How to recognize fraud in corporate transactions?

Lawyers can be disciplined by the Law Society for the “Dishonesty, Fraud etc” of their clients. And so, for the sake of themselves and their clients, a lawyer must always be vigilant against fraud in transactions.

Rule 3.2-7 of the Law Society’s Rules of Professional Conduct states,

A lawyer shall not,

(A) knowingly assist in or encourage any dishonesty, fraud, crime, or illegal conduct;

(B) do or omit to do anything that the lawyer ought to know assists in, encourages or facilitates any dishonesty, fraud, crime, or illegal conduct by a client or any other person; or

(C) advise a client or any other person on how to violate the law and avoid punishment:

The Law Society’s Commentary to this rule further states that “a lawyer should also be on guard against becoming a tool or dupe of an unscrupulous client or persons associated with such a client or any other person”.

The Law Society has outlined several “red flags” that lawyers should be aware of in light of these rules and they are especially relevant for lawyers engaging in services including:

(A) establishing, purchasing or selling business entities;
(B) arranging financing for the purchase or sale or operation of business entities
(C) arranging financing for the purchase or sale of business assets; and
(D) purchasing and selling real estate

Each of the above transactions will (and ought to) require a review of the corporate minute books or corporate record books of the entities involved. Such a review will be necessary not only for the purposes of properly identifying the client and entities forming part of the transaction, but also to ensure the mechanisms of the transactions are carried out appropriately.

The Law Society advises that “Lawyers should be vigilant in identifying “red flags” in their areas of practice and make inquiries to determine whether the proposed retainer relates to a bona fide transaction.” To that end, the Law Society has established a list of practice tips for recognizing fraud in real estate transactions. For example, when dealing with corporations, the practice tips advise looking out for:

(A) situations where the original minute books for the company are not available or incomplete; and
(B) the minute books contain irregularities such as the lack of the “pink-stamped” articles of incorporation. (It is important to note that “pink-stamped” articles are now less common in any event due to the advent of online incorporations.)

Lawyer should also be aware that filings with the Ontario government under the Corporations Information Act can be made on behalf of a corporation easily and without proper identification. This may allow a fraudster to easily change the names of the corporation’s officers and directors or even the corporations registered address. The lawyer should be mindful of minute books that show recent changes to these corporate records.

A properly maintained minute book is an essential step for the diligent lawyer to ensure he or she has lived up to the standard of care directed by the Law Society. An online minute book with a verifiable audit trail and change history log may provide even more piece of mind for all persons involved in a corporate transaction.