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Recognising signs of risk

Recognising signs of risk


Whatever the appeal outcome, the Mishcon de Reya fraud case holds valuable lessons for firm's risk management strategies, advises Martina Hogg

The High Court’s decision to order Mishcon de Reya to pay compensation to a client which suffered losses in a fraudulent property transaction has set hares running across the conveyancing industry. Not least among firm’s concerns, is the pretty extraordinary fact that the court came to its decision despite finding that Mishcon’s lawyers had not acted negligently.

The case is an example of an increasingly common form of property fraud, in which fraudsters identify properties which aren’t under mortgage (via Land Registry records), falsify documents to pose as the owner, and market the property for sale. Such was the case with a property Mishcon’s client Dreamvar set out to acquire in 2014.

The fraud was only discovered after the payment of £1.1m had already been transacted. Dreamvar subsequently sued the firm for negligence, with part of its argument being that Mishcon had not taken adequate steps to determine if the firm acting on the other side of the deal had done enough to establish if its client was indeed the property’s rightful owner. The judge ruled that Mishcon was liable for breach of trust but had not been negligent.

Mishcon is appealing the judgment and has rightly claimed that it could have major ramifications for the wider industry. Indeed, the court’s decision would appear to set the worrying precedent of making advisers liable to provide compensation in such cases on little more basis than the fact they can afford to do so.

It’s an issue that could impact any firm which holds client’s funds on trust – not only conveyancers, but also those handling other commercial transactions. The most obvious, immediate risk would be that this leads to an unwelcome increase in professional indemnity insurance (PII) premiums.

Whether the firm should be found liable when it hadn’t acted negligently has dominated the conversation around the judgment and will, no doubt, be the main issue of the appeal. However, regardless of the outcome, the case holds some key lessons for risk management within conveyancing firms, which could help prevent them falling foul of similar fraud.

Look for ‘red flags’

Properties which are not under mortgage present a higher risk of this form of fraud and this should be factored into risk management. However, firms should also be on the lookout for any other signs that all may not be as it seems. For example, according to reporting of the Mishcon case, the fraudulent vendor had expressed a desire to sell the property at speed, ideally within days. His explanation was that he was trying to ‘get one over’ on his ex-wife.

There is an argument that these factors, considered together, should have constituted a ‘red flag’ in terms of the legitimacy of the vendor’s motivation and integrity and therefore prompted further investigation. Of course, hindsight is a wonderful thing, but considering the outcome of the Mishcon case, firms would do well to consider how they can monitor for similar signs of risk.

Extra layer of due diligence

Clearly, there is a question mark over how far a firm acting for a purchaser can reasonably be expected to go to establish if its counterpart has correctly identified its client. But the Mishcon case suggests that an extra layer of due diligence in high-value transactions would be prudent.

The fraud was discovered when the transfer of ownership was lodged with the Land Registry. There is therefore an argument to be made for involving the Land Registry earlier in the process or, failing that, for firms to carry out their own due diligence on vendors, where risk is deemed to be high. For example, credit-checking facilities can be used to cross-reference claims of property ownership with other bills which would potentially flag up any inconsistencies. Of course, to carry out such a check would require the vendor’s consent. However, failure to grant this may well in itself present another red flag.

All eyes will be on the Court of Appeal case, which is due to be heard in October. Clearly, if the judgment is upheld and PII premiums rise as a result, clients will ultimately bear some of the cost – a situation which would be at odds with the government’s stated aim of reducing the cost and complexity of property purchases.

Martina Hogg is lead compliance consultant at Weightmans