Lessons on fraud

In the wake of recent cases and a new Law Society and Land Registry guidance note, Zachary Bredemear offers an update for solicitors on how to protect against the dangers of property fraud In September the Law Society and HM Land Registry issued the joint guidance note Property and title fraud. The note offers practical guidance to solicitors about the methods used by fraudsters and the signs that a transaction might be vulnerable to fraud. It follows a series of court decisions that illustrate the need for greater awareness of the indicators of potential fraud amongst the profession. The new note also draws on the Land Registry’s experience. It is required by statute to provide an indemnity to persons suffering loss by reasons of the rectification or a mistake in the register (Schedule 8 of the Land Registration Act 2002). In 2016-17 more than 70% of the sums incurred by the Land Registry’s Indemnity Fund involved claims concerning fraud and forgery. The Land Registry has counter-measures to prevent fraudulent applications being registered and stopped 50 such applications in the past year. An indemnity from the Land Registry is not always available to victims of property fraud. In three recent cases against solicitors, Purrunsing v A’Court & Co (a firm) [2016] EWHC 789 (Ch); [2016] EGLR 37 (Ch), P&P Property Ltd v Owen White & Catlin [2016] EWHC 2276 (Ch); [2016] PLSCS 261 and Dreamvar (UK) Ltd v Mishcon de Reya [2016] EWHC 3316 (Ch), the frauds were uncovered before registration was completed. Between them, these cases decide that if an innocent purchaser is defrauded by someone posing as the true owner of a property the position of the solicitors is as follows: The vendor’s solicitor will not ordinarily be liable to the purchaser for negligence or for breach of warranty of authority even if the vendor’s solicitor failed to take proper steps to ascertain the identity of their client (P&P and Dreamvar). If the transaction is completed using the 2011 edition of the Law Society Code for Completion by Post, the default position is that the vendor’s solicitor does not hold the purchase monies to the purchaser’s solicitor’s order and will not be liable for breach of trust if the purchase monies are paid away to a fraudster (P&P and Dreamvar). In this respect, the 2011 edition of the Code offers less protection to purchasers than the 1998 edition (Purrunsing). The purchaser’s solicitors, who ordinarily cannot check the identity of the vendor, will be liable to the purchaser for breach of trust if they receive purchase monies that are paid away to a fraudster (Purrunsing and Dreamvar). A solicitor liable for breach of trust can seek relief from liability under section 61 of the Trustee Act 1925 if they have acted honestly and reasonably, but relief can be refused even though they have not been negligent (Dreamvar). Appeals in P&P and Dreamvar are due to be heard by the Court of Appeal in late February 2018. The new note builds on and supplements other guidance, including the Law Society’s Anti-money laundering practice note. Four lessons can be taken from fresh material in the new note: be vigilant, ask questions, tell the client and keep records. Be vigilant The judge in P&P explained that fraud prevention should not be dealt with on a “purely mechanical” basis without appropriate assessment. The new note tells practitioners to look at each transaction as a whole and to diligently look out for anything that may be unusual or suspicious. One example of the degree of vigilance that may be called for is noticing a discrepancy between the date of birth on an identification document and the date when a person of that name was registered as the proprietor of the land. The new note emphasises that any participant in a conveyancing transaction could be impersonated by a fraudster. A fraudster might pretend to be the buyer to obtain information for a later fraud or to defraud a lender. A conveyancer might be provided with a fraudulent discharge ostensibly from an existing lender (as in Chief Land Registrar v Caffrey & Co [2016] EWHC 161 (Ch)). Documents presented as proof of identity must be checked carefully. Bank statements or utility bills can be easily forged but may contain errors. A fraudster may use genuine identity documents to fool a conveyancer. The note refers to one instance where the fraudster changed their name by deed poll to produce a genuine, but recently issued, passport in the name of the true owner. It is important to remember the risk of fraud is not the same in each transaction. The Land Registry has identified that fraudsters are more likely to target vulnerable registered owners and vulnerable properties. Transactions involving these require more vigilance. Factors pointing to a vulnerable owner include where the notification address recorded at the Land Registry differs from the property address or where it can be inferred from the length of time they have been registered as the proprietor that the owner is elderly. Factors that render a property vulnerable include if it is of high value, without a legal charge and not occupied by the owner. Ask questions The importance of probing inconsistencies and ambiguities is highlighted throughout the note. In P&P, the court emphasised that a solicitor should not be inhibited from making the necessary investigations and asking the appropriate questions for fear of upsetting or affecting their relationship with the client. Illustrations of when a solicitor should ask further questions are provided in the recent cases. If the seller produces a utility bill for a property other than the property for sale, further investigations may be required to link the client to the property (Purrunsing). If a solicitor receives information that is inconsistent with what they have been told about where their client is living and working (such as bank statements showing everyday purchases in a different location) they may need to ask for more information (P&P). The note provides other examples of “suspicious behaviour” that it says should trigger further investigation. The examples range from obvious risks such as “A client who requires the transaction to be completed with great urgency without a feasible explanation”, to less troubling circumstances such as “I’ve moved in with my boy/girl-friend”, being given as an explanation for why the client’s contact address is not at the property. What might appear to be an innocent explanation in one transaction may be one of a number of warning signs that should trigger suspicion in another case. The need for further investigation also applies to unsatisfactory responses given to enquiries raised by the purchaser’s solicitor (Purrunsing) and to documentation received from the vendor’s solicitors that raises a concern about fraud. Tell the client If a solicitor is not fully satisfied after asking further questions they should report their concerns to their client. In both Dreamvar and Purrunsing the failure to inform the client of the risks of proceeding with the purchase was a reason why the solicitors’ applications for relief under section 61 of the Trustee Act 1925 (the 1925 Act) failed. In contrast, in Patel v Freddy’s Ltd [2017] EWHC 73 (Ch) the purchaser’s solicitor told his client not to go ahead with the purchase. The client in Patel proceeded with the purchase anyway (having negotiated a reduced price) but was able to withstand an application for rectification of the register as the solicitor was not shown to have caused or contributed to the mistaken registration by lack of proper care. Keep records The note reminds solicitors to keep records of enquiries and answers received in relation to identification information. Practitioners are also advised to record their own concerns and reasoning in situations that may suggest an increased risk of fraud. For example, if their client cannot provide a contract address. In P&P the lack of a contemporaneous note recording why the vendor’s solicitor did not ask for more information about her client was a matter the judge noted when giving reasons as to why he would have refused relief under section 61 had he found the solicitors liable to the purchaser for breach of trust. Following Dreamvar, solicitors are concerned as to measures they must take to be relieved of liability under section 61 of the 1925 Act. By taking on board the lessons in the new guidance, practitioners will be better able to show that they are just the type of “careful, conscientious and thorough solicitor” that Rimer LJ had in mind in Lloyds TSB Bank plc v Markandan & Uddin [2012] EWCA Civ 65; [2012] PLSCS 27 and who deserves to be “treated mercifully by the court”. Download the full guidance note here Zachary Bredemear is a barrister at 1 Chancery Lane Pic credit: Monkey Business Images/REX/Shutterstock