April 24, 2018

Risk of identity fraud changes the face of Conveyancing

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Risk of identity fraud changes the face of Conveyancing

The recent High Court decision of Dreamvar (UK) Limited v Mishcon has alerted the property and insurance markets to significant changes in property transactions. Solicitors, particularly those who act for purchasers in residential Conveyancing transactions, will need to read the judgment of the case carefully to understand the Court’s application of the Conveyancing Protocol & Law Society’s Code for Completion by post.

The facts of the case involved an imposter posing as a seller of a property to a small development company, Dreamvar UK Limited. Just before Dreamvar was registered as the owner of the property, the Land Registry discovered the fraud when carrying out their periodic checks. The fraudster and the money however, had disappeared. Dreamvar was unable to recover the purchase price paid of £1.1m.  Dreamvar therefore brought claims against Mishcon De Reya (Solicitors acting for them on the purchase). The basis of Dreamvar’s claim was that their solicitors were negligent in failing to identify features in the transaction that should have had alarm bells ringing as to the risk of fraud. The judge also held that the purchase monies were to be held on trust by the purchasers’ solicitors, until ‘genuine’ completion of the property had taken place. It was held that a genuine completion did not take place and therefore there was a breach of trust. 

The outcome of this decision has been commented on as being harsh and severe as the judge had accepted the fact that Mishcon De Reya had acted reasonably and honestly. Despite this, the firm were found liable. It is clear that the judge was keen to allocate liability arising out of such a fraudulent transaction and did so by weighing up which party would be best suited for absorbing the loss suffered by the purchaser victim. The judge was mindful that Mishcon De Reya had insurance in place to cover this type of claim, whereas failing to recover the money at all would be catastrophic for Dreamvar. 

The outcome of this case will be that solicitors acting on behalf of a purchaser in conveyancing transactions need to ensure that they obtain a legal undertaking from the sellers’ solicitors that they have taken reasonable steps to establish its client’s identity. From the facts of this case, the sellers’ solicitors had not met the fraudster and had simply accepted a driving licence and TV licence as forms of client I.D. The oddities on the driving licence were not followed up and a TV licence is not a source listed in the Law Society’s Anti-Money Laundering guidelines as acceptable verification. Whilst the sellers’ solicitors accepted that the documents provided were not adequate proof of identity and a face to face meeting should have been arranged, the sellers’ solicitors did not owe a duty of care to Dreamvar; that remained with their own solicitors.

If the sellers’ solicitors’ client due diligence procedure in the Dreamvar case were adequate then the fraud would never have happened.  Mishcon De Reya on the other hand had done nothing wrong – they simply relied on the sellers’ solicitors to perform its client due diligence obligations. The decision shows the real risks of such fraudulent transactions and highlights the fact that the parties in conveyancing transactions must remain vigilant as fraudsters are adopting more and more sophisticated methods.

Firms will now look to avoid the risk of identity fraud by developing risk assessment strategies; asking for evidence of the vendor’s solicitors client due diligence and the buyer carrying out limited checks on the vendor’s identity. Purchasers solicitors will need to ensure they obtain confirmation from the sellers’ solicitors that they have taken reasonable steps to verify their client’s identity in accordance with the Law Society’s Anti Money Laundering Guidance and that enhanced due diligence has been carried out where they have not met their client face-to-face.

Permission was granted in this case for an appeal to the Court of Appeal and the Law Society were to intervene because of the potentially substantial implications for property solicitors and how this may affect a firm’s insurance premiums in the future. This is because the High Court effectively ruled that insured solicitors were best placed to carry the financial burden of fraud, where they had been neither negligent or dishonest. This will affect market choice for those requiring legal conveyancing because firms will need to have sufficient insurance in place to absorb such costs associated with the risk of fraudulent transactions. Furthermore, solicitors acting for purchasers may need to change their retainers to cover themselves from potential liability, which could fall foul of provisions in Consumer Rights legislation. The outcome of this case will undoubtedly bring about massive changes to traditional conveyancing and its processes in England and Wales. 

Ashika Patel, Conveyancing Solicitor