Real Estate: Value, identity and other frauds

Here is a typical scenario involving a flip of property for fraudulent purposes:  

• The fraudster enters into a legitimate contract to buy real property from an innocent seller at market value. The agreement includes the right of the buyer to assign the contract. The fraudster retains a lawyer to carry out the transaction.
• Almost immediately, the fraudster enters into a second contract with a nominee buyer (acting in concert with, or as a dupe of, the fraudster) at an inflated price.
• The nominee buyer takes the second contract to a lender to arrange mortgage financing.
• The lender approves a high-ratio mortgage on the inflated amount without independent valuation.
• The fraudster’s lawyer is asked to act for both the lender and the nominee buyer.
• The lender is unaware of the first (legitimate) contract and the fact that the lawyer is acting for the fraudster as well as the lender and the nominee buyer.
• The lawyer is asked to complete the transaction by preparing documents so that the property transfers directly from the innocent seller to the nominee buyer (the “assignee”) at the lower price set out in the first contract.
• The lender advances mortgage funds in excess of the amount required to buy the property under the first contract and the lawyer is directed to pay the surplus to the fraudster or to someone apparently unconnected to the transaction.
• In addition to the warning signs described above, there are others:
  • Often the nominee buyer signs a power of attorney in favour of the fraudster so that the nominee need not attend at the lawyer’s office to sign documents.
  • The nominee buyer appears to know or care little about the transaction and may be accompanied by a “handler” who understands the deal.
  • The lawyer takes instructions from the fraudster, not the nominee buyer.
  • A disbursement (often in the $5,000 to $7,000 range) is payable to the nominee or a seemingly unrelated party.
  • The deposit is payable directly to the vendor, not to a real estate agent or lawyer.
  • Real estate commissions are rebated to the buyer or seller.
  • There is no real estate agent involved in the transaction.
  • The lawyer is paid higher than usual fees or even a bonus.
  • The client is a new client and promises to refer more transactions to the lawyer.
  • All of the funds required to close the transaction come from an institutional lender.

Review the common characteristics of value frauds with your conveyancing staff. Direct them to advise you if they notice that a transaction has more than a couple of the characteristics.

Instruct any staff conducting Land Title Office searches to order, if appropriate, searches that show all of the cancelled charges, not just the current charges. Such searches will disclose a rapid turnover of mortgages. If suspisions are raised, consider doing historical searches to see if the property has been flipped at higher prices or mortgaged repeatedly.

Although “flips” are relatively common in any active real estate market, be particularly careful whenever you encounter one. If the seller under the Contract of Purchase and Sale is not the same as the registered owner on title, ask your purchaser client questions to get a sense of whether the transaction is legitimate.

Obtain and keep a photocopy of picture identification of buyers / borrowers to protect yourself from potential negligence claims. Simply recording the driver’s licence number is probably not sufficient protection. If you are receiving instructions from anyone other than the buyer / borrower, it is prudent to obtain a copy of that individual’s identification as well.

If a transaction involves the use of a power of attorney, consider obtaining the lender’s consent to accepting mortgage security signed pursuant to a power of attorney.

If a large percentage of the mortgage proceeds are to be paid out to a borrower directly, or to parties other than the existing mortgagee or seller, make further inquiries.

Carefully review any directions you receive to determine if individuals or entities apparently unrelated to the transaction (other than a recognized creditor) are to receive significant amounts from the mortgage proceeds. Is the lender aware of how the proceeds are being disbursed? Has it directed you to pay the money to third-party creditors?

If presented with any circumstances that just do not pass the “smell test,” insist on the evidence required to put you at ease.

