Law Society alert on fraud schemes
August 10, 2005
Lawyers engaged in real estate transactions may have something else to worry about: "Oklahoma Flips" (or "value fraud schemes") have reared their ugly head in BC.
The Law Society is actively looking into these schemes so as to alert BC lawyers. The schemes typically involve a fraudster who purchases real property and resells it to a complicit purchaser at an artificially inflated price. This positions the new purchaser to deceive a mortgage lender as to the true value of the property when obtaining a mortgage loan.
Watching out for fraudulent flips
Here is a typical scenario involving a flip of property for fraudulent purposes:
- The fraudster enters into a legitimate contract to buy a piece of real property from an innocent seller at market value. The agreement includes the right of the buyer to assign the contract. The fraudster retains a lawyer to carry out the transaction.
- Almost immediately, the fraudster enters into a second contract with a nominee buyer (acting in concert with the fraudster) at an inflated price.
- The nominee buyer takes the second contract to a lender to arrange mortgage financing.
- The lender approves a high-ratio mortgage on the inflated amount without independent valuation.
- The fraudster's lawyer is asked to act for both the lender and the nominee buyer.
- The lender is unaware of the first (legitimate) contract and the fact that the lawyer is acting for the fraudster as well as the lender and the nominee buyer.
- The lawyer is asked to complete the transaction by preparing documents so that the property transfers directly from the innocent seller to the nominee buyer (the "assignee") at the lower price set out in the first contract.
- The lender advances mortgage funds in excess of the amount required to buy the property under the first contract and the lawyer is directed to pay the surplus to the fraudster or to someone apparently unconnected to the transaction.
Other red flags of fraud
In addition to the warning signs described above, there are others:
- Often the nominee buyer signs a power of attorney in favour of the fraudster so that the nominee need not attend at the lawyer's office to sign documents.
- The nominee buyer appears to know or care little about the transaction and may be accompanied by a "handler" who understands the deal.
- The lawyer takes instructions from the fraudster, not the nominee buyer.
- A disbursement (often in the $5,000 to $7,000 range) is payable to the nominee or a seemingly unrelated party.
- Real estate commissions are rebated to the buyer or seller.
- The lawyer is paid higher than usual fees or even a bonus.
Lawyers are reminded of Chapter 4, Rule 6 of the Professional Conduct Handbook, which states that a lawyer must not engage in any activity the lawyer knows or ought to know assists in or encourages any dishonesty, crime or fraud.
BC real estate lawyers may wish to bring this notice to the attention of their conveyancing staff. Fraudulent schemes have become of great concern in Ontario, and the Law Society of Upper Canada has devoted significant resources to the investigation of complaints about lawyers being involved in these schemes. For more information on real estate frauds and how law firms can detect and avoid them, see:
Law Society of Upper Canada reference materials on fighting fraud:
A 2004 issue of Law Pro Magazine: