How to avoid falling victim to identity fraud

The issues in P&P Property Ltd v Owen White & Catlin LLP and another and Dreamvar (UK) Ltd v Mishcon de Reya (a firm) and another [2018] EWCA Civ 1082; [2018] EGLR 27 were quite clear: who should bear the victim’s loss when a fraudster purports to sell a property? Both P&P and Dreamvar were the victims of an intricate but not uncommon identify fraud. The cases arose from the same set of facts: ■ a fraudster posed as the owner of a registered property; ■ the fraudster instructed solicitors and agents to act for him on the sale of the property; ■ genuine purchasers were found; ■ the purchasers instructed their own solicitors; ■ contracts for the sale and purchase of the property were completed in accordance with the Law Society Code for Completion by Post (the Code); ■ the fraud was discovered after completion but before registration, the fraudster having already disappeared and made away with the proceeds of sale. For more background details of each case, see Allyson Colby’s legal note, “Stranger danger”. Breach of trust In Dreamvar, both Dreamvar’s own solicitor, Mishcon de Reya, and the fraudster’s solicitor, Mary Monson Solicitors, were held to be in breach of trust. In P&P, no claim was brought against P&P’s own solicitors, but the fraudster’s solicitor was also held to be in breach of trust. Breach of trust claims arise on the basis that the purchaser pays his conveyancer completion monies in preparation for completion. A trust relationship arises in this regard – the purchaser’s solicitors hold the completion monies on trust for their client and are to use the money solely for the purpose of completing the property transaction. Until the High Court decisions in P&P and Dreamvar, most practitioners were of the view that a further trust relationship also arose when the purchaser’s solicitors paid the completion monies to the vendor’s solicitors, as the vendor’s solicitors should equally be deemed to hold the completion monies on the same basis – ie solely for the purposes of completing the property transaction. Accordingly when, as in P&P and Dreamvar, a genuine completion does not take place (a fraud having been perpetrated), the purchaser’s and the vendor’s solicitors will be in breach of trust – both will have used the trust monies for a purpose other than completing the property transaction. However, in each of the first instance decisions in P&P and Dreamvar, Ben Patten QC successfully argued in the High Court that the vendors’ solicitors should not be liable for breach of trust on the basis that the Code, which had been adopted in respect of both transactions, intervened. Both firms of solicitors argued that the Code (at paragraph 10) placed on them an absolute obligation to pay away the completion monies to the fraudster on completion, and on this basis no implied trust relationship arose. The Court of Appeal has now overturned these earlier decisions – and determined that the Code does not intervene to absolve the vendors’ solicitor from being in breach of trust. Quite correctly, it determined that, absent a valid completion taking place, the vendors’ solicitors had no authority under the Code or otherwise to release the completion monies to the fraudster, and were accordingly held to be in breach of trust. While all of the defendant solicitors in P&P and Dreamvar sought relief from liability for breach of trust under section 61 of the Trustee Act 1925 (which can be sought from the court by trustees in breach where they have acted honestly and reasonably and they ought fairly to be excused), none were granted relief. The vendors’ solicitors in both P&P and Dreamvar were deemed to have failed to act reasonably, and their applications for relief failed on that basis. In Dreamvar, the purchaser’s own solicitors, Mishcon de Reya, also claimed relief and this application was also refused; while Mishcon de Reya had acted honestly and reasonably, the Court of Appeal held that (with or without insurance) it was better able to meet and absorb its client’s liability. It was also not irrelevant that Mishcon de Reya was far better placed to consider, and as far as possible achieve, greater protection for Dreamvar against the risk of fraud. Breach of undertaking  The Court of Appeal also held both of the vendors’ solicitors were in breach of undertaking. Paragraph 7 of the Code contains an undertaking on the part of a vendor’s solicitors, that they have the “seller’s authority to receive the purchase money on completion”. The Court of Appeal held that “seller” for these purposes means the real owner (and not the fraudster), thereby placing the vendors’ solicitors in breach of undertaking. Breach of warranty of authority In P&P, the Court of Appeal also held that the vendor’s solicitors had breached their warranty of authority, as they stated they acted for the “seller” when they did not, but the court held no reliance was placed on such statements (and thereby the vendor’s solicitor escaped the otherwise strict liability to pay the victim’s losses that would have arisen had the court determined there had been such reliance). No further appeal The P&P and Dreamvar judgment is now settled