In these scams, the lawyer does not know the borrower or seller personally. Some of the common characteristics may include:

• The borrower is not the registered owner of the property, but is relying on a power of attorney to borrow funds.
• Some discrepancy exists between the identification produced and the name of the owner as shown on title. The name on the identification produced may be close, but not identical to the registered owner’s name, or the name may be identical but the address or occupation differ.
• You are asked to contact the client exclusively by cell phone, or send documents or proceeds to the client at an address that is different than that on title or, if the borrower is a company, an address that is different than that shown on the corporate search.
• According to transfer documents that appear validly witnessed, the client recently used a different lawyer or notary to complete the purchase. For some reason, the client is now retaining you rather than simply returning to that lawyer or notary to complete this transaction.
• The client has a seemingly plausible and innocent explanation as to why she is unable to produce photo identification.
• The client is a new client and promises to refer more transactions to the lawyer.
• The client is already known to you, but only as a client of another lawyer in the firm. The client wants you to complete the deal on the basis that, although his identification is unavailable (again for some plausible reason), formal identification isn’t necessary as you know him.
• The borrower has not placed fire insurance on the house, or asks you to obtain a waiver of the fire insurance requirement.
• The transaction must be completed in a hurry.
• Where property is jointly owned, two individuals attend, but only one has satisfactory identification. The other individual has some reasonable explanation for only having non-picture identification.
• One of the owners of a property held in joint tenancy comes to you alone, and asks you to sever the joint tenancy and place the mortgage against that owner’s half interest.

Don’t be lulled into complacency by the fact that a fraudster is putting up money. If a fraudster thinks that the potential return is high enough, he or she may gamble putting up their own money as a deposit or retainer.

The following is an excerpt from the Identity fraud alert published June 10, 2008 and updated June 23, 2008. 

The Lawyers Indemnity Fund has become aware that another variation of identity fraud has surfaced in BC.  Real estate practitioners are at risk.

As with other identity scams, the fraud involves impersonators. In this particular ruse, you are contacted by a son asking you to act on behalf of his father on a sale. The sale, done by way of a private contract (no realtor), is of clear title property. A large down payment has already been paid to the seller. You do not know the son or the father. The son tells you that the sale proceeds are to be made payable to a corporate third party, not his father. You meet with the father to satisfy yourself that undue influence is not at play. You ask the father for identification, and he produces a BC driver's licence and SIN card in the name of the owner registered on title. The father instructs you to pay the funds to the corporate third party, with a plausible explanation. The purchaser, who is part of the fraud, has secured mortgage financing to complete the transfer. On closing, sale proceeds are delivered by the purchaser's notary or lawyer. No undertakings are required from you as title to the property is clear. The true owner later discovers that the property has been transferred and is encumbered by a new mortgage. The driver's licence and SIN card were fakes and the purported purchaser, son and father — all impersonators — have disappeared.

Note:  We updated this report in 2010, advising that the rogues that prompted that notice were back in business.

The following is an excerpt from Identity fraud – Alberta loan on Alberta land and reported through Practice Watch (p. 16), Benchers’ Bulletin, 2012 No. 4 Winter

A recent real estate mortgage identity fraud in Alberta had a BC component, and we bring it to your attention in case it comes your way. Three lawyers were involved, two legitimate Alberta lawyers and one fake BC lawyer. Below is generally what happened:

• Fraudsters pretending to be the principals of a company posed as the true owners of a piece of Alberta commercial real estate. The players, a “husband and wife” and their “son,” were represented by an Alberta lawyer.
• The fraudsters made arrangements for a $3 million commercial loan from a legitimate mortgage company operating in western Canada. The lender was represented by Alberta counsel.
• The lender required a $20,000 good faith deposit from the borrower (the fraudsters’ fake company) to conduct due diligence.
• The fraudsters provided the $20,000 to the lender and also provided a fake company minute book and personal guarantees.
• The son met with the Alberta lawyer, and claimed that his mother and father were in BC.
• The parents’ identity was to be verified in BC by a person the fraudsters claimed was a BC lawyer; however, it so happened that there was a legitimate BC lawyer with the same name.
• The fraudsters asked the Alberta lawyer to wire the loan funds to Mexico instead of BC where they lived (a sudden change in plans that raised suspicion).
• The Alberta lawyers did some crosschecking and discovered that the contact details for the fake BC lawyer did not match with the legitimate BC lawyer. The legitimate BC lawyer was unaware that his name was being used.
• The fraudsters lost their $20,000 deposit. The legitimate law firms only lost their time.

