CBA 2005 R Usher Paper With Ba Address

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CBAs Canadian Legal Conference and Expo 2005

Trust, but Verify Fraud Reduction and

Awareness for Law Firms1

Ron Usher

Staff Lawyer, Law Society of British Columbia( [email protected] )

A CLE Presentation for theCanadian Bar Association

National Real Estate Law SectionVancouver, B.C.

August 15, 2005

October 2008
mailto:[email protected]:[email protected]


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Trust,butVerify CBALegalConference2005

Introduction

In May of 2002 a member of the Law Society of BC named Martin Wirick2 resigned. He advised the society that

he had made some serious errors in his practice. To quote from section 14 of his July 2002 bankruptcy

statement: Give reasons for your financial difficulty. Failing to pay out mortgages pursuant to my undertakings, but

instead paying monies to my client on his promise to pay out the mortgages, but who failed to do so. The

serious errors turned out to involve hundreds of files and many millions of dollars 3.

Since that time the law society has been involved in a massive investigation, certainly the largest in the history of

the B.C. law society. The details of that investigation and what has been found are set out in numerous articles

on the web site of the law society and in numerous media reports4. There will no doubt be a book published

about the entire affair. Mr. Wirick was disbarred in December 2002, and so far over $24 Million has been paid

to claimants pursuant to the Special Compensation Fund maintained by the law society.

A Conveyancing Practices Task Force was created to examine what happened and to make recommendationsfor change.Two reports were prepared, and a final report will be out in late 2005.

What was changed in B.C.

As a result of the Wirick investigation there were three major practice changes made:

1. The Canadian Bar Association (BC Branch) (Real Property Section) standard undertakings5 (as

referenced in the BC standard form contract of purchase and sale) were amended to require vendors

lawyers to promptly report to the purchasers solicitor details of the payout of existing mortgages.

2. A new law societyrule requires the mandatory reporting by both involved lawyers when discharges have

not been filed within 60 days of closing. Thousands of these reports have been filed.

3. Changes were made to the trust protection programs of the law society.

The big picture

The Wirick investigation and the work of the task force inevitably lead to our taking a broad look at real estate

practice and fraud
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1) Trust, but Verify

Trust, but verify was a phrase used by US President Ronald Reagan in regard to negotiations with the Soviet Union.What became apparent as we looked into conveyancing practices was that there was plenty of trusting, but often no

verification. Trust between lawyers should not be confused with faith. The practices of the real estate bar had

evolved at a time when mortgage discharges were obtained locally and promptly. By the time of the Wirick affair

lengthy delays in delivery of discharge documents by financial institutions had become the norm. As a result the litany

of excuses given for the failure to obtain a discharge was believable to inquiring lawyers.

The receipt of the discharge had lost its value as the verification that the monies had been properly used to pay out the

existing mortgages it just was much too delayed. As a result we changed the focus of the lawyers obligations to the

payment made to payout the existing mortgage. This had the advantage of being completely under the control of the

lawyer, in no way dependent on corporate decisions and dalliance.

The general principle is that all undertakings should be self-proving. In other words if an obligation is imposed, the

undertaking should include the means by which satisfaction will be known. So instead of I will do X and I hope that

someone else will do something the undertaking now is I will do X and will demonstrate that I have done what I

said I was going to do by promptly providing you the following documentation that is under my control.

Some have suggested that this means the end of trust in the profession. What it is is the end of blind faith. No lawyer

should object to a reasonable request to demonstrate that another lawyers trust in him or her was well deserved.

Transactions in B.C. are still closed with the efficiency that undertakings and professional trust create. The new

process creates a properly and promptly closed loop. I trust you to do X is now responded to by I did X, and here

is reasonable proof that I did so that your file is complete.

We cant control the business processes of the financial institutions. To their credit we have seen improvements in the

delivery of mortgage discharges. But by focusing on the payment of money rather then the delivery of the discharge

document we have brought the process back under the control of the lawyers.

Any time an undertaking is drafted, the author needs to ask, How and when will I know that this obligation has been

satisfied?

2) Use Common Sense


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advice Ive ever received as to the secret of success the necessity of spending time on task. There must be

available for every file sufficient time for the task. It is no excuse to deny the file time due to low fees. I remember

hearing JayFoonberg, a US lawyer and author say in regard to fees It is better not to do the work and not get paid

than to do the work and not get paid. It is even worse to accept the file, do poor work, and get paid poorly. In other

words, make sure you are getting paid enough to pay enough attention.

