Additional Enquiries: Asking the right questions
Although the professional duty to act in the best interests of the client is clear, making the right enquiries on behalf of the buyer may not always be straightforward.
There are standard types of documentation which must be obtained by the buyer’s solicitor. The real question is whether further enquiries should be made, extending beyond these typical paperwork requests. As well as gathering information on all relevant aspects of the property, should the buyer’s solicitor raise enquiries as to the identity of the seller?
Additional enquiries are in themselves a common element of practice, but a key issue – highlighted by growing cases of fraud within the conveyancing industry – concerns whether enquiries relating to identity should become a part of standard procedure.
With large amounts of money being transacted every day, conveyancing has become a growing target for fraudsters. Masquerading as the seller, the solicitor or both, criminals are continuously developing new ways of duping their victims and obtaining hundreds of thousands of pounds. Correctly identifying and validating correspondence and having both staff and clients adhere to your policies and procedures is a fundamental part of combatting this type of fraud.
The importance of gaining this identity information prior to exchange has been illustrated in recent conveyancing fraud cases. Being heard last year, they also highlight the uncertainty in the law and the confusion over where the responsibility lies.
Masquerading as a Wimbledon property owner, the criminal, in this case, transferred the proceeds of sale – worth £470,000 – to a third-party account in Dubai.
On the basis of failing to ensure that the seller’s solicitor had taken the relevant steps to check the seller was indeed entitled to sell, a claim was made against the buyer’s solicitor.
The buyer also made a claim against the sellers’ solicitors, for being in breach of trust when transferring the money to the fraudster. Whilst accepting the claim, the solicitors sought relief under s.61 of the Trustees Act.
The judge found that a number of indicators should have been enough for the transaction to be stopped.
As the buyer’s solicitors had also failed to inform the buyer of the response they had received to additional enquiries, they were found to have acted negligently. Having asked for confirmation of familiarity with the sellers and verification by ID, they received an ambiguous response. Although the standard identity check had been done, the buyer had not been informed that the checks indicated a different address to the one listed in the Land Registry title. In order to verify entitlement to sell the property, further questions should have been asked; the buyer had been vulnerable to a risk he was unaware of.
In this case, solicitors on both sides shared the responsibility.
In this similar case, £1.1 million was stolen by a fraudulent seller, following the ‘purchase’ of a London property.
As the money was no longer being held on trust, the seller’s solicitors were found to be entitled to pay their client, even if the transaction was fraudulent. They were therefore not found to have been in breach of trust.
Instead, the entire burden was carried by the buyer’s solicitors.
The judge believed that reasonable care had been taken by them and that they had also been reasonable for them to not suspect identity fraud. The judgement also highlighted that it was not standard practice to ask the seller’s solicitors for identity verification and that there had been no need to do so in this case.
The buyer’s solicitors stated that in return for the provision of valid documents, they had released the monies to the seller’s solicitors. As the transaction was not genuine, the courts decided that this was insufficient.
Given the need to remedy the situation and the insured status of the buyer’s solicitors, they were found to be liable. This is despite the judge being unable to find they had acted negligently.
Although the judge highlighted that it was reasonable not to have asked for verification of client identity, it is arguable that had this been pursued, the transaction would have been stopped.
However, the appropriateness of incorporating such queries has been put further into doubt by the numerous guides and protocols surrounding conveyancing. Initially designed to streamline the procedures used during a residential conveyancing transaction, the Conveyancing Protocol aimed to increase the standardisation of the process and reduce the time spent by conveyancers on negotiating contracts.
In order to attain the best level of experience for all parties, the Protocol is designed to be adopted by both sides of the transaction but can be used by just one.
Step 32 of the Protocol focusses on additional enquiries for solicitors on both sides of the house purchase. For the buyer’s solicitor, it takes a strong stance on the type of matters which should be brought to attention. It highlights that additional enquiries should be thoroughly considered before being submitted, only being raised if they concern matters relating to the “particular nature or location of the property or which the buyer has expressly requested.”
It goes on to advise that is should be the purchaser themselves who should ascertain any additional information, if they have the capability to do so. Should there be “indiscriminate use of ‘standard’ additional enquiries”, this may constitute a breach of the Protocol, and the seller’s solicitor is under no obligation to gain a response from the seller.
Although the Protocol aims to increase the efficiency of transactions and reduce the volume of additional enquiries, the recent cases have drawn attention to the acute scope of permitted queries.
With fraud becoming a growing challenge – especially within conveyancing – it raises the question as to whether further enquiries should be made prior to the exchange of contracts.
As well as encouraging certainty and improving the culture within a firm, could the standard introduction of additional enquiries ensure that money is always sent to the correct location?
These could include:
- Have you previously acted on behalf of the client?
- Have you taken the relevant ALM checks in relation to your client in accordance with the AML practice note, including adopting a risk-based approach and having viewed original documents?
- Has the identity of your client been independently verified electronically with a reputable search provider?
- Have you written to your client at the property address for service at HM Land Registry and received a response?
- Have you viewed any documents which only the true owner would be likely to possess?
The Law Society have confirmed that the best interests of the client are to take precedence over the Conveyancing Protocol, so although providing an effective standard to abide by, it can be outweighed by the nature of the transaction.
Do you think raising questions such as these would be beneficial for conveyancing transactions? Have you already implemented such enquiries within your firm? On the other hand, would you answer such questions if you were to receive them?