Should borrowers' solicitors burden the risk for identity fraud?

Should borrowers' solicitors burden the risk for identity fraud?




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The recent judgement of the Scottish Court of Session in the Blemain Finance Limited and Cheshire Mortgage Corporation Limited cases Jason McGee-Abe reported on Tuesday may prompt lenders to reconsider what written confirmations they should obtain from the borrower’s solicitor with regard to the borrower’s identity. Solicitor Clive Whitfield-Jones, a Director at Jeffrey Green Russell Limited, explores some of the complexities of this type of mortgage fraud...

Their Scottish Lordships referred to the 2010 English case of Excel Securities v Masood, when considering the Blemain and Cheshire cases, stating that: “The way in which the fraudsters went about setting up their fraud was remarkably akin to that adopted by the fraudsters in the present cases e.g. they produced passports and utility bills to the solicitors to support their identity.”

Their Scottish Lordships quoted a number of passages from the judgement of Judge Hegarty QC in the Excel case, including the following extracts:

"Excel carries on business in the financial sector, specialising in making short-term commercial loans. It must be well aware of the commercial risks involved in making such loans, including the risk of fraud and, in particular, identity theft. When the impostor was introduced to it as a prospective client, it carried out certain checks in order to satisfy itself that he was the person whom he represented himself to be, that he lived at the address at which he claimed to be living and that he was indeed the registered proprietor of the property at 17 Richards Place. Having done so, it decided to proceed with the proposal and enter into a transaction with the impostor, albeit on the mistaken footing that his name was James Charles Whittaker Golding, the owner of the property in question.

[98] BM Solicitors, on the other hand, was a firm providing professional services and, as such, would not normally be expected to do more than carry out those services with reasonable professional skill and care...

[99] In the present case, BM Solicitors was almost certainly instructed by the self same impostor as had been dealing directly with Excel itself. Though the solicitors may not have had any specific knowledge of the inquiries made by Excel, they could reasonably have assumed that Excel would have carried out sufficient investigations to satisfy itself as to the identity and creditworthiness of the individual concerned. But they nonetheless carried out their own checks, which were, in fact, similar to those which had previously been carried out by Excel; and, after they had done so, like Excel, they were content to accept that their client was the person whom he represented himself to be".

Judge Hegarty QC concluded, after reviewing the legal authorities that:

"They strongly suggest that the court should not readily impose upon a person rendering professional services an absolute, unqualified obligation amounting, in effect, to a guarantee of his client's identity and title...

But the risks against which Excel is seeking to be protected in these proceedings are the commercial risks involved in lending to a person who may not be all that he claims to be. For my part, I can see no justification why risks of this kind should be transferred from the shoulders of a commercial concern such as Excel on to those of a professional firm such as BM Solicitors."

Their Scottish Lordships “endorsed those views entirely” and also stated: “The identity of a person is made up from a bundle of qualities or attributes. In particular there is nothing in principle in the law of contract to prevent an agent from guaranteeing to a third party that he has a principal who is the same person as appears on property registers, for example, as the owner of a specific property.” As Judge Hegarty observes at page 103 of his judgment however: "It is... almost inconceivable that an agent would agree to this".

It is in the lender’s interests to transfer as much of the risk of identity fraud as possible on to the shoulders of the borrower’s solicitor. One can see the courts, on policy grounds, being unwilling to let this transfer go too far, at least in the absence of very clear words. A prudent solicitor would not normally accept risks amounting to an absolute guarantee of identity. A professional indemnity insurer may refuse to insure a solicitor who takes such risks.

If a lender cannot establish absolutely the identity of the borrower, how is the solicitor expected to do so? Having said that, a borrower’s solicitor might provide confirmations that are helpful to a lender. One example is considering how long the solicitor has acted for the borrower. A solicitor is likely to be more certain of the identity of a longstanding client than a stranger who has just walked through the door.

I recommend all those with an interest in identity fraud to read the full judgement in the Blemain and Cheshire Mortgages cases. It’s available on www.bailii.org or I will email you a copy on request. The source of the extracts from the court judgements in this article is www.bailii.org and Crown Copyright is acknowledged.


 

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