The second type of fraud is equally sinister but complicated by the fact that the lawyer is often complicit in completing the fraud.

The scenario

A lawyer with too much time on his hands finds himself face-to-face with a golden opportunity: He may be a real estate agent, a financial advisor, or just someone who seems to have a lot of connections. The lawyer has never met this person before, but is told this person has the ability to bring in a lot of business, either directly or through another person the lawyer may or may not ever get a chance to meet. This person is the "mastermind."

The lawyer wonders only briefly why a sole practitioner in his position would be chosen by this client, but his concerns are soon allayed when promises of high fees in exchange for quick processing of real estate transactions are presented.

The real estate deals start coming to the lawyer directly from the mastermind. They may appear somewhat unusual in that they appear to all have short closing dates that require immediate processing, often without time to conduct proper searches. Often there is a flip involved, in which the financial institution has agreed to lend money on the higher purchase price of the flip agreement. The lawyer often acts for all parties. But all directions and information come from one party: the mastermind.

Typically, the scam works like this: Jane Doe is a legitimate vendor with property for sale. The mastermind of the fraudulent scheme submits an offer to purchase the Doe property with Mr. Smith posing as the purchaser.

A purchase price is agreed on, as is a closing date for the transaction (the "original agreement"). The mastermind, Mr. X, then prepares a second agreement of purchase and sale whereby:

• Smith sells to Black for a price in excess of the original purchase price (the "flip agreement"); or
• Doe sells to Black for a price in excess of the original purchase price (the "fake agreement").

In situations where there is a flip agreement, both the original agreement and the flip agreement are sent to the lawyer for processing.

In situations where there is a fake agreement, the bank is usually provided with a copy of the fake agreement as part of an application to obtain mortgage financing on the basis of the higher consideration.

In both cases, the bank lends money on the strength of the higher purchase price contained within the flip agreement or the fake agreement.

In that regard, the mastermind also provides the bank with false information about the proposed borrower Black, such as false letters from employers allegedly verifying Black's income, false social insurance numbers, and false addresses, etc.

Once the mortgage funds have been paid out by the bank, and the mortgage has been registered on title, the mastermind rents out the property and makes the monthly mortgage payments presumably using the rental proceeds.

It is believed that both Smith and Black are "straw men" posing as vendors and/or purchasers and that the true purchaser is the mastermind.

The police and some of the financial institutions involved have been alerted to these fraudulent schemes and have conducted their own investigations into the matters.

As a result of these fraudulent transactions, a number of financial institutions have been left "holding the bag" when the mastermind stops making the monthly mortgage payments and the property is sold under power of sale for significantly less than the principal amount of the loan.

The issue of liability coverage

LAWPRO has also become involved when the financial institutions seek to hold their lawyer responsible for the shortfalls. LAWPRO's involvement starts with the retention of coverage counsel in order to determine whether the lawyer was a willing participant in the fraudulent scheme, wilfully blind to it, or merely an innocent dupe when processing the transactions involved. There is no coverage under the LAWPRO professional liability policy for situations in which lawyers were involved in fraudulent activities.

As one can, no doubt, imagine, these fraudulent schemes can be very costly to LAWPRO, both in terms of coverage investigations and, if necessary, in terms of liability payments.

So the next time you are sitting in your office on a rainy day, keep in mind that if an opportunity presents itself that seems too good to be true, it just may be.

• The new face of real estate fraud
• Diligence no match for determined fraudsters
• Lawyers as pawns: The warning signs
• The Land Titles Register: Can it be relied on?
• FLIP: When all that glitters is not gold
• The warning signs of flip frauds
• The shapes fraud can take
• How to identify a fraudster