Notice to the Profession
July 23, 2004
Law Society warning to real estate practitioners re: fraud
The Law Society of Upper Canada is aware of increasing instances of fraud in relation to mortgage loan transactions. These frauds usually involve either complicit or fraudulent purchasers, and/or real estate agents, mortgage brokers and unfortunately, in some cases, lawyers.
Typically, mortgage fraud involves the use of false identities and the artificial inflation of property values. Both these elements can be present in the same transaction.
Use of False Identity
The Law Society has identified two predominant ways false identity is used to perpetrate mortgage fraud:
- Identities of purchasers and mortgagors in real estate
transactions are created by appropriating the identity particulars
of real persons.
- Impostors pose as lawyers representing fictitious purchasers. These impostors appropriate and use the identities of lawyers in good standing with the Law Society to fraudulently secure mortgage loans on properties for fictitious purchasers. In these instances, the contact information provided to the vendor's lawyer is fake.
In one situation, a wholly fictitious law firm was fabricated together with contact information.
Lawyers are reminded that it is important to verify the identity of new clients by requesting and copying identity information, including photo identification, for their file.
If concerned about the identity of a lawyer acting in a transaction, lawyers should consider verifying that the address and phone number of that lawyer match the information on file with the Law Society. This can be done easily by searching through the Law Society's online member directory. Lawyers may also contact the Law Society at 416-947-3315 or toll-free at 1-800-668-7380, ext.3315.
Lawyers should be vigilant about protecting their personal information. Lawyers and their staff must safeguard their diskettes and pass phrases used to access the electronic registration of title documents system in accordance with subrules 5.01(7) and (8) of the Rules of Professional Conduct. You can review these subrules online.
Artificial Inflation of Property Values
Often in fraudulent mortgage transactions, the true market value of the property is artificially inflated to deceive the mortgage lender. This is commonly accomplished in two ways:
- "Flips" - In these cases there will be an immediate resale to a
complicit purchaser of the property at a substantially higher value
and only the resale particulars are disclosed to the mortgage
lender.
- "Misrepresentations of Purchase Price" - The documentation submitted to the lender for the purpose of obtaining financing indicates a higher purchase price than the actual purchase price. For example, the agreement of purchase and sale may indicate that a deposit was paid where in fact no deposit was paid, or the purchaser receives a substantial credit against the purchase price on closing for repairs/renovations, and the lender is not made aware of this.
The Law Society has developed reference materials and planned a continuing legal education (CLE) program to help lawyers involved in real estate transactions avoid becoming the tool or dupe of unscrupulous clients. The reference materials are available on the Law Society's Web site.
The Law Society is very concerned about the increasing incidence of lawyer involvement in fraudulent real estate transactions and has allocated additional resources to address this issue. The Law Society is also working with other institutions, agencies and authorities in an effort to identify ways to prevent, detect, and counteract fraudulent activity.
Lawyers with questions may contact the Law Society at
416-947-3315 or toll-free at 1-800-668-7380, ext.3315. LAWPRO has
also recently published a special report on fraud, which can be
accessed online at: www.lawpro.ca.
