Residential Property: reducing the fraud risk

The vast majority of conveyancing practitioners know that conveyancing tops the risk table for financial crime as far as the legal sector is concerned. Criminals are constantly looking to exploit weaknesses in the firms’ systems and controls; and they are experts at staying ahead of the game. Fraudsters are attracted to the big sums of money involved in conveyancing like bees to a honeypot and there’s no sign of a slowdown in their criminal attempts.

Although government views conveyancing transactions as a serious risk, it acknowledged in its 2017 National Risk Assessment – which considered the issue of money laundering and terrorist financing as significant threats to the UK’s economic security - that few solicitors are actually knowingly involved in illegal activity. The Solicitors Regulation Authority (SRA) in its Risk Outlook 2018/2019 found that residential conveyancing Suspicious Activity Reports rose by 66 per cent across the previous two years. Property solicitors need to take the threat seriously.

However, there’s a sting in the tail as far as the criminals are concerned: conveyancers and their firms are far more astute at recognising the initial warning signs of potential money laundering and fraud. So-called ‘Friday afternoon fraud’, for instance, has become so frequent that it is not uncommon for firms to include a footnote on all their correspondence warning clients about requests to send money to an alternative bank account.

If you haven’t yet taken that step, the following is included in emails and letters from a conveyancing firm the writer is using for a property purchase:

PLEASE NOTE OUR BANK ACCOUNT DETAILS WILL NOT CHANGE DURING THE COURSE OF THIS

TRANSACTION AND IF YOU ARE ASKED TO SEND TO AN ALTERNATIVE ACCOUNT PLEASE ADVISE US

IMMEDIATELY. WE WILL NOT ACCEPT RESPONSIBILITY IF YOU TRANSFER MONEY INTO AN INCORRECT

ACCOUNT.


Unfortunately, the circumstances where criminals hack into a solicitor’s email account and contact the client, purporting to be the solicitor requesting funds be transferred to another account, often at short notice before a completion, is on the rise. The SRA says in the first quarter of 2018, Friday afternoon fraud had risen to 71 per cent. The SRA’s 2019/2020 Risk Outlook is imminent and we will be looking at its findings with interest.

Guidance

Conveyancing solicitors and other conveyancers will therefore welcome new guidance and upcoming guidance on good practice and maintaining their integrity in practice in their efforts to minimise these risks. First, the Law Society has just published its updated Conveyancing Protocol 2019 which reminds conveyancers of the regulatory requirement to make clients aware of fraud risks and the methods for avoiding them.

Second, on 25 November 2019 the SRA’s ethics guidance on Acting with Integrity comes into effect. The guidance relates to the new Standards and Regulations (“shorter and more targeted”, says the SRA) which come into effect on the same day.

The guidance explains solicitors’ obligation to act with integrity in SRA Principle 5, a concept which is wider than actually acting dishonestly. It notes that the Court of Appeal has confirmed that although linked, ‘lack of integrity’ did not equate to dishonesty.

The guidance sets out a helpful illustration of a failure to protect clients from mortgage fraud. Two partners had been recruited by a sole principal without proper vetting, one of which committed fraud in a conveyancing transaction. The sole principal became aware of it but took no real steps to protect clients in other transactions. This, said the Solicitors Disciplinary Tribunal and the High Court, amounted to acting without integrity.

Giving judgment in the High Court, Morris J said: “…. actual knowledge or recklessness in the sense of being aware that the conduct posed a risk and consciously taking it, will be highly likely to give rise to a finding of lack of integrity. However, I accept the SRA's submission that it is wrong to define lack of integrity as requiring recklessness. Lack of integrity does not necessarily involve risk taking. So, for example, the solicitor who dips into the client account with the intention of putting the money back lacks integrity because a client account is sacrosanct regardless of the risk of the money not being repaid".

He made it very clear in the ruling that "lack of integrity" and "dishonesty" are not synonymous, even by the objective standards of reasonable people. Further examples illustrating lack of integrity in the absence of dishonesty include making a number of improper payments from client account; putting your own financial interests before those of your client; and recklessly misleading the court amounted to failing to act with integrity.

Ahead of the new rules and guidance coming into effect, practitioners must not rest on their laurels. The risk of fraud in conveyancing remains high (don’t assume cybercriminals take summer holidays) and solicitors play a large part in preventing it. The Law Society urges firms to mitigate the risks and solicitors must ensure they comply with the latest AML guidance. It helpfully highlights particular “red flags” in conveyancing that could signal the presence of ‘dirty money’.

  • rapid succession of transactions relating to the same property
  • use of cash or third-party intermediaries without adequate commercial explanation
  • use of overseas trusts or companies to conceal property ownership
  • unexpected early repayments, for example of a mortgage

Solicitors should also note that according to the National Risk Assessment, special attention should be given to transactions involving super-prime residential property in London and Edinburgh.

Mortgage fraud: a warning

Mortgage fraud is a particularly lucrative form of fraud sometimes catching conveyancers unawares, but practitioners should heed the Law Society’s warning that they can be liable even if unaware of the fraud (or did not actively participate in it). This is because the definition of fraud in the Fraud Act 2006 has been extended, as has the UK’s anti-money laundering regime in the UK and can catch solicitors who are unwitting third parties to fraud – even if they are not aware of it.

Note that the courts will assume a high level of knowledge and education on the part of solicitors and “will often be less willing to accept claims that you were unwittingly involved if you have not applied appropriate due diligence”.

A recent SDT ruling is a timely reminder to conveyancers to take great care in their dealings and disclosures. A solicitor was struck off for failing to disclose information to a lender following a conveyancing transaction bearing all the hallmarks of potential mortgage fraud. In a leasehold sale dating back to 2008, a highly experienced solicitor had acted in the purchase of the leasehold property but failed to advise his lender client, Barclays Bank, that a sub-sale was involved and that there had also been a prior transaction.

He admitted the allegations against him acknowledging he should have told Barclays about the true structure of the transaction, but he said in mitigation that he genuinely believed the bank knew of the structure of the transaction. He also said he was under pressure to progress the matter. The SDT found his conduct so serious that he should be struck off the roll.

Make no mistake that residential conveyancing will never be free from the risks of fraud and financial crime. However, conveyancers can significantly minimise the fallout if they act with integrity; remain alert to the red flags indicative of potential fraud and money laundering; comply with their regulatory requirements; and follow the formal guidance from the SRA and the Law Society.

 

 

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