Real Estate agents and Trust Account Fraud
Disclaimer: This article is intended to provide a summary and general overview only. It is not intended to be, nor does it constitute, legal advice. You should seek legal advice from a barrister or solicitor working in the area of real estate and/or criminal law before acting or relying on any of its content.
Are you a real estate agent who has been charged with offences relating to a trust account? In addition to the penalties that arise under the criminal law, misappropriation of client funds constitutes serious misconduct at the professional (or Department of Fair Trading) level.
Real estate agents (like lawyers) are effectively custodians of their clients’ funds. With the price of property and the size of deals coming out of cities like Sydney and Melbourne, the amounts held on trust can literally run into millions of dollars. This is a significant responsibility.
Licensees under the Property, Stock & Business Agents Act 2002 must hold clients’ funds in a trust account. These must be kept at an authorised deposit-taking institution in NSW, approved by the Director General. The ‘approved institutions’ are:
Australia and New Zealand Banking Group Limited (ANZ)
Bananacoast Community Credit Union Ltd
Bank of Queensland
Bank of Sydney Ltd
Bendigo Bank Limited
Berrima District Credit Union Ltd
Coastline Credit Union Ltd
Community CPS Australia Limited (trading as Beyond Bank Australia Limited)
Community Mutual Ltd (trading as Regional Australia Bank)
Greater Bank Ltd
Holiday Coast Credit Union Ltd
HSBC Bank Australia Limited
Hume Bank Limited
Illawarra Mutual Building Society Limited
Macquarie Bank Limited
Maitland Mutual Building Society Ltd
National Australia Bank Limited
Newcastle Permanent Building Society Ltd
St. George Bank Limited
Southern Cross Credit Union Ltd
The Summerland Credit Union Ltd
Unity Bank Limited
WAW Credit Union Co-operative Ltd
Westpac Banking Corporation.
Source: Department of Fair Trading NSW
In recent years that has been significant media reporting on:
Real estate agents misappropriating client funds; and
Real estate agents being the victims of identity fraud, impersonators and theft (the Department of Fair Trading now publishes real estate fraud prevention guidelines which are designed to assist real estate agents prevent identity theft).
Real estate agents need to be aware of the following legislation:
Property, Stock and Business Agents Act 2002 (‘the Act’); and
Rules of Conduct two in the Property, Stock and Business Agents Regulation 2003 (‘Rules’).
Consistent with their role as professionals, estate agents must exercise reasonable skill, care and diligence.
Real estate agents have fiduciary duties. This means that sellers and vendors have a right to place the utmost trust and confidence in their agent’s ability to manage and protect their funds and property; the Rules of conduct stipulate that an agent must act honestly, fairly and professionally with all parties in a transaction. They must also act in their clients’ best interests unless doing so would be contrary to the Act or Regulations, or would be otherwise unlawful.
Any person can make a complaint to the Director General about an alleged breach of relevant legislation by a real estate agent and indeed, NSW Fair Trading can undertake an investigation and take disciplinary action against real estate agents irrespective of whether or not a complaint has been made e.g. where a trust account investigator has identified trust account anomalies and/or a breach.
Disciplinary measures that can be taken against real estate agents
Where a real states agent has acted unlawfully, improperly, unfairly or incompetently, section 191 of the Act provides that disciplinary action can be taken against the holder of a real estate licence.
Disciplinary action can include:
A caution or reprimand;
Monetary penalties/fines (but generally only for minor offences)
Making an estate agent submit to undertakings (to do/or not do certain things)
Placing conditions on a licence
Where there is trust account fraud, particularly systematic and sustained fraud, an estate agent will typically have his or her licence cancelled and the matter will be referred to police. Thus, under the Act, a person who commits trust account fraud will be guilty of an indictable offence and liable to imprisonment for a term of up to 10 years.
Fraud can also be referred, where appropriate, to other government agencies such as AUSTRAC and the Department of Immigration and Border Protection.
Show cause notices
The Director General can serve a show cause notice on a person where there are grounds for taking disciplinary action against the person. This allows the real estate agent to make a submission to the Director General as to whether the proposed disciplinary action ought to occur. Extreme caution should be exercised when responding to ‘show cause’ notices. Under the criminal law a person enjoys a right to silence, and a presumption of innocence also applies. Accordingly, advice should be sought from a lawyer as to whether it is in your interest to prepare such a submission and, if it is, what should and should not be included.
Further, in appropriate circumstances, it may be appropriate to seek an extension of time as sometimes as little as 14 days is given to respond.
In trust account misappropriation matters it is not atypical for the Director General to immediately suspend a licence or certificate of registration. If this is to occur you should seek legal advice as to the best way to proceed as in certain circumstances it may be in your interests to accept the automatic suspension.
Depending on the allegation it may be possible to seek an internal review of a decision made by NSW Fair Trading. Any internal review should be reviewed by someone other than the original decision maker.
In appropriate cases, disciplinary decisions can be reviewed by lodging an application with the NSW Civil and Administrative Tribunal.
Before seeking any type of review, you should seek legal advice.
Police & Department of Fair Trading prosecutions - Case studies
Case study 1 (as reported by the NSW Government online)
In March 2016 a real estate agent and company director pled guilty to 12 charges in Parramatta Local Court for, amongst other things, creating fictitious real estate listings to obtain early commissions and defrauding his company's trust account of $808,173.69.
After taking into account number of mitigating circumstances, the estate agent concerned was sentenced to two years’ imprisonment to be served by way of an Intensive Corrections Order (in the community rather than gaol/jail).
The real estate agent’s licence was also cancelled by NSW Fair Trading who also disqualified him from holding a licence and working in the industry for 15 years.
Case study 2 (as reported by the NSW Government online)
A director of a South Coast real estate agency believed to have defrauded her clients of $789,000 was sentenced in Parramatta District Court during September 2015. An examination of the licensee’s accounts by the Department of Fair Trading found numerous deficiencies in the relevant rent and sales trust accounts and discovered falsified corporate book keeping records - alleged by prosecutors to be an attempt to have disguised her fraud.
A significant factor in her sentencing was the fact that, with family assistance, she was able to repay the fraud to the NSW Property Services Compensation Fund. The District Court also heard that at the time of offending she was suffering from a very significant gambling problem.
In what can only be described as an exceptionally good result for her, she was sentenced to imprisonment for a period of two years to be served by way of an Intensive Corrections Order (in the community rather than jail) commencing on Friday 25 September 2015.
By Sebastian De Brennan, Barrister, email: firstname.lastname@example.org