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The Advisory: Volume 8, Issue 5, December 2010


Click here to view the PDF version of The Advisory

Risks Up Close

The risks are real. The schemes are sophisticated; the traps are devious.

This section of the Advisory discusses risk and identifies some of the warning signs. We’d also like to share with you steps the Law Society of Alberta is taking to assist lawyers in reducing risks and limiting their exposure.  

Warning Signs of Two Business Scams

By Kathy Whitburn, Manager, Complaints, Law Society of Alberta

1. Corporate Identity Theft

Scenario:

A corporation holds itself out to be the owner of a property (e.g. a commercial property) but, in fact, the corporation has been created to defraud the legitimate owner of the equity in the property. If there is a mortgage registered on title, a false discharge is registered and then the corporation sells the property or obtains a new mortgage.

Best practices:

  • do a corporate search to determine the names and addresses of the directors and officers, and their addresses and the addresses of the registered and records offices; 
  • get photo identification of the person purporting to have signing authority;
  • ask to see the appropriate corporation resolution giving that person signing authority

Flags:

  • the corporate minute book is not available;
  • the minute book is produced but annual returns are not current or there are some other irregularities;
  • the deal is rushed and;
  • the address of the person with signing authority is different than that listed with corporate registry.

2. Investment Schemes

Scenario:

A corporation seeks investments from various sources, promising high returns for short-term investments. The investors enter into a written agreement with the corporation which provides that the funds are immediately releaseable to the corporation. The investors are instructed to send the funds to a lawyer who is to hold the funds in trust. The lawyer is not retained by the investors and, upon receiving instructions from the corporate client, releases funds to the corporate client. When the deal goes sour, the investors see the lawyer as being liable. What the investors don’t understand is that the funds were being held in trust on behalf of the developer and not on behalf of the investors. The bottom line is that there is no reason for the lawyer to be holding the funds at all.

Best practice:

Advise the investors, in writing, that you are not acting on their behalf and that if you receive any investment funds from them, that you will not be holding the funds on their behalf but on behalf of your client, the corporation.

Four Types of Mortgage Fraud to Watch For

1. Fraud for shelter

The owners or potential owners “fudge” their mortgage application so that they can get a mortgage they can’t really afford. 

2. Oklahoma flip, the Bump or Value Fraud

A property is sold by legitimate vendor to a numbered company controlled by the fraudster. The property is flipped several times with a significant increase in the alleged property value each flip. No money changes hands. The property is then sold to a straw purchaser who obtains a mortgage for the inflated value, the property goes into foreclosure and the lender is left with an unpaid mortgage that is much greater than the actual value of the property. 

3. Identity Theft or Title Fraud

There are two kinds: (1) the legitimate owner retains title to a property that the fraudster has targeted. The fraudster obtains a mortgage with forged and false documents often with the assistance of a dishonest broker or bank employee; (2) the fraudster actually illegally transfers the property from the legitimate owner to someone else and that someone else gets a mortgage. Again, the true owner only finds out when the illegitimate mortgage goes into arrears. 

4. Rescue Fraud

The legitimate owners of a property are in financial difficulty and agree to sell their property to a fraudster’s numbered company for an inflated price. The fraudster promises to get a new mortgage and then transfer the property back in three to six months. The fraudster does get the new mortgage but the legitimate owners do not get anything more than a nominal amount from the net sale proceeds. They pay rent to the fraudster equal to the new mortgage payments. However, the fraudster does not make the mortgage payments and does not transfer the property back to the legitimate owners so new foreclosure proceedings are started and the original owners are eventually forced out of the property. 

Best Practices to Avoid Mortgage Fraud

  • Do your title searches. If the property was sold only days earlier or if you’re presented with a number of different purchase agreements where the price keeps escalating, do a historical search.
  • Obtain and keep client photo identification.
  • Ask the purchaser(s) questions like what they do for a living, why they decided to purchase this particular property, etc.
  • If there are multiple purchase contracts and the closing dates are out of sequence, ask why.
  • Ask about special or irregular credits to the purchaser. 

Practice Good Habits to Prevent Loss

By Lisa Sabo, Director, Insurance, Law Society of Alberta 

  • Know the new Client and Identification Verification Rules.
  • Confirm advice and instructions in writing.
  • Keep good notes of conversations with clients – a short memo to file can save the day when the client’s recollection of a conversation differs from the lawyers.
  • Retainer letters clarify what the lawyer will and will not do; as do non-engagement and disengagement letters.
  • Be cautious of third parties who are involved in the client’s transaction and are not independently represented — confirm in writing that you do not act for anyone but the client; recommend independent legal advice.
  • Resist the temptation to save the parties money in legal fees by simply papering the deal when the deal goes sour. One of the first places the parties look is to the lawyer for failing to properly advise them about the risk in the transaction.
  • Beware of the client who seeks to use your trust account as a bank account. Ask yourself; what professional services you are rendering? (See the new Client and ID Verification Rule).
  • Be wary of clients who are promising unrealistic returns on investments on funds deposited in the lawyer’s trust account. 

Remember that you are the lawyer. Don’t relax good practice habits because you have a longstanding relationship with a client. If a deal goes sideways, fingers almost always point to what the lawyer should have done or could have done better. 

Practice Tips for Trust Funds and Accounting Records

By Kathy Whitburn, Manager, Complaints, Law Society of Alberta 

Practice Tips – Receiving Trust Money

  • Know who money is coming from
  • Understand trust conditions on funds, attempt to get in writing
  • Deposit money daily
  • Consider getting funds certified
  • Be aware of money laundering laws and rules 

Paying Out Trust Money

  • Review ledger card before disbursing funds to ensure sufficient funds on hand
  • Ensure ledger cards are up to date
  • DO NOT PAY OUT unless certain funds have cleared yy Ensure trust conditions met before paying out
  • Ensure trust cheque fully completed before signing
  • Do not post-date trust cheques
  • Ensure trust cheques are maintained in a safe and secure location (lock & key)
  • Ensure account rendered before trust transfer

Accounting Records

  • Keep records organized
  • Label all books, records and boxes
  • Store records in bankers box
  • Keep cheques and bank statements together
  • Maintain ATM receipt slips with deposit books
  • Create a month-end checklist
  • Create a monthly reconciliation package
  • Organize bank statements and reconciliations by bank account
  • Colour code cheques (general vs. trust)
  • Maintain voided cheques
  • Get certified cheques back from bank
  • Maintain one ledger card per matter

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