Sizzling Real Estate Market Brings Fraud Traps for Closing Attorneys

If you practice real property law in North Carolina and are unfamiliar with 2020 Formal Ethics Opinion 5, stop what you’re doing and read it. Right. Now.

Finished? Now read it again. Afterwards, share it with everyone on your practice team, then discuss what changes, if any, you need to make in your closing procedures to avoid falling prey to a fraudulent wire transfer scam.

NC 2020 FEO 5, approved by the State Bar on January 15, discusses a lawyer’s professional responsibility to inform clients about relevant, potential fraudulent attempts to improperly acquire client funds during a real property transaction.

In the months since 2020 FEO 5 was issued, the opinion has become even more urgent in light of a sizzling real estate market, record home prices, and stepped-up efforts from scammers and cyber-criminals.

Among other key points, the opinion discusses the importance of:

• Sending buyers an informational letter at the outset of representation that includes instructions for wiring closing proceeds to your trust account.
• Warning clients of the risks of potential wire fraud associated with the transaction.
• Instructing buyers to telephone your office using the number listed your letterhead before initiating the wire to verify the wiring instructions.
• Confirming that you will not change wire instructions via email.

Read NC 2020 FEO 5 here.

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2020 FEO 5

Here is the factual inquiry in 2020 FEO 5: “Buyer in a real estate transaction retained Lawyer as settlement agent. At the outset of the representation, Lawyer sent Buyer an informational letter including instructions for wiring closing proceeds to Lawyer’s trust account. Lawyer’s letter includes a warning about potential wire fraud associated with the transaction, and that in order to prevent wire fraud Buyer should telephone Lawyer’s office using the number listed in the letterhead before initiating the wire to verify the wiring instructions. The letter also states that Lawyer will not change wire instructions via email. Lawyer sent Buyer an informational letter including instructions for wiring closing proceeds to Lawyer’s trust account.

On the date of the scheduled real estate closing, Buyer telephoned Lawyer’s office and left a voicemail inquiring about wiring instructions for sending closing proceeds to Lawyer’s trust account. Minutes later, Buyer received an e-mail message purporting to be from Lawyer indicating that Buyer should ignore Lawyer’s previous wire instructions and instead should utilize new wire instructions that were attached to the email. This e-mail was not sent by Lawyer or by anyone acting under Lawyer’s direction. The e-mail did not have an attachment, so Buyer replied to the email noting the lack of an attachment. In response, Buyer unknowingly received fraudulent wiring instructions and initiated the wire transfer of the closing proceeds to what he thought was the Lawyer’s trust account but was actually to a third party’s fraudulent account. When Buyer appeared at closing and inquired about Lawyer’s receipt of the closing proceeds, Lawyer discovered that the funds had never been received into his trust account.”

Some highlights from the opinion:

Inquiry #1: “Did Lawyer violate the Rules of Professional Conduct by failing to prevent the fraudulent wire transfer of Buyer’s proceeds?

Opinion #1: No. Lawyer’s letter to Buyer at the outset of the representation containing a warning about the potential for wire fraud and instructions to the client to personally confirm wire transfer instructions via telephone to Lawyer’s office reasonably minimize the risks associated with the transfer of funds during a real property transaction. Lawyer has a duty to competently represent Buyer in the real estate transaction and to ‘keep abreast of changes in the law and its practice, including the benefits and risks associated with the technology relevant to the lawyer’s practice…. Lawyer also has a duty to adequately and effectively inform Buyer about the potential risks associated with the transfer of funds in connection with a real property transaction so that Buyer can make ‘informed decisions regarding the representation.’ [A] lawyer satisfies his or her professional obligation if s/he takes reasonable measures to educate him or herself on real property transaction scams; implements within the lawyer’s practice (including staff) reasonable measures to minimize the risks to client funds in accordance with the Rules of Professional Conduct; and adequately communicates to the client the risks associated with the transfer of funds in connection with a real property transaction and clear instructions on how to safely transfer funds to complete the real property transaction. Accordingly, Lawyer has fulfilled his professional responsibility with regards to Buyer and the underlying real property transaction.”

Inquiry #2: “Same scenario as Inquiry #1, but Lawyer failed to send the letter at the outset of the representation containing the warning about wire fraud and the instructions for verifying wire transfer instructions at closing. Lawyer did not otherwise provide any warning to Buyer about potential wire fraud, Lawyer did not provide instructions specifically described to avoid wire fraud, and Lawyer has not made any effort to educate himself or his staff about the potential for wire fraud in connection with real property transactions conducted by Lawyer’s law office.

Does Lawyer’s failure to provide any warning to Buyer or otherwise take steps to avoid potential wire fraud violate the Rules of Professional Conduct?

Opinion #2: Yes. As noted above, scams and other attempts to divert and fraudulently acquire client funds associated with a real property transaction are ever-present, increasing, and evolving. A lawyer serving as a settlement agent for real property transactions has a duty to implement reasonable measures to minimize the risks associated with the transfer of funds in real property transactions, including to be aware of and educated on these developments, and to communicate with his client about these risks and how the lawyer intends to avoid them. See Opinion #1.”

Source: 2020 Formal Ethics Opinion 5 | North Carolina State Bar (ncbar.gov)