3) Beware of External Changes

It became very apparent to us during the consideration of Wirick /Gill how much the world of finance has changed

over the years. While the outside world had changed lawyers practices had not. Industry business practices in regard

to lending, due diligence, etc. have changed dramatically. The expectations of the key players lenders, clients, and

intermediaries have changed, creating substantial practice pressures. Generally this examination showed us how

important it is for the legal community to keep with what is going on around them. It seemed like the story of the

frog in the pot of water that is heated slowly eventually to the great detriment of the frog! For lawyers it means

always checking assumptions, asking how incremental changes impact on the nature of the services we provide. Andknowing where to draw the line.

4) Use new information systems and services

The good news is we are living in a time of amazing and abundant information. In much of the country land title

information is readily available at our fingertips. In BC, we have very complete access to our public land title system

through BC Online. There are also affordable non-governmental resources from such services as Landcor. Id

recommend that a basic Landcor report be obtained for every BC transaction. In fact they should be obtained prior to

clients signing the contract of purchase and sale. There is also incredible information available from many Canadian

Municipalities via their online and public geographic information systems. These systems have maps showing

boundaries, services, zoning, air photos, etc. At the very least a client would be impressed to be given a colour photo

of their home and new neighbourhood.

In B.C we now have an Activity Advisory Service that sends an email every time there is activity on any particular

land parcel. This ensures a no surprises closing. Weve used this service to watch for and catch significant real estate

fraud.
http://www.foonberglaw.com/http://www.landcor.com/http://www.landcor.com/http://www.foonberglaw.com/


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activities of fraudsters who were seeking out naive lawyers to do their work. Use the Google alert service to place

standing periodic searches of your own and your firms name to see what is being said or represented about you. It is

not unusual for scam web sites to reference the sites of parties in order to suggest endorsement of the scheme. Your

whole firm web site can be hijacked and spoofed. This happened to a Victoria law firm as part of multi-national

investment fraud.

6) Deal with principals

It often happens in frauds that there are several layers of people that present themselves to the law firm. There often is

no direct client that you deal with personally. There are promoters in the background you dont see but talk to on the

phone. Odd Front men may show up and deliver documents and money. They may have in tow various dupes or

nominees whose names are used the in transactions. Layers of people and paper shroud chains of complexity. You

need to ask yourself why is the deal being done this way? Does it pass any sort of smell test? Who is your client,

really? Do you really need this work? Why are you being asked to meet someone in the back seat of that huge limo?

Why do your clients need handlers that shadow meetings? Why the odd lack of interest in your attempts to explainthe transaction? Whats the hurry?

7) Remember your loyalties

Be careful not to let your enthusiasm for your keen new client to lull you into forgetting your other obligations. If you

are acting for a purchaser and a lender be very mindful of the duties you owe the financial institution. The

intermediary real estate sales person or mortgage broker is not your client. Why would you agree to keep something

from the bank? The urge to get along by going along can be very powerful and will lead to nothing but trouble.

Watch for insider involvement at the financial institution. Calling the accomplice at the bank wont solve the problem.

You may need to talk to a supervisor or in-house counsel.

8) Dont let documents (paper and electronic) out of your hands and control

Watch for requests to take documents you prepared out of the office. Too often this has been a ruse to facilitate

document tampering or phoney executions. Find out who you are sending documents to. Use the Internet to check

out the other party. Most law societies have on line systems for making member inquiries.

9) Be scrupulous about all notarial acts


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to solicitor have very detailed requirements. These need to be read carefully and either complied with or negotiated

with the lender. Remember, as strange as it may seem, the lender very likely knows very little about the borrower, and

often will never even had met them. You may be the first face-to-face contact in the entire transaction.

While you dont have to have the credentials and skills of a forensic document examiner, you do have to look at,

consider, copy and retain copies of the identification documents presented by your client. In many U.S. jurisdictions

thumbprints are obtained. I visited one Montreal notary who retains a colour scan of all ID documents. In B.C. we

recommend taking copies of two pieces of identification, with at least one being a government issued document with a

photograph.

10) Inform your staff

A planed program of education and system is needed for your staff. Are they familiar with the warning signs of scam

deals so they can catch them at an early stage? Do you have a relationship with them such that they can easily

approach you when they smell a rat?

11) Watch the tendency to please overcoming your professional independence

It is the most human of all urges to want to please those around us. Clearly it is easier to go along so that we are seen

to get along. Wed certainly dont want to be seen as the most dreadful of all monsters the deal killer.

12) Beware referral sources / dependence on a small number of clients or referral sources

The cultivation of referral sources and good clients is a legitimate part of building successful law practice. There is

however a dark side to having too narrow a base for your income. Every lawyer needs to be able to fire clients

and sources of work when their demands compromise the lawyers own personal and professional integrity. Many

fraudulent situations involving lawyers arise out of dependency upon a special client. Too often the lawyer

themselves has personally invested in the clients grand scheme, only to loose both the money and the right to practice

law.

