Property fraud revisited
Locations
This article was first published in Estates Gazette on 30-07-2016
In “Frustrating property fraud” (EG 25 October 2014, p109), we considered property frauds involving a “rogue” conveyancer or a “bogus” law firm. This was followed up by a look at the more common identity fraud cases, where fraudsters impersonate the registered proprietor of a property, purport to sell the property and then march away with the proceeds of sale (“Property fraud: how to right a wrong”, EG 17 January 2016, p59). In the same article, we reviewed some of the remedies available to victims of such frauds, including breach of trust claims. Such claims will arise where conveyancers, holding completion monies on trust for the buyer, pay away the monies otherwise than for purposes for which they were intended – ie by paying away the monies without completion taking place. We also covered section 61 of the Trustee Act 1925 (the “1925 Act”), which gives the court a discretionary power to grant relief in respect of a conveyancer’s breach of trust. This is available to a conveyancer who acted honestly and reasonably.
Conveyancers beware
Lately, the court has provided further guidance in respect of these types of breach of trust claims, and the circumstances where section 61 relief will be granted. Of course, in fraudulent property transactions, both the buyer’s and the seller’s conveyancers will pay away the completion monies otherwise than for the intended purposes to which those monies should be put. Accordingly both conveyancers may, as a consequence, be in breach of trust. It is therefore possible for both the buyer’s and the seller’s conveyancers, innocent of involvement in the fraud, to be held liable to the victim of the fraud.
This is exactly what occurred in the recent case of Purrunsing v A’Court & Co (a firm) and another [2016] EWHC 789 (Ch); [2016] PLSCS 111, and in finding both conveyancers liable for breach of trust, the court gave a clear indication as to the reasonable standards to which conveyancers must adhere in order to qualify for relief under section 61 of the 1925 Act. It is worth noting that in Purrunsing (and customarily in all other property fraud cases), the fraud invariably occurs to those categories of property identified as vulnerable – namely, properties which are: (i) vacant; (ii) tenanted; (iii) not charged; (iv) registered to a sole proprietor; and/or (v) of high value – each being a red flag.
Practitioners must be particularly vigilant when dealing with properties with these characteristics. If one of more of the red flags are present, it is imperative that practitioners undertake enhanced due diligence, particularly when acting for the seller. In closely following anti-money-laundering know-your-customer requirements, conveyancers must not treat this as a box-ticking exercise, but rather consider carefully the information being supplied and ask further questions if they are not satisfied – particularly in high-risk transactions.
Conveyancers must also be vigilant as to any classic signs of fraud which may be evident during the course of the transaction: for example, a seller wanting a quick sale; a client corresponding by e-mail only; a seller corresponding from an address other than that specified in the proprietorship register of the office copy entries; a client who is overseas and/or unable to meet in person; and a seller seeking payment away of completion monies to an unconnected and/or overseas bank account. These are further red flags, which must not be ignored.
Accordingly, in addition to the checks mentioned in the Law Society practice note on property and registration fraud, practitioners must be alert to any other warning signs (some of which are listed in the text box) and raise further questions either with their client if a seller, or with the seller’s conveyancer if acting for the buyer, while bearing in mind they should not risk “tipping off”. Practitioners should discuss any concerns with their compliance officer and, where acting for a buyer, report fully to their client on any issues.
Conveyancers who do not take these steps are unlikely to be deemed to be acting reasonably, and they may find themselves liable if they complete a fraudulent transaction.
Purrunsing
In Purrunsing, a number of the classic red flags identified above were present – the property was vacant, it was not charged and it was of a reasonably high value (£470,000 in October 2012). In addition, the vendor was purportedly overseas and sought a quick sale, he failed to provide documentation linking him to the property, and he did not wish to correspond via either of the addresses specified in the proprietorship register of the office copy entries.
In addition to these warnings signs, the court held that the vendor’s conveyancer failed to carry out money laundering/identity checks required by the Money Laundering Regulations 2007. The principal failing in this case was found to be the failure to obtain documentation linking the vendor to the property.
The buyer’s conveyancer was also deemed to be liable for breach of trust, as well as in negligence and for breach of contract. This was on the basis that, having made its own enquiries of the vendor’s solicitors as to the identity of the vendor and having received an unsatisfactory reply, the conveyancer failed to act on that reply and/or to warn the buyer of the risks associated with the unacceptable response. Both conveyancers had to pay an equal part of the loss suffered by Mr Purrunsing, each being ordered to reconstitute the trust fund of £470,000.
Breach of warranty of authority
In Purrunsing, the seller’s conveyancer was also exposed to a breach of warranty of authority claim, as the firm asserted it acted for the registered proprietor of the property, when in fact it did not. If the seller’s conveyancer had been liable under a breach of warranty of authority claim, the seller’s conveyancer could have been liable to pay Mr Purrunsing a sum which was greater than the value of the trust fund, ie the purchase price, to take into account the increase in value of the property over the three and half years between the time of the fraud and the date on which the claim was finally determined by the court. Mr Purrunsing did not, however, pursue a breach of warranty claim at the trial.
Law Commission consultation paper
The Land Registry is alert to the red flags identified above and often detects property frauds before registration takes place. However, sometimes fraudulent transactions are registered, and in those circumstances the buyer will have recourse to the Land Registry for compensation under the Land Registration Act 2002. The Land Registry will invariably look to pass on its liability to conveyancers who have acted unreasonably. However, given the rising incidents of fraud, the Land Registry is seeking to bolster the common law remedies available to it. In the recent Law Commission consultation paper on updating the Land Registration Act 2002, a number of changes are mooted which, if enshrined in legislation, will result in conveyancers being required to assume even more responsibility for fraudulent transactions. In particular, there are proposals to tighten up the declaration in Land Registry forms as to the genuineness of documents and to introduce new statutory duties of care, either in respect of the grant of deeds, or when it comes to verifying identity. Although the paper emphasises that the responsibility of the conveyancer would be to take reasonable steps to satisfy itself, these proposals represent a further move to make conveyancers responsible for detecting fraud and will enshrine in legislation the reasonable steps conveyancers are required to undertake to prevent fraud.
Classic warning signs of identity fraud
• Property being sold is vacant, tenanted, not charged, owned by sole proprietor and/or of high value
• Seller is based overseas, has not been met and/or deals through third party/intermediary
• Seller is seeking to complete with great speed, especially without particular reason
• Irrational or unexplained instructions or actions on the part of a seller • Replies from seller to preliminary enquiries not giving specific information, and mistakes in the information provided
• Nothing to connect the seller with the property being sold – practitioners should make sure they correspond with the client at the address specified in office copy entries as well as any address given to them by the seller
• Completion monies to be paid to a third party’s or an overseas bank account • Photographic ID is very recent – in this case be vigilant and ask to see an older driving licence or an expired passport or birth certificate