Protecting yourself against vendor fraud

Never have conveyancing solicitors had it so bad. Competition and economic pressures have conspired to drive fees down to unrealistic levels and corners are sometimes cut, but lack of attention to detail can prove a costly false economy. Vendor fraud has tripped up practitioners but there are basic steps practitioners can take to protect themselves from expensive professional negligence claims and excess payments.

In recent years, a number of bogus firms and fake branches of genuine law firms have been posing as vendors' solicitors and making off with mortgage advances.

Another species of mortgage fraud is where an imposter poses as the registered proprietor of a property and convinces a legitimate law firm to act for him in his 'sale'. The legitimate firm acting for the purchaser is then at risk. While they are also a victim of the fraud, they become vulnerable to a claim for breach of trust in paying away mortgage monies.

On 26 March 2012, the SRA issued a warning notice in respect of bogus law firms and identity theft, which listed possible indicators that a firm/branch office is bogus. Only last Thursday (12 July) it circulated a notice about a fraudster posing as a legitimate law firm. Conveyancing solicitors need to be aware of the risk and be vigilant.

Practitioners can also avoid claims payments arising from the various types of vendor fraud, by conducting every conveyancing transaction by the book; this should then enable them to claim relief under section 61 of the Trustee Act 1925, in the event that breach of trust is established against them.

Firms relying on section 61 need to have acted honestly and reasonably. A good way for firms to demonstrate that they have acted 'reasonably' is to ensure that they have complied with all of the (sometimes lengthy) terms of their retainer with the relevant bank or building society. While seemingly obvious, many time-poor practitioners do not remind themselves of the fine details of their instructions as often as they should; points, such as the reporting of direct payments to the vendor, inevitably get missed and the prospect of a section 61 defence is lost.

Vendor fraud is something that every conveyancing solicitor needs to guard against. Where firms have paid over mortgage funds in breach of trust, the message of the judiciary is clear: they will only show mercy to those that have done things by the book.

Vendor fraud checklist

Here are some basic points to consider:

1. Ensure that your conveyancing staff have read the SRA warning notice in respect of bogus law firms and identity theft (available on the SRA website at www.sra.org.uk).

2. Use the SRA warning notice to compile a tick-box checklist of indicators that a firm is bogus. Ensure that it is completed on every purchase file before mortgage funds are released.

3. Check whether the vendor's solicitor is listed on the Law Society's website (www.lawsociety.org.uk).

4. Know the exact terms of your retainer and stick to them. Train staff to do likewise.

5. If acting for the same lender on several files, use a tick-box checklist of its general retainer terms on each ?purchase file.