Identity fraud is one of the UK's fastest growing crimes. According to a recent survey, nearly one in ten UK adults believe they have fallen victim. The cost of ID fraud per annum is, according to statistics published by the Government in February 2006, in the region of £1.7 billion and growing. There has been high profile coverage of the issue in the media recently - from a Panorama report on how easy it is to obtain fake European passports, to news that the Information Commissioner is investigating whether banks dump account holders’ confidential information in their ordinary waste sacks.

Identity fraud occurs where someone invents a fictitious identity or steals the identity of a person (alive or dead). A significant proportion involves credit card or mobile phone companies but ID fraudsters are often involved in transactions which need solicitors, thus exposing the innocent solicitors to claims by the victims.

Verifying the identity of the client

For the purpose of satisfying the Money Laundering Regulations 2003, a solicitor must obtain evidence which is reasonably capable of establishing that the client is the person who he or she claims to be and which does in fact satisfy the solicitor of this. The Law Society website provides substantial guidance on the steps needed to ensure compliance with the Money Laundering Regulations and, in particular, guidance on how to comply with the obligation to obtain satisfactory evidence of identity.

It is commonplace for a solicitor to ask a new client to prove their identity by bringing in their current passport or driving licence and prove their address by bringing in a recent bank statement, utility or council tax bill. Surely, if a solicitor complies with the Money Laundering Regulations and Law Society guidance, there is nothing to worry about? Not quite…

ID theft and claims

Imagine a scenario in which the solicitor is instructed by an imposter with access to confidential information about the victim and fake documents to verify identity and address. Can the solicitor nonetheless face a claim? Yes. Would such a claim succeed? Possibly …

Take this example. A fraudster presents himself at a solicitor's office purporting to be the owner of a property which he wishes to sell. He provides evidence of identity and address. The name corresponds to the registered owner of the property and the address is that of the property. There is nothing suspicious about the transaction. The solicitor duly confirms to the purchaser’s solicitor that "I act for Mr X”. On completion, sale proceeds are paid to the fraudster, who then disappears. The true owner resurfaces and seeks rectification of the register at HM Land Registry on the basis that he/she is the owner and did not sell the property. It turns out that the owner had been abroad on business and had let the property to someone who turned out to be a conman.

The true owner of the property (and his mortgage lender) may seek damages in negligence (perhaps the cost of rectification of the title register and consequent losses) on the basis that the solicitor failed to identify that the client was a fraudster. There may be arguments as to the scope of any duty of care but the victim will inevitable attract a great deal of sympathy from the court. In defending the claim, the solicitor will say that, by seeing evidence of identity and address, he has done all that a reasonably competent solicitor would have done. The care with which the solicitor carried out the ID checks – and whether the solicitor was aware of anything else which might be regarded as a badge of fraud – will come under close scrutiny. Even if the solicitor followed usual practice, it may not be enough if the court considers that his approach exposed someone to a foreseeable and avoidable risk (see Edward Wong Finance Co Ltd v Johnson Stokes & Master (1984) 1 AC 296).

But this is not the end of the matter. The innocent purchaser (and/or their mortgagee) may bring a claim for breach of warranty of authority against the solicitor (for losses sustained when the transaction is set aside). This is on the basis that the solicitor warranted that he had authority to act for the property owner, when in fact he was acting for a fraudster. The law in this area is strict. Even if he acted reasonably and in good faith, this might not be a complete answer to such a claim.

The leading case on breach of warranty of authority is the Court of Appeal decision in Penn v Bristol & West Building Society and others [1997] 3 All ER 470. The sellers’ solicitor represented to the purchaser’s solicitors that he acted for Mr and Mrs Penn, when in fact he had only ever met Mr Penn and had only taken instructions from him. Mr Penn had considerable business debts and, with his business partner, decided to execute a mortgage fraud by selling his property to Mr Wilson (who was party to the fraud). Mrs Penn was ignorant of the sale. Her signature was forged by her husband. The Court of Appeal agreed that the solicitor was in breach of a warranty to Bristol & West that he had the authority to act for Mrs Penn and thus was liable. The court identified an important qualification, however: “the question of whether a warranty of authority has been given [and – we might respectfully add – the nature and extent of that warranty] rests on a proper analysis of the facts in any given situation” (Waller LJ).

The decision in Penn predates present concerns over identity theft. However, it highlights some key factors: a solicitor is the agent of his client when dealing with the solicitor for the other party to a transaction; the solicitor impliedly warrants that he has that client’s authority; if that warranty proves false and the other party has relied to their detriment on it, the solicitor may be liable for consequent losses, irrespective of whether they acted carefully in verifying the client's identity.

An indemnity from the Land Registrar may, incidentally, be available under the Land Registration Act 2002 to a party who suffers loss where a registered transaction is set aside. However, this will not assist where the fraud comes to light before the transaction is registered.

An unfair burden?

There is clearly a public interest in ensuring that solicitors carefully and diligently discharge their professional and statutory obligations to verify their clients’ identities. But is it fair that a solicitor who has done everything professionally required of him should face claims for losses caused by the actions of an ID fraudster? Should a third party who deals with an ID fraudster through a solicitor be in a better position than someone who deals with the crook direct?

Where the person whose identity has been stolen sues, the negligence test as to the reasonableness of the solicitor’s actions may well be viewed as striking the right balance between protecting the public and avoiding an unfair burden on the profession.

Where there is a claim by an injured third party, to whom no duty is owed but who relied on the solicitor’s warranty of authority, it seems likely that the courts will continue to turn to the Penn line of authorities. This is unexceptionable where the solicitor has not been careful with identity checks. After all, it should not have been difficult to check with Mrs Penn that she agreed to the transaction. However, Penn might seem to operate harshly against a solicitor who has done everything required to verify identity but who, through no fault of his/her own, is instructed by a fraudster.

The answer is, perhaps, to look a little closer at the facts of the case and consider the extent of the warranty which is properly to be implied. Was there an absent second client, as in Penn? Was the warranty that “A is my client, A is the owner of the property and A has instructed me to act in the sale”? or was it, more accurately, that “I act for a person who has produced satisfactory evidence of identity that he is A and who has instructed me in the sale of the property which he claims to own”? This analysis avoids the potential mischief of overzealous application of Penn, yet preserves a remedy for third parties whose loss could have been avoided if the solicitor took reasonable steps. It seems unlikely that practitioners could expressly limit the scope of their warranty to this effect – what purchaser (or purchaser’s solicitor) would regard an attempt to do so as other than an alarm bell and withdraw from the deal?

Conclusion

Solicitors must remain on their guard and critically examine the evidence of identity which their client presents. Even then, this may not be enough to prevent a claim being made against the practice, though careful analysis may reveal that a defence is available.

Duncan Crine, partner

This article was first published in Legal Week.