Conveyancers Duped by Million Pound Property Fraud - Was it Avoidable?

The news of a property fraud reported in the Daily Mail (http://www.dailymail.co.uk/news/article-3356929/The-thieves-stole-wife-s-house-sold-1-3million.html ) at the weekend should send a chill down the back of all conveyancers across the land. 

A young woman — who paid the full amount with no mortgage — had been duped into handing over £1.35 million to the a person purporting to be the legal owner of the property. 

The money was last seen on its way to a bank in Dubai.

The real owner was totally oblivious to the fraud until the Land Registry smelling a rat declined to register the property in the name of the young woman. 

There were two primary fraudsters.  One who took out a rental agreement on the property before the property was placed on the market, and the other who stole the identity of the real owner.  Between them they were able to fool the letting agent, the selling agent and both the selling and buying conveyancers. 

This was a fraud perpetrated at the highest level.  

So what could have been done to prevent it?  Probably not very much given the sophistication of the perpetrators. 

The question of whether negligence lies with either the seller or the buyer’s conveyancers must also be a vexed issue. 

So what lessons as conveyancers can we learn from these circumstances?

From a sale perspective there was nothing on the surface which would have alerted the seller’s conveyancer.  The ID supplied for the registered owner, that is the seller, was fake but unless it was obviously fake there was not much more one could expect the seller to do to identify the fraudulent  activity. 

Interestingly, had the seller made use of the Land Registry Alert procedure there is a possibility that the true owner would have been alerted about the proposed sale when the purchaser  undertook the OS1 search before exchange. Clearly conveyancers should all be advising buyer clients, especially the Buy To Let clients, to register for this type of alert. Failure to do so may in the future be viewed as a negligent omission. 

So what additional checks or alert factors should conveyancers as result of this incident consider?

Property of high value with no mortgage are at highest risk especially if they are rental properties. Conveyancers dealing with this type of property should perhaps check on the internet to see whether the property has been advertised for let recently.  In this case the fraudster tenant had only just taken out a rental agreement and had, which is unusual, paid the rent in cash. 

If instructed on this type property perhaps conveyancers should also look at the ID documents more closely and always arrange for the file to be referred to a senior member of staff for a second review. 

Suspicion should be heightened if the registered proprietor is abroad and there is a third party purporting to act for the owner. In this case the property had been put on the market purportedly on behalf of the owner by the person who had taken out the rental agreement.  Its unknown whether this was known to the seller’s conveyancer. 

Another alert factor is the instruction for the sale proceeds to be transferred to an account based outside of the Country.  If a conveyancer is instructed to transfer any funds abroad following a sale, there is now, I would suggest a strong, good argument  to pause and to take a more detailed look at the circumstances.  At the very least, the transfer should be referred to a Partner or other senior colleague for checking. 

So in short conveyancers acting in transactions of this type should keep a close eye on transactions involving:

• Property with high value with no mortgage of other charge 

• Property where the seller is shown as living at an address which is different from that of the property

• A seller looking to sell through an intermediary

• The transfer of funds to an account held abroad.

From a buyer's perspective perhaps there is now a case to consider raising some extra enquiries when it can be seen from the Land Registry Document that the property to be purchased is held by a registered  proprietor who is not in occupation and or which is occupied by a tenant.

Questions of this type which conveyancers may wish to  consider include:

1 Please produce from the letting agent references for the tenant and confirmation on how the rent has been paid i.e whether in cash or by cheque as well as confirmation that all standard money laundering and identity checks have been carried out on the tenant.

2 Please confirm the date on which the tenant took up occupation.

3 Please confirm that the funds to be transferred on completion are to be paid into a bank account held in the UK.  If the funds are to be paid into an account abroad please confirm that these will be held by you for 48 hours before the funds are remitted ( the reasoning here is that if the buyer turns up on completion to find the property occupied without vacant possession ) there may be some time available to prevent the funds from being remitted.  In the present case this would not have helped as the property was vacant at the time of completion.  If the buyer’s conveyancer  had known that the tenancy agreement was only granted prior to the marketing of the property and was now being sold with vacant possession then this may have rung some alarm bells. 

I am not sure whether these questions will find favour with the sellers solicitors but at the very least they may put the sellers solicitors on notice that the transaction is a high risk one and as a consequence raise the level of vigilance.

At the end of the day detection of fraud to a large extent is based on instinct and more often luck.   All practitioners can do is to ensure all the standard checks are carried out and that staff are trained on what to look out for and to remain vigilant throughout the transaction. 

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 david@mjpconveyancing.com

We need to do more to protect our clients money

The recent report of a significant loss suffered by a client following the interception of an email by a gang of fraudsters has sparked a debate about the suitability or otherwise of communicating with a client via email especially as regards the exchange of financial information. 

Mr and Mrs  Lupton sold a fla for £340,000. Two days before the set completion date of February 27, Mr Lupton’s solicitor, Perry Hay & Co in Richmond, Surrey, emailed him requesting his bank account details for the sale proceeds to be paid into.

Mr Luton replies and unfortunately for all concerned the email was intercepted by fraudsters.

Posing as Mr Lupton, the fraudsters emailed Perry Hay & Co again instructing them to disregard the previous details and send the money to a different account instead.

