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Jean-Yves Gilg

Editor, Solicitors Journal

The evolving nature of fraud

The evolving nature of fraud


James Preece, Vicky Hardy, and George Chaisty advise firms on understanding the risks involved in property transactions and how to protect against falling foul of fraud

The National Fraud Authority puts annual mortgage fraud losses alone in the region of £1bn. Given the potential ramifications for a solicitor who fails to identify fraud, it is essential they are alive to the evolving techniques being used.

We identify some emerging practices used by fraudsters and how fraud might be prevented. In addition, we detail some of the claims that can be made when a fraud has been perpetrated and the potential defences. We focus on the particularly problematic area of property transactions.

'Traditional' mortgage fraud, where a lender is deliberately misled into lending money it would not otherwise have agreed to lend, either with or without the connivance of the solicitor, became a considerable problem in the 1980s property boom and resurfaced during the resurgent property market of the last decade.

Increasingly, however, fraudsters are using ever more sophisticated methods. A common scam involves the fraudsters setting up a bogus firm of solicitors and/or impersonating the seller of the property (although sometimes the fraudster is a true owner with the threat of repossession looming).

The buyer and their solicitor are given the name of the bogus firm and, assuming the fraud proceeds as expected, hand over the purchase monies, which promptly disappear, leaving the buyer (and usually their lender) out of pocket and with no title to, or security over, the property.

The sophisticated methods fraudsters use to make the firm seem authentic - for example, cloning websites and letterheads - are ever changing, making it all the more difficult for solicitors to detect frauds. Sometimes a property will be sold by a fake vendor, usually with a false identity mimicking the owner, thereby fooling both firms of solicitors and the buyer.

Fraudsters are reliant upon buyers' solicitors not carrying out full due diligence or otherwise not noticing discrepancies in paperwork, and ultimately paying over the completion monies, which are then quickly moved on. As monies are often lost irretrievably, prevention is key. To protect against falling foul of sham law firms and bogus sellers, solicitors should, among other things:

Check the firm and individual solicitor are both registered with the Law Society;

  • Check the contact details provided are correct, even if the firm or individual is already known;

  • Undertake internet searches of the firm's name, partners, and staff, and see if there is anything which suggests a false office or identity;

  • Cross-check details on the Solicitors Regulation Authority's (SRA) scam alert web pages, which list all scams and frauds notified to it;

  • Follow up on an instinct that something does not 'feel right' (such as an unprofessional website, spelling mistakes, refusal to provide requested information relevant to identity, or the unexplained speed of a sale at an undervalue);

  • Make further enquiries if you notice any irregularities;

  • Keep file notes of any such conversations or enquiries; and

  • If you remain sufficiently concerned, tell your client (if acting for the buyer) or, if acting for the vendor, challenge them or, if needs be, cease
    to act.

Another common fraud is the 'Friday afternoon scam', which seeks to capitalise on the pressure of tight deadlines faced by solicitors handling large amounts of money on behalf of clients.

While this activity is by no means new, the methods employed are increasingly sophisticated, with fraudsters using a combination of identity fraud and cyber techniques to convince solicitors to disclose sensitive information about client accounts, or to transfer funds into an illegitimate account.

By telephoning the solicitor or accounts team direct, or even hacking or recreating email accounts, the imposters convince unsuspecting solicitors to release funds direct to the fraudsters' bank account.

Once again, prevention is key and it makes good sense to do the following:

  • Not allow clients to talk directly to individual members of the accounts team;

  • Ask questions of the caller if you are suspicious;

  • Never give any access or security information to anyone over the telephone or in an email, no matter how genuine they sound, and remember that banks will never ask for your PIN or password over the phone or via email;

  • Take the caller's details, if they are purportedly calling from a bank, and call back, but rather than using the number they have given you, use the main contact number you have for your bank (normally your bank's client relationship manager);

  • Audit your data security;

  • Use up-to-date anti-virus protection that includes a firewall; and

  • Require staff to use complex secure passwords, which are changed regularly.