law; the cases are not being appealed to the Supreme Court (none of the parties having filed applications for permission to appeal within 28 days following judgment). It is, however, perhaps not surprising that there will be no further appeal – in these cases the vendors’ solicitors were deemed to have acted unreasonably, to have acted in breach of undertaking and to be in breach of trust; and on the facts there appeared little basis to appeal their resultant liabilities. While Mishcon de Reya, as the purchaser’s solicitors, may have mounted an appeal on the basis of the court’s refusal to grant relief from breach of trust, it ought to be able to pass on its liability under a contribution or breach of undertaking claim to the vendor’s solicitors, so little would be gained from bringing an appeal. Practical implications The cases do, however, highlight the obligations imposed on practitioners to be alert to fraudulent activity – not just identity fraud, but also other forms of fraud, including cyber fraud. The requirement for such diligence applies to the whole legal profession (not just conveyancers) as well as to agents, especially when handling client monies. The facts of these cases also highlight how such frauds, or the risk of such a fraud occurring, can be identified at an early stage in a transaction by practitioners acting diligently. To this end, while the Court of Appeal would not impose a duty of care as between a purchaser and a vendor’s solicitor (claims in negligence brought by P&P and Dreamvar were unsuccessful), the determination will invariably provide for a right of recovery for the victim of the identify fraud in circumstances where a claim arises due to a vendor’s solicitor’s failure to carry out and comply with its anti-money laundering (AML) and “know your client” obligations. The legal profession is now considering a number of ways to mitigate risks arising from such fraudulent transactions; however, the primary means to mitigate risk is to act diligently as this will ensure in the vast majority of cases that the fraud, or risk of fraud, is detected at an early stage in the transaction and prior to completion. Acting for a buyer? 1. Ask a seller’s solicitor to confirm that they have carried out all AML checks against the seller in accordance with all relevant regulations and that the results are satisfactory. 2. Be aware and vigilant throughout the transaction and look out for any signs that things may not be what they seem, eg has the buyer met the seller, is the age of the seller consistent with when the property was bought and are there inconsistencies in the seller’s replies to enquiries? If anything causes you concern, ask questions. 3. If the contract is signed by the seller’s solicitor, ask the solicitor expressly to confirm that they have the authority from the seller to sign on its behalf and make clear that the buyer will be relying on this confirmation. 4. Ask the seller’s solicitors to adopt the Law Society Code for Completion by Post, and, if they will not, then ensure you obtain appropriate undertakings in the form set out in paragraph 7 of the Code and for the redemption of any charges. 5. When preparing for completion, ensure before sending out the completion monies that you have an undertaking from the seller’s solicitor to hold completion monies to the buyer’s solicitor’s order, pending their release on formal completion over the telephone. 6. Before completing, ask the seller’s solicitor to confirm that they are holding the transfer and any other documentation for completion duly executed by the seller. 7. Consider whether the seller’s solicitor’s professional indemnity insurance would be sufficient to cover your client’s potential liabilities arising from the transaction. Acting for a seller? 1. Always do anti-money laundering (AML) checks thoroughly, not just as a box-ticking exercise: ■ ensure that any copy documents are properly certified and check out with certifier; and ■ ensure you have a tie-up between the address of the property being sold and the seller’s address – if the addresses differ, ask why and consider carefully the reasons given and whether they need additional confirmations. 2. Be particularly careful if you do not meet the seller face to face. 3. Be alert generally to suspicious circumstances, eg transactions needing to be done in a rush, arrangements changing without apparent reason, the seller seeming to know little about the property, and inconsistencies in replies to enquiries. 4. Think carefully before accepting instructions to sign a contract on behalf of a seller. 5. Do not adopt the Law Society Code for Completion by Post without thinking carefully as to whether you can give the undertakings implied. Ultimately, if conveyancing transactions are to proceed, the seller’s solicitors will need to give undertakings, either implied or express and, provided they have been diligent in their AML checks, this should not be a problem. 6. Do not send completion monies to anyone other than the seller (or the solicitor to the seller’s mortgagee), and think very carefully before sending monies outside the jurisdiction. Owen Talfan Davies and Jayne Elkins are partners at FieldFisher