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Beware the straw buyer

With a bubbling housing market in major metropolitan centres across Canada, residential real estate lawyers are on the front lines in the battle against mortgage fraudsters.

By Michael Rappaport, National Magazine

When an organized crime syndicate in Vancouver attempted to pass a fraudulent mortgage through Ron Usher, they chose the wrong real estate lawyer to try to dupe. Usher, a lawyer at Bell Alliance Lawyers & Notaries Public in Vancouver, had been a staff lawyer at the Law Society of British Columbia for eight years, where he focused on real estate and technology matters and frequently lectured on fraud awareness.

“It was a classic imposter and straw buyer fraud,” Usher says. Usher says that he received a call in May 2008 from a man asking him to act for the sale of his father’s home. Another man had been recruited to pose as the father and assume the identity of the homeowner. The syndicate also paid a straw buyer (a phony purchaser) to go along with the fake transaction.

The fraudsters might have pulled off the scam against a less seasoned real estate lawyer. But alarm bells were ringing in Usher’s head.

On the phone, the first man appeared evasive and Usher noted that the call display didn’t match his name. He had found Usher’s firm online so there was no known referral source. When the vendor posing as the father arrived at Usher’s office, Usher checked his ID, which appeared brand new. There were no encumbrances on title. The vendor told Usher that he had received a $665,000 offer on his East Vancouver home and a $66,500 deposit. He instructed Usher that the deposit money from the purchaser was to change hands directly and the money was to be paid to a B.C. numbered company. No realtors were involved in the sale.

None of these factors alone would have necessarily made Usher wary. But taken together? As a vigilant and experienced real estate lawyer, Usher says he follows the motto “trust but verify.”

Acting on his suspicions, Usher checked the address of the property, looked up the phone number and dialled it. Needless to say, the true owner was shocked to learn that his home was for sale. That’s when Usher contacted the police.

On May 27, 2008, a middle-aged man with horn-rimmed glasses and dressed in an ill-fitting blue suit — which appeared as if it had been purchased solely for the occasion — arrived in Usher’s office preparing to sign closing papers.

Unbeknownst to the impostor, the transaction was being recorded by a hidden surveillance camera and the articling student seated beside him was actually an undercover police officer with the Vancouver Police Department’s financial crimes section. As soon as the impostor signed the closing papers, the police slapped handcuffs on him and escorted him out of Usher’s office.

Fraud claims spike

Real estate related fraud remains a concern which lawyer professional indemnifiers and law societies across Canada continue to monitor. Real estate claims involving fraud have trended upward in Ontario over the last decade, according to Dan Pinnington, director of practicePRO at the Lawyers’ Professional Indemnity Company (LawPRO), the lawyers’ liability insurer for the province. Pinnington noted that LawPRO has seen on average 50 real estate fraud related claims each year, reaching a high point of $3.5-million in 2007.

The type of mortgage fraud that the Vancouver crime syndicate attempted to pass through Usher is known as “identify fraud,” whereby a fraudster impersonates the registered owner of a property and transfers it to him/herself or a co-conspirator. The fraudulent transfer is used to obtain a mortgage for the value of the property, which is defaulted upon in due course.

Also widespread is “value fraud,” whereby the actual value of the property is artificially inflated by the fraudster — often through one or more flips to fictitious purchasers — in order to obtain an inflated mortgage which is subsequently defaulted upon. Sidney Troister, a senior partner in the commercial real estate group at Torkin Manes Barristers and Solicitors says that value frauds are harder to pull off, since lenders insist on examining the transaction history of a property and if they notice an inordinate increase in the purchase price, lenders will apply greater scrutiny.

Troister also says that title frauds, whereby fraudsters steal title to a property, are no longer a concern, at least in provinces such as Ontario and British Columbia, thanks to legislative amendments to land title acts to address title fraud and the protection that title insurance offers against real estate fraud.

“The irony is that real estate lawyers were up in arms against title insurance 10, 15 years ago. Today, no one [in Ontario] is willing to do a deal without it,” Troister says.

In most cases of mortgage frauds, the lender, usually the bank, is left to bear the loss. However, occasionally the lender will attempt to allege negligence against the real estate lawyer for not performing the proper due diligence.

Pinnington says LawPRO has worked hard to alert lawyers about frauds as quickly as possible since they are on the front lines. “Our first major efforts in this regard date back to 2004, when several issues of LawPRO Magazine featured information on the growing prevalence of real estate fraud and tips on how to spot fraud and fraudsters,” Pinnington says. “More recently, we’ve broadcast e-mail alerts to lawyers alerting them to fraud scams as they were unfolding, based on information lawyers were providing to us.”

In 2005, the Law Society of Upper Canada’s (LSUC) real estate working group released a report naming several key factors behind the rise in mortgage fraud — among them the fact that potential buyers need not meet lenders in person, easier access to information about properties and homeowners, increased competition within the mortgage industry — all of which tempt parties to skirt proper due diligence before closing deals.

Malcolm Heins, the chief executive officer of LSUC says that the law society has taken steps to combat mortgage fraud in Ontario since the report was issued. In particular, Heins says that the “two-lawyer rule,” effective April 7, 2008, whereby both the vendor and buyer in a transfer of real property must each be represented by separate lawyers and the “new rules on client identification,” effective October 31, 2008, have led to a slight dip in mortgage related frauds since frauds spiked in 2007. All Canadian law societies have agreed to adopt similar rules in an effort to fight fraud.

In the end, however, the best remedy against mortgage fraud is, as Francis Bacon might say, to find out more, and not keep suspicions in smother. Usher cautions that he has encountered several other real estate lawyers who were hoodwinked by similar mortgage frauds, despite having had bad vibes about a client, because they did not act on their suspicions.

“You have to trust your Spidey-sense,” he says.