good but its consequences are far reaching for the high street conveyancer and will surely leave a lot of us thinking is it really worth running and taking responsibility for all of these ever increasing risks when the fee we able to charge is often much less than that charged by the lender, the broker, the panel manager, and the estate agent. 

One simple solution to all of this uncertainty and exposure is to provide an alternative to the holding of client money.  Surely this decision cries out for serious consideration to be given to moving the management of client funds away from the conveyancer to a regulated and centralised third party. 

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com

The practical implications of P&P Property Limited v (1) Owen White and Catlin LLP (2) Crownvent Limited t/a Winkworth [2016] EWHC 2276 (Ch).

What should you do, and what exposure do you have when you act for a seller only to find after the transaction has completed that the seller is not the owner of the property but a fraudster?  

This was the very situation which a seller’s solicitor and estate agent faced in P&P Property Limited v (1) Owen White and Catlin LLP (2) Crownvent Limited t/a Winkworth [2016] EWHC 2276 (Ch).

Facts

An impostor posing as the real owner of the property instructed Winkworth to market the property and the First Defendant (‘OWC’) to undertake the conveyancing.  The impostor claimed he was living in Dubai and was looking for a speedy sale.   OWC carried out the usual identity checks (in robotic form only) and the sale proceeded with the purchaser P&P Property paying 1.03 million for the unoccupied property.

Upon completion the net sale proceeds were passed on to the purchaser. Subsequently the true owner when walking past his property was alerted when he saw builders ripping out the kitchen of the property. By this time the impostor had vanished with all of the net sale proceeds (£927,000).

The Claim

The purchaser who purchased from the impostor was not of course happy and decided after the fraud came to light to bring a claim against the seller’s solicitors and also the estate agent for breach of warranty of authority and breach of duty.

There was a separate claim brought against the seller’s solicitors for breach of trust relying on the fact the misappropriated funds passed through the hands of the seller’s solicitors.

Breach of warranty claim

The judge found that if a client appoints a solicitor the only warranty that a third party dealing with that solicitor can rely on is that the solicitor has authority to act on behalf of the client.  There is no implied warranty that the solicitor can vouch for the client’s authenticity as the owner of the property to be sold. 

The judge found:

‘The basic representation is only that the agent has authority to act for another, a matter which arises between him and his principal and is something which is usually peculiarly within his own knowledge. An agent does not, simply by acting as agent, represent that his principal will perform the contract or is solvent or make any other representation as to the principal's attributes or characteristics. The court should not imply a warranty of authority which has an effect going beyond the basic representation, save where it is clear that the necessary promise is properly to be implied. This is particularly so in relation to professionals, including solicitors, who do not normally undertake an unqualified obligation.’

To extend the warranty to this level would in the view of the Judge Robert Dicker QC constitute a guarantee that the client was the registered proprietor of the property and essentially create a strict liability for any loss arising if as in the present case the client was found to be an impostor. The judge found that such warranty was also entirely inconsistent with the practice adopted amongst conveyancing solicitors and out of line with the Law Society Code for Completion by Post (2011).

The judge also found on the facts of this case that there was not in breach of warranty on the part of the estate agent but did not rule out the possibility that in certain circumstances a claim could be well founded.

Breach of Duty of Care

Again the Judge found in favour of both Defendants.

On the facts (and more particularly in the absence of evidence to show a breach of warranty of authority) there was no evidence that the Defendants had accepted responsibility to ensure that the client was the true owner or that the impostor was not who he claimed to be.  

The judge also found:

‘The imposition of such a duty of care on the part of Owen White to take reasonable care to ensure that Mr Harper was the true owner of the Property, would also, in my view, be inconsistent with the detailed rights and obligations set out in the Law Society's Code for Completion by Post, which I consider further later in this judgment’.

In terms of the claim against Winkworth the judge found:

‘I accept Mr Polycarpou's evidence [purchaser’s solicitors]  that he expected Winkworth to have carried out their client due diligence and anti-money laundering checks and relied on them to have done so. However, reliance on its own is not sufficient to establish a duty of care on the part of Winkworth.

On the basis of the test derived from Hedley Byrne v Heller, it is also necessary to establish, amongst other things, the necessary objective assumption of responsibility by Winkworth and, in this respect, the primary focus is on statements or conduct which crossed the line between them.

Nothing was said by Winkworth about the steps taken in relation to its client due diligence and anti-money laundering obligations. Mr Polycarpou did not ask and Mr Hunt did not volunteer anything in this respect. The furthest that the evidence went was that Mr Hunt appreciated that Mr Polycarpou would have expected both Winkworth and Owen White to have carried out their respective money laundering checks before marketing the property.

Assessing the relevant evidence as a whole, there was, in my view, no communication or conduct which crossed the line such that, in this particular case, objectively Winkworth are to be taken also to have assumed responsibility to P&P Property for taking reasonable care when carrying out their client due diligence to ensure that their client was the true owner’.

Breach of Trust

The Claimant claimed that OWC held the funds that it received from the purchaser on trust, that no valid completion took place and that the completion monies were therefore paid out in breach of trust.

