Fraudulent “Fake” Prime London Buyers, But Has The Industry Changed?

Last year saw the conveyancing industry rocked by two parallel fraud cases the results of which at the time were said to herald ‘enormous challenges’ for solicitors handling house sales as well as the wider property industry including agents, developers and lenders.

The Dreamvar vs Mishcon De Reya and P&P Property vs OWC and Winkworth cases were complicated legal wrangles involving relatively simple frauds in both cases.

Criminals posed as the owners of empty or rented prime properties in central London and instructed solicitors and estate agents to ‘sell’ their homes quickly. Developers (Dreamvar and P&P Property) were persuaded to buy the homes by a low price and financial rewards to complete quickly.

Once the funds had been transferred, the overseas-based fake sellers disappeared, in both cases before any Land Registry work had begun. During the subsequent litigation started by Dreamvar and P&P Property to recover the millions they had lost, it transpired that the fake vendors’ solicitors had not completed the necessary identity checks thoroughly enough.

At a glance

  • Last year’s landmark Dreamvar and P&P Property fraud cases have had unexpected implications for homes ales in London and beyond.
  • Many conveyancers are of the view that it is estate agents who need to tighten up their procedures.
  • The expected exit of smaller conveyancers from the property market that many though would follow the cases has not taken place.

The two cases, which were eventually concluded in the Court of Appeal together, shocked many in the property world and opened a can of legal worms, exposing the commercial pressures that are brought to bear on estate agents, lawyers and buyers to turn a blind eye to potential fraud.

At the time, it was predicted that the backwash would price out smaller firms from the conveyancing market by jacking up premiums for fraud protection insurance.

Many also expected it to paralyse the prime London housing sales market as agents and conveyancers faced the possibility of reimbursing clients even if they had completed all the necessary ID checks.

But a year on, has much changed? DealMakerz decided to find out. One company unconnected to the two cases but which is at the centre of the London housing market is the property team at North London legal firm Osbornes Law, which is also involved heavily in personal injury and family law.

It says the most obvious output of the cases has been increased activity by regulators who have been busy over the past year. This includes the Home Office and Solicitors Regulation Authority, both of which have using the slack procedures highlighted by the case to hammer down on the property industry’s practices.

“Any sensible firm of conveyancers was already on top of a lot of the KYC or ‘know your client’ issues that arose as a result of these cases – you should know your client and where their money is coming from,” says Simon Nosworthy, Head of Property at Osbornes Law .

“That has always been a fundamental requirement. However, it is clear that the Solicitors Regulation Authority are really cracking down on this now and they are probably under pressure by law enforcement agencies to improve the situation.

“But particularly with the Mishcon case it seemed inherently unfair that the innocent law firm [the buyer’s conveyancer] was penalised, and not the firm that had acted for the fraudster, simply because they were in a better financial position to swallow the loss.”

Several of the solicitors Dealmakerz talk to say the increased use of insurance, and a hike in insurance costs, did briefly materialise but has now largely retreated.

Nosworthy suggests that it wasn’t a sensible solution anyway. If everyone had taken out insurance then few would work to stamp out fraud  because if one fraudulent attempt did slip through, everyone would be compensated by the insurance company.

But the cases have made conveyancers much more wary about talking to each other about client identity and other fraud-based checks – ironically the opposite outcome that might be hoped for.

This is because, if one side asks the other if they’ve completed identity checks, for example, and the other gives a response that is not then checked properly before the deal proceeds, the original questioner will be exposed. Several of the lawyers suggested that therefore it’s better not to ask questions at all.

Know your client

Another issue the cases have forced is the huge difference between the level of KYC diligence practiced by estate agents and the efforts made by conveyancers.

One of the lawyers Dealmakerz contacted about this would only speak about it anonymously, claiming that the government’s expectation that estate agents have the will or capability to match the KYC work of conveyancers is ‘not realistic’.

More worrying, the lawyer said it is not the small fry or medium size agents who are not up to par on fraud, but the large corporate agents ‘in town’.

In one case, a leading corporate estate agency was asked how many Suspicious Activity Reports it had filed over the past year as required under current Anti Money Laundering regulations, and the answer was ‘none’.

“The whole system wasn’t conceived well because estate agents won’t give a monkeys about all this as much as lawyers will, because they’ve got the SRA on their back,” the lawyer said.

Rob Hailstone, CEO of Bold Legal Group, says he would like to see a greater focus on solving the main issue that, despite the final adjudications in the cases, has yet to be cleared up.

And that is to establish “who should be held responsible when the purported seller of a property turns out to be a fraudster and the buyer ends up losing their money and not owning the property in question”, he says.

Prevention or cure?

“However, as with most things, prevention is better than cure and spotting a fraudster early in is much better than teams or lawyers and numerous judges taking months to decide, who, in the eyes of the law at least is at fault or should be held responsible.

“Everyone involved in buying and selling property these days should be alert to the possibility of a potential fraud taking place.”

Ian McKenzie, CEO of The Guild of Property Professionals, takes a more belts and braces approach, suggesting that the ‘red flags’ that point to a potentially fraudulent transaction are not that difficult to spot.

“There are a number of warning signs that all parties to a property transaction should keep an eye out for,” he says.

“For instance, does the owner or seller live abroad, is the property empty or tenanted, is it of high value, is it mortgage free, is a quick sale required, does the alleged owner have a lack of knowledge about the property, do all of the ID documents look and feel right or have some only been issued recently”.

“Whilst one of these ‘red flags’ on their own might not ring any warning bells, put two or more together and they might, and further investigation should take place.”

Jonathan Handford of estate agency brand Fine & Country lays the blame more squarely with conveyancers, who he says are too slow to register properties, giving fraudsters more breathing space to practice their scams, and making his work more difficult.

“In my nearly 20 years’ experience as an estate agent, I find it remarkable just how many properties aren’t registered with the land registry upon completion,” he says.

After talking to so many players in the home selling chain, it is clear that the Dreamvar vs Mishcon De Reya and P&P Property vs OWC and Winkworth cases have, rather than uniting everyone in an effort to prevent fraud, helped entrench views that it’s the other people’s fault.

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