Solicitors' liabilities

What are the implications for solicitors if the worst happens? The answer is often a hefty breach of trust claim. Not surprisingly, a failure to keep client money safe from fraudsters can have serious ramifications for the solicitors entrusted to guard it.

In Santander UK v RA Legal Solicitors [2014] EWCA Civ 183, a fraudster purported to act as conveyancer for a vendor. The property owner
had no intention of selling the property and the fraudster had forged the transfer deed. RA Legal, acting for the purchaser and his lender, released the purchase monies to the fraudulent conveyancer, who made off with the funds.

It was held that the firm had an implied obligation to hold the funds to the vendor's order until completion. The fraudster was not the property owner's true conveyancer and therefore completion had not occurred. By releasing the monies to the fraudster, RA Legal acted in breach
of trust.

Similarly, in Lloyds TSB Bank v Markandan and Uddin [2012] EWCA Civ 65, a firm acting for Lloyds released mortgage funds to fraudsters posing as solicitors at a genuine firm. It was noted, obiter, that parting with loan money for 'worthless forgeries in purported performance of a purported contract that was a nullity is not completion at all' and doing so would result in a breach of trust even if the solicitor acted innocently.

Liability for breach of trust is strict (rather than fault based) and so the stakes are high for solicitors who do not identify issues with the identity of the vendor or their solicitors.Is there any defence or other relief? First, in AIB Group (UK) v Mark Redler & Co Solicitors [2014] UKSC 58, the Supreme Court considered a situation where a solicitor, in breach of trust, failed to discharge a prior lender's charge in full, so AIB took a second charge only. AIB sought to recover its full losses from the solicitor, but the court concluded that it was only entitled to the pecuniary difference between a first-ranking charge and one postponed to the prior lender. In other words, causation does come into play when considering compensation.

Second, innocent solicitors can be protected by section 61 of the Trustee Act 1925, which gives the court discretion to excuse a solicitor who acted 'honestly and reasonably'. In Nationwide Building Society v Davisons Solicitors [2012] EWCA Civ 1626, the Court of Appeal accepted that the standard required for a solicitor to successfully run a section 61 argument is 'not [a standard] of perfection'. Nevertheless, solicitors must take a high degree
of care.

An application for section 61 relief failed in Santander UK. The solicitor had made inadequate requisitions, not queried inadequate replies, failed to obtain the vendor's solicitors' written commitment to follow the completion code, and failed to appreciate that completion had gone wrong when no confirmation that the previous mortgage had been discharged was received. Notably, the solicitors were not granted relief despite a finding that the fraud was likely to have succeeded even if the solicitor had acted reasonably. The Court of Appeal made it clear that there is a high threshold to surmount in order to obtain relief from a finding of breach of trust.

Likewise, in the recent case of Purrunsing v A'Court & Co and another [2016] EWHC 789 (Ch), both the firms acting for an imposter vendor and for the defrauded purchaser were held liable for breach of trust in failing to guard the purchase monies and denied section 61 relief. Neither had acted reasonably: the (purported) vendor's solicitors had failed to comply with their anti-money laundering obligations by failing to obtain documentation linking the apparent vendor to the subject property, and the buyer's solicitors had failed to advise their client appropriately about the absence of such an established link.

The release of money without adequate checks can also result in claims for breach of fiduciary duties and regulatory consequences. For instance, if money is lost due to a scam, the firm will be in breach of the SRA Accounts Rules 2011, which oblige a firm to immediately reinstate the missing monies. Failure to do so risks intervention by
the SRA.

The impact of these types of frauds, both financially and from a reputational point of view, can be devastating.

The ever-evolving methods described in this article show fraudsters may not be identified through basic anti-money laundering checks at the outset of a transaction, and solicitors must therefore be vigilant at all times. It is a mistake to think that a less buoyant housing market means fraud is on the wane.

James Preece, pictured, is a partner, Vicky Hardy a senior associate, and George Chaisty an associate at Clyde & Co @ClydeCoNews