Conveyancers: Protecting against property fraud
Fraudsters continue finding new ways to target conveyancing firms. By being aware of key red flags and undertaking rigorous due diligence, Lockton explains how firms can protect themselves from potential claims
Conveyancing firms are a prime target for property frauds, owing to the large volume of client monies held, along with long-term increases in property values. Thankfully, by being aware of key red flags and undertaking rigorous due diligence, firms can protect themselves from potential claims.
What is property fraud?
There are many types of property fraud, but scams will typically involve a fraudster hacking into a client’s email account to impersonate a third-party. The fraudster may pretend to be a buyer, seller, lender or conveyancer. In the case of Davisons Solicitors v Nationwide [2012] EWCA 1626, fraudsters even created a fictitious firm that obtained a branch address registered with the Law Society, before posing as acting for a seller.
Statistics suggest that property fraud is a growing threat. According to Lloyds Bank, conveyancing scam reports increased 29% in the second half of 2023, compared with the six months prior. Earlier this year, a case emerged of one solicitor who was duped into transferring more than £290,000 to a hacker, resulting in regulatory fines of £26,000.
During the course of any conveyancing transaction, there are various red flags that may indicate a potential fraud, including:
- Urgency to complete on the part of the seller
- Lack of a selling agent
- Sale of a (unencumbered) mortgage-free property, or cash purchase
- Outdated or very recent identification documents (driver’s license, passport, etc)
- Absence of available documents from the time of the initial purchase
- Lack of interest or concern in any problems identified with the title
- Absence of information around who acted on the initial purchase
- Alterations or inconsistencies in names, email addresses, or company information
Implications for conveyancers
Firms who fail to identify fraud may find themselves liable for lost client monies, and can suffer significant reputational damage. Where firms are found to have breached a relevant code of conduct, such as failing to carry out significant AML checks, they may incur regulatory fines. Earlier this year, one such firm was fined £20,000 for unwittingly enabling conveyancing fraud.
Even where systems and processes are in place to mitigate fraud, failure to follow these is likely to leave conveyancers responsible. In the well-known Court of Appeal case of P&P Property v Owen White and Catlin [2018] EWCA Civ 1082, the firm who ‘acted’ for the imposter seller was not able to obtain relief from their breach of trust due to their failure to follow their own due diligence. They did not complete the client ID form and took no notice of the fact that the fraudster had told them that he was working abroad.
Similarly, although software is available to help identify when a new or fraudulent email address is used, this does not help when clients have their emails hacked. These claims might be defendable, but only where a firm can point to clear warnings of fraud being sent at the outset of a transaction and repeated in email footers.
Even when the completion money arrives safely, it can only be paid away to the correct recipient in order to achieve a genuine completion. The Law Society Code for Completion by Post was updated in 2019, to make it clearer that the seller’s solicitor only gives undertakings where there’s a genuine sale. For a buyer and their legal team, the risk is reduced, but they are unlikely to escape responsibility if it transpires the seller’s solicitors are not insured, or have their insurance claim declined for dishonesty. In this scenario, the buyers’ solicitors may seek Section 61 Trustee Act 1925 relief from sanctions, which is to a large degree within the discretion of a court and so, in practice, is granted only in exceptional cases.
When acting on a mortgage or re-mortgage, there is often one firm acting for the lender and one for the borrower, which adds another layer of risk. If the borrower turns out to be a fraudster, the innocent owner of a property will have any fraudulent charge removed, leaving the lender unsecured and, inevitably, the mortgage will not be repaid. There are no concluded cases on the point, but it is certainly arguable that the lender’s legal team will have some liability in these circumstances given their access to the borrower, and a potential responsibility to identify them for their principal.
How conveyancers can protect against property fraud
To prevent and manage the risk of fraud, it’s essential to observe due diligence processes and be alert to potential threats throughout.
Key steps to follow include:
- Ensure client onboarding processes are robust and up to date — does the given reason for the sale seem legitimate?
- Keep your due diligence and ‘know your client’ processes up to date
- Ensure teams are fully trained on the systems and the importance of anti-fraud processes, and that those processes are followed rigorously
- When acting for a buyer, include both your client and the seller’s solicitors in your investigations
- Exercise extra caution at the point of completion — take stock before funds are paid away (potentially never to be seen again)
- Keep up to date with the latest fraud detection techniques, and balance the cost of any new technology against the potential impact of any claims
- Remember that if the transaction doesn’t feel quite right, it is worth consulting a senior colleague for guidance
- Consider a rigid policy of not accepting a change of client bank details once they have been given, the risk is too high.
Fraudsters are continuing to finding new ways to steal completion money. Nevertheless, the majority of claims we see could have been avoided if existing safeguards had been followed properly.
Contact us for more information, or visit our Solicitors page.
The information provided in this article is for general information purposes only and should not be construed as legal or professional advice. While every effort has been made to ensure the accuracy and relevance of the content, the authors and publishers make no warranties regarding its completeness of accuracy.