The judge found in favour of OWC relying on paragraph 3 of the Law Society Code for Completion by Post (2011 edition) (the "Code")

This provides:

‘’In complying with the terms of the code, the seller's solicitor acts on completion as the buyer's solicitor's agent without fee or disbursement but this obligation does not require the seller's solicitor to investigate or take responsibility for any breach of the seller's contractual obligations and is expressly limited to completion pursuant to paragraphs 10 to 12".

The Judge found:

‘….that the fact that paragraph 3 provides that the seller's solicitor is not required "to investigate or take responsibility for any breach of the seller's contractual obligations" is, in substance, inconsistent with the vendor's solicitor being liable, as the purchaser's agent, for breach of trust in releasing the money in the event that completion does not occur because the seller does not have title. One of the seller's obligations is to provide a genuine transfer of title. If the vendor's solicitor is liable for breach of trust merely because no genuine transfer is provided it would effectively be taking responsibility for what paragraph 3 says it is not. The extent of the vendor's solicitor's obligations on completion are governed by the express undertakings that it provides in accordance with the Code. In my view, in the light of the guidance in cases such as Mothew [Bristol and West Building Society v Mothew [1998] Ch 1] , in these circumstances it would be wrong to construe the Code so as to give rise to a breach of trust or, as a result, as an effective guarantee of title.

In short the judge found that it would be inconsistent with the terms of the code to hold that a breach of trust occurred by reason of the seller releasing the completion funds to the purchaser when it was argued that the seller was not in a position to provide a genuine transfer of title.  Essentially the judge took the view that paragraph 3 specifically excludes the sellers solicitor from liability for any breach of contract on the part of the seller.

Sellers Solicitors Conduct

Helpfully the judge took the time to consider whether the sellers solicitors would have been able to avail themselves of the Section 61 of the Trustee Act 1925 relief had he found that a breach of trust had occurred.

Section 61 provides:

"If it appears to the court that a trustee, whether appointed by the court or otherwise, is or may be personally liable for any breach of trust … but has acted honestly and reasonably and ought fairly to be excused for the breach of trust … then the court may relieve him either wholly or partly from personal liability for the same."

The judge it is safe to say was not impressed with the seller’s solicitors and found that if there had been a breach Section 61 relief would not have been available.

In short the judge found there were sufficient ‘red flags’ to alert the seller’s solicitors and to cause at the very least the seller’s solicitors to raise further questions.

The ‘red flags’ (and there were many) in this case included:

Unoccupied property

‘Seller’ living abroad

No legal charge

Relatively high value

Impatient client

Discrepancies between signatures

Lack of a correspondence address or evidence as to where the ‘seller’ was in fact living and working or how long he had been there.

Failure to pick up form the ‘seller’s’ bank statements when presented the fact that most of the items within it appeared to be London based.

Failed electronic identity check.

The judge concluded:

‘The fraud was plainly a sophisticated one which appears to have carried out with some expertise. However, in my view, it is plainly possible that, despite the obvious sophistication of the fraud, further questions would have revealed the true position or discouraged Mr Harper from proceeding further and, even if they did not, they would have increased the prospect of that occurring’.

Practical Implications

This case is unremarkable and should not lead in my opinion to any significant change in practice.

Upon acting for a seller it is important to keep in mind both statutory and professional obligations particularly the widely known obligation a conveyancer has to be alert to indicators of money laundering and/or fraud and to identify and action ‘red flags’ as and when these arise.  To simply ignore and do nothing is not advisable and could leave you exposed to liability.

It is clear that a responsible and alert practitioner given these circumstances should have spotted that there was something not quite right about the transaction.  It should be clear by now that if you are acting on a sale where there is no mortgage, the property is empty and the ‘seller’ purports to be living abroad, further inquiries should be made.  In this case the seller’s solicitors should have never allowed this transaction to proceed.  There were clear warnings and to argue as the seller’s solicitors did that she did not consider it was appropriate to raise a large number of questions with her client simply is not an acceptable argument.  If in doubt the seller’s solicitors should have terminated the retainer. 

What more you might ask could the seller’s solicitors have done? In this case I do take the view that further evidence to link the seller to this property could have been sought.  I do not consider it is unreasonable given the large number of red flags to have asked the client to provide details of who acted for the ‘seller’ on the purchase of the property and to contact those solicitors to seek verification of identity.  I know some may argue this is a step too far and probably in the majority of cases it is but as I say the alarm bells were constantly ringing in this case.

If acting for a purchaser and it is noted from the Seller Information Form that the property is empty and there is an alternative address for the seller shown (which in this case the seller’s solicitors failed to investigate) then I do consider that the seller’s solicitors should be asked about the checks undertaken to ensure the seller is in fact the registered owner.  In other words to ask for a warranty.  If this is refused then perhaps insurance should be considered or the buyer should be warned of the risk of fraud.  

Summary

In this case the I am of the view OWC was lucky to have come away untouched.  The prominence given to the Law Society Code surprised me and was clearly and cleverly used by the judge to find for the sellers solicitors which overall I agree was the most just decision to reach.

The underlying message however is that a conveyancer whether acting for a seller or purchaser needs to be alert at all times and if there are red flags of the type which appeared in this case, and which do not disappear on further investigation, not to be reluctant to report these matters to the National Crime Agency, and ultimately to pull out of a retainer.  

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at davidp@mjpconveyancing.com