13) Know your professional conduct rules.

The Professional Conduct Handbook of the Law Society of B.C. now provides in section 4-6 that A lawyer must not

engage in any activity that the lawyer knows or ought to know assists in or encourages any dishonesty crime or fraud
http://www.lawsociety.bc.ca/publications_forms/handbook/body_handbook_ch04.html#4-6http://www.lawsociety.bc.ca/publications_forms/handbook/body_handbook_ch04.html#4-6


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14) Be very careful when powers of attorney are used

In the Wirick / Gill matters it was discovered that Mr. Gill had seventy-eight powers of attorney registered in our landtitle office. These were used to execute all manner of land title documents. Some financial institutions now have

specific instructions forbidding execution of mortgages by power of attorney. Extra care, inquiry and documentation

are needed whenever legal maters are to be concluded by a person using a power of attorney.

15) Dont play bank

Two examples are given in the footnote to the rule mentioned in point 13 (above) that arise out of actual files. The

first warns of the danger of letting your trust account be used as the fraudsters bank account. Any money in your trust

account must be there for a specific purpose relating to the legal work you are doing. If there is no legal purpose then

do not take deposits. The second example, again arising out of remarkably common occurrences, is where the

scamster, who has promised typically fantastic investment returns, calms the fears of reluctant investors by moving the

money through the lawyers trust account. Inevitably when things go wrong, the investors claim that they thought their

money was safe with or even guaranteed by the lawyer.

16) Understand why scamsters need lawyers

Rouges seem to have a special knack for flattering the egos of lawyers. They know that by trading on the reputation

and professional status of a lawyer they can hide their devious plans. They need what lawyers have: (a) a trust account,

(b) confidentiality obligations, (c) solicitor client privilege, (d) the ability to transfer large sums of money anonymously,

and (e) credibility. The certainly are not looking for your legal advice. These deals have remarkably little legal content,

and often small fees. Mr. Wiricks fees have been described as modest.

17) Get Historical searches

Even though in Torrens type land systems the historical register does not need to be consulted for the purposes of the

current transaction, a broader look will often reveal patters of fraudulent dealings. For example, a search showingcancelled items may reveal a patter of borrowing that is suspicious. You may find that the property has been flipped

several times for the purpose of pumping up the value. Increasingly lenders do not ask for appraisals. They may be

relying on problematic AVMs (Automated Valuation Models.) A recent series of scams in Vancouver depended on

faulty valuation systems Each of the problematic loans could have been avoided by a $6 95 report from Landcor com


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their clients as the trend to the use of insurance products as a replacement for due diligence becomes common. For

example, if a lender is the beneficiary of both mortgage loan and title insurance they may be tempted to reduce costs

by making fewer inquires. Third party services providers who sometimes are as well the providers of the insurance

may cut corners to increase profits. There is an increasing attitude of dont worry, the deal is insured that is very

dismissive of the professional obligations of the lawyer and the risk that the client may be buying a lawsuit.

19) Understand H.A.L.T.

In the literature about addiction problems there is often reference to H.A.L.T. This is an acronym for hungry, angry,

lonely or tired. The suggestion of course is to be particularly beware of problems you can get into when HALT

applies to your personal situation. Mr. Wirick has described himself at the time of the scam as being tired,

emotionally drained.7 There are terrific personal assistance resources available in most provinces for lawyers. In BC

the law society provides access to the Interlockemployee assistance program and to the Lawyers Assistance Program

(LAP).

20) Know about the common scams

There is wealth of literature on the common financial and real estate scams. There is excellent material on the Law

Society of Upper Canada web site. See also Fighting back against fraud the risks in real estate in the 2005 No.

2 edition of the Law Society of B.C.s Benchers Bulletin. Attached as an appendix to this paper is a brochure from

the Law Society of England and Wales on banking instrument fraud.

At the beginning of each episode of the 1980s T.V. show Hill Street Blues the sergeant would send the police men

and women out to the mean streets with the admonition And, hey - let's be careful out there. The advice and

concern the sergeant expressed certainly could be applied each morning as lawyers and staff start another busy day in

their complex and pressured practices.

1 Thi i d i thi th f th th d d t il th i i f th L
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5AccesstothiswebpagerequiresCBAmembership

6ManyofthepointsraisedinthispresentationweredevelopedbyToddFollettoftheLawSocietyofB.C.andCLE

ofB.C.aspartofaprogramonfraudthatwepresentedtolawyersinB.C.in2003and2004.

7Seethearticlereferredtoinendnote4


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Documents

CBA 2005 R Usher Paper With Ba Address