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Keeping Watch: Mortgage Fraud

Mortgage fraud is common in many jurisdictions around the world.  Escalating prices of property serve as a strong incentive for fraudsters. A “successful” mortgage scam can leave parties with large losses and start disputes as to who should bear the blame for the loss. Conveyancers are generally almost never exempted from these disputes.  In fact, conveyancers may still find themselves caught in fraud scams even after carrying out the various checks.  Hence, apart from good conveyancing practices, conveyancers must also keep an eye out for suspicious offers or other irregularities that raises red flags.  Remember, if it sounds too good to be true, it probably is.

The case study below involves two Insured Practices ("IPs") who became victims of the same scam.  In both cases, the IPs were experienced conveyancers who carried out the necessary checks in conveyancing practice.  The cause of their misfortune?  Reliance on a scam artist/real-estate broker.

The salient facts:

Case 1

Insured Practice:  Messrs Olaf, Kristoff & Partners
Lawyer in Charge: Kristoff
Fraudster: John Doe (the introducer/despatch person/real estate broker)       





 


The Scam

John Doe previously introduced purchasers/ borrowers to Kristoff while he was working as a legal assistant at his previous firm.  This time, John introduced Kristoff to the Vendor and the Purchaser who required a solicitor to handle the sale and purchase as well as financing of a property.

Kristoff prepared the Sales and Purchase Agreement ("SPA") in line with the usual conveyancing practices and wrote to the developer to obtain their consent, as there was no separate document of title to the property.  The success of the scam was premised on Kristoff’s reliance on John Doe.  At no point in time did Kristoff deal directly with the Purchaser or the Developer.  In addition to that, Kristoff also relied on John Doe’s despatch service for delivery of all documents to the Developer and vice versa.  This gave the John Doe the opportunity to forge all the relevant documents to portray a genuine transaction.

Having received the relevant confirmation from the developer and all other supporting documents, Kristoff advised the bank to release the loan sum.  Kristoff only became aware of the scam when the developer later alerted him on the irregularities in the correspondence and by the bank when the purchaser had defaulted on the loan.

Case 2

Insured Practice: Messrs Elsa, Anna & Associate
Lawyer in Charge:  Elsa (one of the panel solicitors on the Bank of Arendelle)
Fraudster: John Doe (the introducer)         

The Scam

The same fraudster in Case 1 above was also responsible for the fraud in this case.  Knowing that Elsa was newly appointed to Bank of Arendelle’s panel, John Doe held himself out as a freelance real estate agent who had a good relationship with many of the bank’s officers.  He even strengthened his credibility by introducing many bank officers to Elsa.

Having gained her trust, John Doe perpetrated the scam using the same techniques as he did in Case 1.  Like Kristoff in Case 1, Elsa too fell into the trap of relying on John Doe’s despatch services in delivering and collecting all documents and letters.  Based on the forged documents, Elsa advised the bank to release the loan sums.  Unsurprisingly, the purchaser here too defaulted on the loan sum.

AVOID FRAUD!

1. Know Your Introducers And Clients

Fraud is almost, if not always predicated on misplaced trust.  While it is a common practice to rely on introductions for new businesses, it is important to know whom you are dealing with.  Once introductions are done, solicitors should deal with clients directly.  That way, you are able to verify the identity of your client directly and spot any potential red flags.

Use ­the 100-point identity checklist to guard against fraudulent dealings.

2. Do Not Ignore Red Flags!

The panel solicitor defending these two cases advised that while a solicitor’s retainer does not include a positive duty to detect and prevent fraud in the matters entrusted to him, anything suspicious or doubtful to a competent solicitor should put the solicitor on enquiry.  In Case 2, a close examination of the building contract for the bungalow would have revealed that the registered owner was not the said “Vendor”.  In fact, the offer to deliver documents on behalf of both the IPs is a red flag by itself! 

3. Do-It-Yourself

The major ingredient for the success of this fraud scheme was the total reliance on John Doe’s services to deliver and collect documents from the Developer’s office and even the Land Office..  When dealing with documents and letters, it is highly advisable to rely on your own personnel as opposed to an outside source.  Even then, the solicitor should exercise supervision over the handling of these documents!

Moreover, in both cases, whilst the solicitors may have relied on the introducer to carry out all the groundwork, the solicitor had done nothing independent to verify the authenticity of the transaction.

Apart from that, practice sending faxed copies of letters or documents to the intended recipient.  In that case, you are able to ensure that your documents reach the intended recipient.  Any conflicting replies should raise red flags.

More importantly, always deal with the client directly!