Risk management conveyancing red flags - Unauthorised and/or premature payments of trust money.
35 of the 438 conveyancing claims (28%) registered by the AIIF in the first nine months of the 2011 insurance year arose out of unauthorised payments of trust money.
The issue of unauthorised payments of trust money is an extremely serious one. The courts have over the past few years been particularly unsympathetic towards practitioners who do not deal with funds held in trust with caution.
(For the SCA’s view on the duties of practitioners when dealing with trust money, see Hirschowitz Flionis v Bartlett and Another 2006(3) SA 575 SCA and Du Preez and Others v Zwiegers (2008 (4) SA 627 SCA).
Also see the judgment of Du Plessis J in Jaco Johan Roestof v Cliffe Dekker Hofmeyr Inc, Case No 34306/2010, North Gauteng High Court, which was handed down on 15 December 2011.
There are various reasons for this type of payment, inter alia, the conveyancer/secretary pays the proceeds of the sale, the deposit or purchase price or part thereof:
- to the incorrect party, after registration (sometimes because of fraud on the part of the payee);
- to the seller/developer/third party, before registration of transfer, without the written permission of the purchaser;
- to the seller/developer/third party, before registration of transfer, with the permission of the purchaser, but fails to properly advise the purchaser of the risks of doing so;
- to the seller/developer/third party, before registration of transfer, with the permission of the purchaser, but fails to ensure that the necessary protections for the purchaser are in place.
In this article, I look at examples of actual cases where this has allegedly occurred:
1. Payment to the incorrect party after registration as a result of fraud on the part of the payee.
This seems to be a growing trend. Please see the details of a recent matter which we have had to consider below (Case 1).
We have also very recently been informed by a well-known firm that their office was contacted by their client (the seller) who stated that she saw that her transaction was on prep in the Deeds Office and that she would like to change their banking details.
Fortunately the conveyancing secretary was sharp enough to realise that the voice was not that of the client. She requested the “client” to come into the offices with her identity document. This did not happen, as it was clearly a hoax.
The following week they received yet another call from a woman attempting to give telephonic instructions to change the banking details of another client. Fortunately there was excellent communication and risk management in this conveyancer’s office. They were fully prepared and did not fall prey to this attempted hoax either.
Case 1: The conveyancer received specific written instructions from the sellers of an immovable property, Mr and Mrs M, to pay the proceeds of the sale into the account of Mrs M at X bank.
On the day before registration, the insured received a telephone call purportedly from Mrs M, with instructions to make payment into her new account at Y bank. She undertook to send the new banking details to the conveyancer via e-mail. On the following day, he received the e-mail with the new banking details and the proceeds were thereafter paid into the new account with bank Y.
Several days later, the conveyancer was advised by the sellers that the money had not been received into the account at bank X. They were adamant that they had no accounts at Y bank and had not instructed him to pay into an account at Y bank. They alleged that neither the telephonic nor the e-mail instruction had come from them.
Lessons learned: In this particular case, the fraudster clearly had inside information about the transaction. The problem is that it is difficult to pinpoint how the information was obtained and by whom. It could have come from within the conveyancer’s practice or perhaps from the sellers themselves. There is also possible collusion on the part of an employee of Y bank.
Do you think that the conveyancer acted reasonably? Did he do all that he could to protect his own and his clients’ interests?
What might he, with the benefit of hindsight have done to prevent this fraud?
There are precautions that might have been taken, particularly if the conveyancer had been aware of the prevalence of scams such as this one:
- He could have insisted that the clients both come into his offices to sign written confirmation of the change in the payment instruction. (Unless he could personally verify the identity of both clients, he should also have insisted that they again produce their identity documents); and
- He could have insisted that Mrs M produce documentary proof relating to the new bank account; or
- If for some reason neither a) nor b) were possible, then at the very least, he should have verified the e-mail address from which the instruction was received and telephoned Mr M to ensure that he agreed with his wife’s instructions to change the banking details. (As an additional precaution, he could also have telephoned Mrs M to confirm that the initial call and instruction had indeed come from her).
It may seem overly cautious to suggest that both husband and wife need to verify the instruction. We have on numerous occasions had to deal with claims where one of the spouses gave instructions to the attorney contrary to the wishes of the other. There have been several cases where the husband has brought a woman pretending to be his wife, to sign documents in the attorney’s office. This is just one of the reasons why it is essential to properly “FICA” all clients.
One of the dangers of failing to obtain documentary proof of the new bank account is that, where an internet transfer is done, the bank will not compare the account number with the name of the account holder. If the account details are incorrect the error will not necessarily be picked up.
In some other matters in this first category:
Case 2: The conveyancer was instructed to attend to registration of the transfer of property from company O (represented by Mr P) to C cc.
The conveyancer had been provided with a resolution of O Company to the effect that Mr P should act on its behalf. The resolution specifically stated that Mr P’s authority was to be limited to the signature of the Deed of Transfer and that the execution of any other documents should receive prior approval from the director of the Company.
Registration was subsequently effected and the nett proceeds were paid into a bank account nominated by Mr P. Thereafter a certain Ms M telephoned the conveyancer’s practice enquiring why the proceeds of the sale had not been paid to the Company. The conveyancer had never before had contact with the Company or Ms M. He had taken all instructions from Mr P and had not been given the Company’s banking details.
Mr P could not be contacted thereafter.
Case 3: The conveyancer attended to a transfer. The purchase price was R470 000 and the purchaser obtained a bond of R550 000. The conveyancing secretary paid the surplus of R80 000 over to the seller with the balance of the proceeds of the sale, mistakenly believing that it was due to the seller.
