Circular No 169/2023
Dated 20 Jun 2023
Dated The Bar Council recently reviewed five notifications received by the Malaysian Bar Professional Indemnity Insurance (“PII”) Scheme Insurer relating to the misuse of sale and purchase agreements to disguise and obtain friendly loans. In these notifications, clients of law firms exploited the knowledge of lawyers in order to prepare sham documents. In these incidents, there were lawyers who were aware of the nature of the transactions and there were also those who were unsuspecting victims.
This I-RiskAlert is issued with the aim of informing Members of the Bar of such schemes and to warn Members who deliberately engage in preparing such sham documents.
Generally, in these cases, the lawyer is approached by a buyer to prepare a sale and purchase agreement (“SPA”). The buyer and seller sign the SPA, which may include unusual clauses with regard to the payment. A large amount of money is passed to the seller, usually through the lawyer. The property is then transferred to the buyer by the lawyer. Later on, the seller alleges that they had been led to believe that the SPA signed was for a friendly loan and that the property had been security for the friendly loan. The seller had not intended to sell the property. This eventually leads to the lawyer being sued for the return of the property, for conspiracy to commit fraud, negligence, breach of stakeholder duty, and etc.
Be wary of variations on the above narrative. Some cases involved multiple properties or shares being sold instead of just one property. Other variations of these cases may include the involvement of unrepresented persons, the insertion of unusual clauses in the SPA, the involvement of properties that were charged to the bank when the SPA was signed, and the involvement of forged official letters. In one of the cases, the buyer claimed to not have signed the SPA at all. In another, the buyer openly claimed to have given a friendly loan and that the property was for full and final satisfaction of the loan.
As lawyers, you should:
- Conduct a thorough background check and verify the capacity of the parties involved. Conduct a Customer Due Diligence (“CDD”) and if necessary, conduct an Enhanced CDD in accordance with section 16 of the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (“AMLA”). Also, you should screen their names against the sanctions list under section 66B of AMLA.
- Ensure that all parties involved understand who the lawyer represents in order to prevent any potential conflicts of interest or misunderstandings between the parties involved.
- Be cautious when dealing with unrepresented persons for the same reason, particularly when there are conflicting interests involved. Encourage them to seek their own legal representation or represent themselves, to avoid any perception of impropriety or conflict of interest. If that fails, seek to obtain a Letter of Acknowledgement as outlined in Circular No 007/2016 .
- Obtain a clear understanding of the transaction you are handling, including the purpose of the agreement and any potential risks associated with the deal. This is crucial to ensure that the transaction is legitimate.
- Be aware of the red flags that may indicate that a transaction is suspicious, such as the parties involved being unfamiliar with one another, any unusual terms of the agreement being used, the value of the property not tallying with the purchase price, a rushed time frame for the agreement, the client appearing to be under duress, and etc. In such cases, you are advised to lodge a Suspicious Transaction Report following the provisions for anti-money laundering and countering financing of terrorism (“AML/CFT”).
- Have a clear rationale for inserting uncommon terms and clauses into agreements. Ensure that all parties involved fully understand the implications of including these terms in the agreement.
- Provide clear explanations of legal terminology and concepts as well as obtain written proof that the parties involved understand the contract and any unusual terms that are included.
- Keep a written record of all communications with clients and any advice that has been given.
- Prioritise maintaining regular communication with parties involved in a transaction, tracking any and all payments, and following up on clients who fail to collect important documents.
- Stay organised and maintain open all lines of communication to proactively mitigate any potential risks and avoid any possible disputes or legal action.
However, the above is not an exhaustive list and lawyers are advised to seek further precautionary measures that may be more suitable and can be tailored to their own individual needs and practice.
Finally, for lawyers who are aware of these activities and may be tempted to engage in them, be warned that the risks far outweigh any potential benefits. A sham transaction contains elements of a criminal transaction. Any ensuing monetary transactions, including receiving legal fees, could be construed as illegal proceeds. Participating in such criminal activities may invite a fine and jail sentence under AMLA. Failure to recognise a sham transaction may be construed as failure to comply with the AML/CFT compliance programme and may lead to being fined and jailed. Engaging in such activities can lead to negligence lawsuits, conspiracy lawsuits, and the loss of one’s reputation. It may also result in one being struck off the Roll. Most importantly, any claims for any lawsuits made against these lawyers will not be covered by the PII Scheme. Embarking on such unethical endeavours will lead nowhere and it is only a matter of time before these lawyers are found out.
In conclusion, the Bar Council urges lawyers to exercise caution when dealing with sale and purchase agreements to avoid engaging in any activity that could be perceived as dishonest or unethical. By exercising caution, lawyers can uphold the dignity of the legal profession and maintain the trust and confidence of their clients.