Paragon: Landmark fraud case send shockwaves through the conveyancing world
The conveyancing world has been left shaken by a recent High Court decision ordering city firm Mishcon de Reya to pay more than £1 million after its client Dreamvar (UK) was deceived into making a payment for the purchase of a property to a rogue tenant posing as the owner.
The case has led to widespread confusion and unease over the potential implications for property lawyers and their insurers. Conveyancing has always been seen as a high risk business by insurers, and if the decision stands on appeal, there are concerns that insurers will review whether they will keep residential conveyancing firms on their books or at the very least increase premium rates on conveyancing work.
A big surprise was that the court found against Mishcon, despite stating that the firm had not been negligent – it held there had been a breach of trust by Mishcon in relation to their purchaser client. This, on the face of it, seems to widen the risk exposure for conveyancing firms.
Dreamvar argued that Mishcon had been negligent in failing to obtain an undertaking from the vendor’s solicitors regarding the vendor’s identity and title to the property. This argument failed. However, the court found Mishcon to be in breach of trust, as they had paid the purchase price to the wrong person. It may be that the trust element was a vehicle to allow the judge “the only practical remedy” of allowing Dreamvar to be compensated by Mishcon’s insurers.
Although high profile, this is by no means an isolated case. Everyone involved in conveyancing will only be too aware of the ever increasing risk of falling victim to new fraud schemes.
In another High Court ruling last year, conveyancers on both sides of a transaction were found liable for a rogue vendor who committed fraud amounting to £470,000. The judge ruled that anti-money laundering regulations hadn’t been adequately complied with and no documentation linking the vendor to the property had been obtained.
A similar case will be heard at the Court of Appeal later this year where the buyer is claiming breach of warranty of authority and negligence against the solicitors and estate agents.
Regardless of the result of this and Mishcon’s forthcoming appeal, there is a need for extra vigilance in terms of verifying the identities of all the parties when acting for either a vendor or purchaser. While the courts are debating this conundrum and insurers are considering their position, property lawyers are advised to consider taking additional steps to mitigate potential risks:
1. Ensure that all fee earners follow sound client identification and verification procedures.
2. Have detailed procedures, known by all, for identifying high risk matters (e. g. disparities between the address being used for correspondence and the property address; back to back transactions).
3. Once a matter is deemed high risk, extra precautions should come into play (for example an additional layer of checks; referring the matter to the COLP/risk partner for a decision on whether and how to proceed).
4. Record all checks made on the file.
5. When acting for the purchaser, it is unlikely that the vendor’s solicitor will give a warranty that they vouch for the identity of their vendor client, given the risks to them of so doing. Practical advice therefore is to raise enquiries with the vendor’s solicitor to establish how and what processes were used to verify the vendor’s identity. Consider requesting evidence of the vendor’s ownership of the property (such as documentary evidence only the actual owner is should be in a position to provide).
6. If you do not receive satisfactory responses from the vendor’s solicitor, advise your purchaser client.
There are many who believe that our system of land registration has to shoulder at least some of the blame for the situation. They say that it is too easy for a fraudster to pose as the owner of property. There are calls for reform of the system, or at least modifications to make it more fraud-proof.
This does not help conveyancers at the moment to navigate these potentially treacherous waters. The best advice must be to make sure you are as well prepared as possible to minimise the risks.