Case 4: The conveyancer represented Mr W, the seller of an immovable property, as the transferring attorney. His firm also acted as the bond cancellation attorneys for A bank.
The seller alleges that the conveyancer wrongfully paid over to A bank, an additional amount in excess of the cancellation figures.
It appears that this additional amount was related to an overdraft in the name of a cc and had nothing to do with the transfer. The conveyancer’s secretary had requested and received revised cancellation figures from the bank and had failed to notice that these were related to a completely different account number.
2. Payment to the seller/developer/estate agent/third party, before registration of transfer, without the written permission of the purchaser.
Case 5: The conveyancer held a deposit of R500 000 in trust. The estate agent wished to be paid R400 000 as partial payment of his commission, prior to transfer.
Both seller and purchaser agreed to this. Thereafter the transaction was cancelled and the purchaser claimed the amount back from the conveyancer. There was no written agreement between the parties in this regard and the purchaser denied having agreed to the payment.
3. Payment to the seller/developer/estate agent/third party, before registration of transfer, with the permission of the purchaser, but failure to properly advise the purchaser of the risks of doing so.
Case 6: The seller and purchaser agreed that a certain portion of the purchaser’s deposit would be paid directly to the seller prior to registration. The purpose of this was to enable the seller to build himself some alternative accommodation on his son’s property, so that the purchaser could move into the property sooner. The seller received the payment and moved out. The purchasers moved in for a short period but changed their minds about the purchase before registration. They alleged that the agreement of sale was void because of the non-fulfilment of one of the suspensive conditions i.e. that their own property was to be sold.
The conveyancer had failed to warn the parties of the dangers inherent in their arrangement.
4. Payment to the seller/developer/third party, before registration of transfer, with the permission of the purchaser, but failure to ensure that the necessary protections for the purchaser are in place.
Case 7: The claimants acted as co-investors in a development which would take place on a property. In terms of the agreement between the investors and developer the former would pay an amount into the conveyancer’s trust account. This amount was to be released and only made available to the developer as a deposit once a first covering bond had been registered over the development property and other fixed property, as security for the total amount received from the investors and paid out to the developer.
The conveyancer failed to register the required covering bonds prior to the release of the funds to the developer. The developer was thereafter liquidated and the investors had no security for those funds.
In another such matter:
Case 8: The conveyancer paid over the full purchase price of a property to the seller. The funds had been deposited into his trust account by the purchaser, Ms L and were to be secured by a covering bond over certain erven.
The purchaser alleges that the conveyancer failed to advise her that there were a number of existing bonds over the property, that the seller was not the registered owner of others and was only the co-owner of another. The seller was liquidated and the purchaser is looking to the conveyancer for repayment of the unsecured loan to the seller.
Given the prevalence of these incorrect payments of trust money and particularly of inventive and often convincing fraudsters, we urge all conveyancers and conveyancing staff to be extra vigilant in carrying out their duties in relation to money held in trust.
Attorneys Insurance Indemnity Fund
In our conveyancing department it has become policy that the seller must furnish a bank statement or cancelled cheque before any payments will be made against registration and the same for the purchaser [any credit refund]. Both parties must also sign a document confirming their banking details and the seller is authorising us to pay the balance proceeds once all obligations have been dealt with. If one or either party cannot furnish a bank statement or cancelled cheque a letter from the bank is required to confirm banking details. No last minute changes of banking details are allowed without the necessary proof thereof. At no stage whatsoever do we allow payment of a commission upfront or part payment to the seller before registration. At the end of the day, the conveyancer cannot be consider as the "banker" of the seller/purchaser, but it is unbelievable the stunts being pulled by the parties to the sale [agent/seller/purchaser].
We make sure about the payments. Can you clarify for me : The purchaser pays in the transfer costs in our trust account. Are we allowed to use this costs to pay the rates and taxes on behalf of the seller to obtain the clearance certificate from the Municipality
On the date of registration the rates and taxes are paid pro-rata by the seller and the purchaser, so both parties are responsible for their portion of the rates and taxes For example: To obtain a clearance certificate the rates and taxes are paid in advance for June, July and August. Registration of the property takes place on 15 August. The seller will be responsible for payment of the rates and taxes from 1 June to 14 August and the purchaser will pay the rates and taxes from 15 August to 31 August.
It is usually the responsibility of the seller to obtain the clearance certificate and the three month advance payment is usually included in the deposit payable by the seller. On the date of transfer the purchaser will then reimburse the seller for the portion of the rates and taxes paid from 15 August to 31 August. The transfer costs paid by the purchaser include fees, transfer duty, post and petties, deed search, etc. If the conveyancer uses the purchaser’s transfer costs to pay for the seller’s clearance certificate then there will be a shortfall in the purchaser’s deposit. One should also keep in mind that should the transaction for some reason be cancelled, and the conveyancer used the purchaser’s transfer fees to pay for the clearance certificate then the purchaser would have paid for rates and taxes he was not liable for. The conveyancer will then be faced with a situation where he will have to reimburse the purchaser.
May the transfer attorney deduct monies which is claimed by the seller(occupational rent) from the deposit paid by the purchaser into the transfer attorney's trust account, after the purchaser has cancelled the sale agreement due to breach of conditions by the seller? Law references if available please?
It would be prudent to verify a client's banking details by obtaining either a cancelled cheque or a bank stamped letter of confirmation. However, the bank letter may still be drawn fraudulently, so in order to procure proper risk management, one would also request the bank to verify the account number to the name. The question arises whether the banks would be agreeable to verify this?
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