Loss Prevention Tip #52
Warning re Private Mortgages in Real Estate
The following is an excerpt from a fraud warning recently posted to the AvoidAClaim website (provided through LAWPRO, a malpractice insurance carrier for Ontario lawyers), with a scenario that could also threaten Newfoundland and Labrador lawyers:
“In a hot real estate market fraudsters are even more motivated than usual – there is a lot of money to be had and lawyers are common targets. LAWPRO is seeing a significant increase in the number of real estate frauds involving private mortgages. The Toronto Police Service recently issued a news release about ongoing mortgage frauds targeting law firms.
The frauds we are seeing are incredibly sophisticated. In some cases, multiple fraudsters are in cahoots with each other participating as different parties to a transaction – i.e., the vendor, the buyer, the mortgage broker and/or the lender could be in on the fraud. Regardless of their role, the fraudsters will have very convincing fake versions of all the usual documentation that someone in their role would typically have.
On real estate deals involving private lenders, our experience is that the following circumstances should be considered red flags indicating a possible fraud. While every real estate deal is unique and may have unusual aspects to it, proceed with caution if you see transactions involving one or more of these red flags:
- Large numbers of referrals from a new source: After having someone approach you saying they were referred by a friend, that person then sends you a lot of business right away. Keep in mind, fraudsters will frequently take steps to make it appear they are coming from a trusted referral source, and they may also be familiar to you as they were a party in another transaction you were involved in.
- Many similar transactions over a short timeframe: Within a few weeks you are asked by the new referral source to do the same type of transaction repeatedly, after never having seen these types of transactions before. If anything, the value of the mortgages seem to grow with each transaction you work on.
- “Rush” transactions: A strong push to close from your client, and in particular the referral source, is a red flag that should not be ignored.
- No funds go through a law firm trust account: The parties insist on transferring the funds between themselves.
- All of the funds are transferred outside of Canada.
- It appears that the homeowner didn’t actually receive funds or that no funds were advanced at all.
- The lender doesn’t require post-dated cheques or pre-authorized payments or you have the sense that there is some informality to the deals, perhaps because the borrowers and lenders know each other.
- The mortgage agent or broker isn’t licensed.
- The client does not want title insurance, despite the size of the loan: This is a strong indication of a fraud because fraudsters are trying to avoid the scrutiny that a title insurer will raise.
- You receive or are instructed to write a “direction re funds” that has names you’ve never seen before with no apparent connection to the transaction or the property: If this happens shortly before closing it is almost certainly a fraud.
- The current mortgage is being used to pay off one or more private mortgages that were recently registered, often for large amounts: If a borrower goes to another lawyer to act on a new mortgage and a new lender is involved, this has all the earmarks of being a “fake mortgage” fraud where the first mortgage is a fiction designed to induce the next lender to advance real funds.
- ID and documents that don’t look quite right: With the pandemic it’s more likely that you will meet clients virtually and sign documents remotely. As noted above, fraudster clients will have government ID, property tax statements, corporate documents and everything else you would normally expect them to have. However, as these documents are fakes there may be something that doesn’t look quite right with them. Perhaps the signature line isn’t exactly where it would normally be. Perhaps the signature on the ID looks fine, but you notice that it isn’t exactly the same as the signature on the documents you’ve asked the client to sign.”
We wish to remind members, once again, of the Responsibilities of the Profession re: Anti Money Laundering , Part XVI – Client Identification and Verification Requirements and Part XV – Cash Transactions and Record Keeping Requirements of the Law Society Rules. Remember that you must always confirm a prospective client’s identification.
In order to avoid fraud in real estate transactions, perform all searches as thoroughly as possible, be vigilant and take your time – and beware of any aggressive urgency on behalf of the other parties to complete the transaction. Be cautious with all cheques received, especially if they exceed an agreed upon amount. If you decide to proceed with a transaction, be sure to go to the bank website to verify the branch transit number, address and phone number on the cheque. Wait until the bank confirms that the funds are legitimate and are safe to withdraw from the deposit. Where possible, consider using the Bank of Canada’s Lynx system (formerly the Large Value Transfer System (LVTS)), an electronic funds transfer system that allows large payments to be exchanged securely and immediately.