Knowing your Client

Insights - 25/06/2018

Cathryn Pernstich looks at a recent case involving the sale of two properties by fraudulent sellers and the implications that has on solicitors and clients alike.

By now we should all be familiar with anti-money laundering procedures to be put in place before any business transaction or relationship takes place.  As solicitors we have a high duty of care and recent cases have re-enforced this – particularly in the world of property.

A short while ago the Court of Appeal held two separate firms of solicitors liable for not correctly identifying their client, relying on incorrect information and allowing the sales of the properties to take place.

In the first case, the purported owner of the property instructed agents to sell the property and to sell quickly – he was going through a divorce and wanted a quick sale.  Evidence of physical identity (fraudulent) was given, as was evidence of address (again fraudulent).  The evidence of address was different to that of the property being sold and shown on the physical identity.  The solicitor made no further attempts to verify details despite the discrepancy.

In the second case, the purported owner instructed solicitors in connection with a re-finance.  That instruction changed the transaction to a sale during the process.  The purported owner said he lived in Dubai and provided paperwork in support.  Relevant checks were done, but came back stating “referred”, i.e. do some further checks.  None were done.  The solicitor and the selling agent relied on these and fraud was committed.  The fraud came to light when the real owner by chance walked past the property (which was let out) to find renovation works being carried out.

Upon the application to register the change in ownership, HM Land Registry became suspicious – in the first case this was because of the differences in address.  In response to enquiries made it came to light that in both cases fraudulent sales had taken place.  By that point monies had changed hands and been sent around the world.  Understandably each of the buyers concerned sought action to redress the losses suffered.  The result was the firms of solicitors being held liable by a court.

Where, however, does that judgment leave a buyer and the solicitor acting for them?  Based on the reasoning of the judgment with several possibilities:

  • The selling solicitor giving a warranty to the buyer that the seller is who it says it is. This puts a huge burden on a selling solicitor, could this mean that no-one would want to act for a seller?
  • Should a buyer’s solicitor raise additional enquiries to confirm that the seller’s solicitor has complied with anti-money laundering procedures and insist that responsibility be extended to them? If the seller’s solicitor is reluctant to provide information does that imply fraud?  Can a selling solicitor give that information without breaching data protection rules?
  • Should the buyer carry out its own verification checks on the seller? If it does, what can it find out?  Can it be relied on?
  • Should a buyer take out an indemnity insurance policy against such fraud, if it can?

These cases make it abundantly clear that the questions that should be asked at the start of any transaction – be it with a new client or an existing one – are critically important.  Who are the parties?  Where is the money coming from?  If, therefore, you are asked to provide information to confirm your identity or source of funds, please do not be offended or resist the request.  We are, after all, trying to safeguard everyone’s interests.

If you would like to discuss a property related transaction, please feel free to contact Cathryn Pernstich, Senior Associate Solicitor within our Commercial Property team.  Cathryn is contactable by telephone on 01737 854521 or by email on [email protected]

 

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.