The sale completed and following the discovery of the fraud the account was frozen and £271,000 was returned to the Luptons but the balance of £62,000 had already  been withdrawn by the fraudsters. 

Speaking to the Daily Telegraph, Robert Loughlin, executive director at the SRA, said: “We are very concerned about this continuing activity. The fraudsters are highly sophisticated in their approach. All firms should ensure that their own, internal systems for guarding against scams are up-to-date and that staff know how to implement them.”

Unfortunately the SRA dis not seize the opportunity to provide guidance.    There is an element of common sense involved  but this is easy to say in the cold light of the day but less simple to implement faced with the intensity and pressures of a busy day of completions. 

So what can be done to reduce the risk of falling victim to fraud?

Some commentators speak about the need of encrypted email but I question whether this is a practical solution and more to the point one that is really necessary. 

The first and most important step is to make sure there is a very clear and coherent policy prepared on how to deal with the transfer of client funds and to make sure every single member of your business knows the policy and knows it by heart. 

The policy should make sure that any bank details supplied to you by a client should always be verified by calling the client and taking the client through some security questions.  That is questions to which only the client would know the answers.  You should avoid questions such as date of birth, file references and any other information which a determined fraudster may have gleaned. 

I also recommend that you should always ask the client to send through a copy of the bank statement relating to the account into which the money is to be paid.   This can then also be used to verify the bank details.   I know a bank statement can be replicated but if you have asked the client to forward this to when speaking with the client over the phone the chance of a fake statement being sent through is remote. 

I also suggest that significant sums of money should only be retuned to clients after it has been authorised by a director or partner of the firm.  This will add a second layer of security since the director or partner can then check that the policy has been followed. 

We operate in an uncertain world full of people who operate tirelessly to defraud others - we must be more vigilant and careful with  our clients money. 

Interestingly, following the crime, Perry Hay & Co said it did not believe it was at fault and that the Luptons would have to suffer the loss.  I am not sure about that! 

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk

New duty to warn other conveyancers of client's suspected fraud?

Scotland’s supreme civil court’s decision in Frank Houlgate Investment Company Ltd v Biggart Baillie LLP [2014] CSIH 79 has raised some interesting questions about transactional fraud and could have an important impact on conveyancer’s liability when they act for a dishonest client. 

The facts involve an investment company, the plaintiff, which lent money to the client of  the solicitor, the defendant.  The security for the loan was not owned by the client  and was in fact worthless.  During the course of the transaction the solicitor became aware of he client’s attempt to defraud but nonetheless continued to act and as a consequence of the fraud the investment company suffered a loss. Acting on the instruction of the client the solicitor did not warn the representative of the investment company of the fraud.

The three judges of the CSIH all agreed that the client’s solicitor was liable to the investment company for the losses , although they were not unanimous regarding the basis for that liability.

Lord Menzies held that the solicitor was under an obligation immediately to disclose to the investment company’s representative,  the that the client had admitted fraud and that the security was worthless. That obligation flowed from a continuing implied representation to the other party to the transaction that they are not aware of any fundamental dishonesty or fraud which might make the security for the transaction worthless. Notwithstanding the duty of confidentiality the solicitor was incumbent on a solicitor to act honestly at all times.  Not surprisingly Lord Menzies further held on the facts that he would have found the solicitor liable as an accessory to fraud in any event.

Lord Malcolm  relying  instead on Donoghue v Stevenson held that the solicitor was liable in negligence. He held that it was ‘preferable simply to rely upon the broad concept of culpa [fault], in the sense of failure by a professional to use the care and skill required in the circumstances’. He added: ‘In the present case the actionable negligence arises because [the defendant] came to learn of the fraud and knew, or should have foreseen, that further harm to the pursuers could ensue if he did not take care to protect them.’

There remains a question mark about the soundness of Lord Malcolm’s reasoning since there appears to  little authority around to support the existence of a duty of care by a solicitor to a third party, though the more interesting aspect to this decision is the obligation  to override the duty of confidentiality once a solicitor becomes aware of fraud. 

The bearing of a Scottish decision on practice in England may not be direct, but the case does give rise to some interesting questions.  If these circumstances were to happen in England it is clear the  solicitor  once knowing of the fraud should have immediately desisted from undertaking any further work ( without doing anything to ‘tip’ the client off ) and to then report the incident to the Solicitor Regulation Authority and the National Crime Agency   If there was then no intervention by the SRA/NCA the solicitor should have then terminated the retainer.  The question is whether in the light of the case of Frank Houlgate there would also be a duty once the retainer came to an end to bring the matter to the attention of the other parties in the transaction remains unclear.  How far would that duty extend?  Would the solicitor need to alert another solicitor appointed by the client when approached for the release of the file following the termination of the retainer?

The other question of interest which emerges from this case is that if a solicitor comes across  information, if considered properly and in line with SRA and Law Society obligations,  would show that the client could be acting dishonestly, but the solicitor fails to read or to appreciate the importance of that evidence, would that be sufficient for a lender of other third party to rely on the decision of Houlgate and seek redress for loss. Could this now present a lender with an alternative route to the solicitor’s insurers when loss is sustained due to fraud?

Only time will tell though one thing is for certain it is an argument which I am sure a lender will look to run sometime in the very near future. 

Article by David Pett Director/Solicitor - MJP Conveyancing