Insist on picture identification (unless you are certain of the client’s identity through your own personal knowledge). If there is more than one client, insist that each produce separate photo identification. You may want to do the “drop test”, as a real driver’s license will produce a “tinny” sound when dropped on a hard surface. Avoid making accommodations requested by the client that result in variations to your standard procedure for checking identity. Keep a photocopy of any picture identification that you take in the file, and ensure that it is legible. As noted, simply recording the driver’s licence number is probably not sufficient.

If presented with any circumstances that do not pass the "smell test" — including, in some situations, a request to deliver purchase proceeds to a third party or a large down payment — insist on the evidence required to put you at ease. And appreciate that some circumstances might only be indicative of fraud when considered in the full context of the transaction (eg. new client; clear title property; private contract). Unless you are certain of the client's identity through your own personal knowledge, reduce the risk of being drawn into litigation with further investigation to help you determine if the matter is genuine. For instance:

• Find out how and why the client chose you to act, and check out the information you’re provided.
• Ask for more identification that may be difficult to forge or fake, such as a passport.
• Ask for a library or some other membership card that the real person would likely carry.
• Seek proof that the downpayment was, in fact, paid to the seller.
• Conduct a reverse look-up search using the information your client provides and the address registered on title to see if everything matches. Call the telephone number your search produces and see if the owner is, in fact, your client. Ask more questions if no number is produced.
• Conduct a BC Online search of the corporate third party, and check that your client's answers to questions you pose fit with the information revealed by the search.

If you have any concerns, advise the lender to satisfy itself as to the borrower’s identity and give you instructions to proceed or not.

Be aware that there may be a heightened sense of urgency on the part of a fraudster, who wants to complete the fraud before it’s discovered.  Be alert to any sudden change in plans to send funds to a different person or location.

If the registered owner is accompanied by an individual who is to benefit from the loan, consider meeting separately with the registered owner to satisfy yourself as to that person’s capacity and instructions.

Read mortgage instructions carefully, as lenders may have requirements in terms of disclosure of assignments (flips), as well as client identification.

Be careful as to the nature and extent of any assurances sought by the lender. Lawyers are increasingly being asked to go beyond the officer certifications contained in ss. 41 to 48 of the Land Title Act. Under those provisions, in taking someone’s signature, you are not warranting that the individual is in fact the person named in the instrument. You are simply certifying that you believe that the person signing is who they say they are.

If the borrower is a company, avoid the possibility of the fraudster impersonating the authorized signatory of the company through these further steps:

• Obtain your own updated copy of the corporate search. Do not rely on the client’s old search;
• Follow the same steps with respect to obtaining picture identification for individuals signing on behalf of corporations that you would for individuals signing on their own behalf;
• In any solicitor’s opinion you are asked to provide, always include an assumption as to the genuineness of the signatures and material that you have relied upon, and a qualification of your opinion to that extent;
• Satisfy yourself that the individual signing on behalf of the corporation is authorized to do so, and that the requirements for executing a document on behalf of a company are met, particularly the requirement for multiple signing officers as provided in the by-laws of the company.

Corporate identity fraud can also involve a fraudster pretending to be the principal of a fake company (see Alberta notice above).  Appreciate that fraudsters may create increasingly sophisticated documents to make a fraud seem real — in that case, a company minute book.

Here is what occurred. A new lender was prepared to loan the purported owner money as long as there was sufficient equity in the property. In one transaction, the purported owner provided the existing mortgagee's payout statement. In another, the information statement. Both statements appeared to be genuine bank documents and showed significantly less outstanding than was actually owed. Both were relied on in advancing funds. And in both, the lender was left without the expected security for the loan.

Lawyers can help protect their clients and themselves from the risk of forgery through prudent practice. Insist on receiving statements directly from the lender who holds the existing mortgage. Do not accept statements provided by or through the borrower. In addition, if you act for the borrower, word your undertaking carefully to ensure that it deals only with matters within your control. For instance, unless you have a registerable discharge in hand, avoid simply undertaking to provide this document as it is one that only the lender can provide.

And protect yourself from becoming the victim of fraud by an employee. For example, a scheming employee might actually retain you on a loan transaction and then use that transaction as a means to access funds. If a fraud involves a lawyer's employee, the lawyer's professional liability indemnification policy will not cover any losses suffered, or liabilities to which the lawyer is exposed.