Are you taking reasonable steps to verify identity?

In the recent decision of C & F Nominees Mortgage Securities Ltd v Karbotli & Ors [2020] VCC 987 (Karbotli), the Court held that a mortgagee failed to take "reasonable steps" to verify the identity of the mortgagor under s 87A(1) of the Transfer of Land Act 1958 (Vic) (s 87A) by relying on a solicitor's certificate.

We understand this is the first published decision to consider in some level of detail the requirement to take "reasonable steps" in the context of a person's verification of identity (VOI) obligations and how those obligations apply to the signatory of a document, and provides some guidance on what does not constitute the taking of "reasonable steps".

Facts

The case concerned a $800,000 loan by C & F Nominees Mortgage Securities Ltd (C & F) to Mazop Pty Ltd (Mazop). The loan was secured by guarantees by Mazop's directors, Ms Issa and her son, with a mortgage over Ms Issa's property in Bulleen, Victoria (Property).

Mazop defaulted in the loan repayments and C & F commenced proceedings against Ms Issa for possession of the property. In her defence, Ms Issa claimed her signature on the mortgage was forged by her son without her knowledge. Ms Issa also claimed C & F failed to take "reasonable steps" to verify her identity pursuant to s 87A and so the mortgage should be removed from the register.

Reasonable steps

C & F contended that it had taken reasonable steps to verify the identity of Ms Issa, as it relied on:

• identity documents for Ms Issa, including copies of her passport, Medicare card, expired driver's licence and other tax and financial documents; and
• a solicitor's certificate, which confirmed Ms Issa's lawyer had explained to Ms Issa the general nature and effect of the mortgage documents and that Ms Issa had understood that explanation.

The solicitor's certificate, however, did not certify that the practitioner had actually witnessed Ms Issa sign the mortgage. The signature on the mortgage was apparently witnessed by someone else.

The Court found that the identity documents established that Ms Issa was a real person and the registered proprietor of the property. However, they were incapable of establishing that Ms Issa was the person who purported to sign the mortgage.

The Court held that, by themselves, the identity documents could not be regarded as reasonable steps toward establishing the identity of the person signing the mortgage. They could constitute reasonable steps in combination with "something else" which proves, or at least indicates, that the person signing the mortgage was the person depicted in the identity documents. The comparison between identity documents and the features of the person signing the relevant documents was, according to Judge Macnamara, an "indispensable link in the process".

The Court concluded that relying on the solicitor's certificate to establish this crucial link did not constitute reasonable steps taken by C & F. The certificate was not framed for the purpose of verifying the identity of the person signing the mortgage. The purpose of a solicitor's certificate is to ensure the mortgagor receives legal advice about the effect of the documents they are about to sign; it does not certify that the person who then signs the mortgage is the owner of the security property. There needs to be a direct link between the identity documents and the actual execution of the relevant documents.

Key takeaways

• Section 87A and other formal VOI requirements require a mortgagee, lawyer or conveyancer to take "reasonable steps" to verify the identity of a mortgagor or client. The purpose of the requirement is to ensure that the person executing the relevant document is the same person who is depicted in identity documents and being verified; and
• Relying on a document such as the solicitor's certificate is not sufficient to constitute reasonable steps, as the certificate does not address whether the mortgagor/client executed the mortgage.

Unfortunately, much of the confusion in the legal profession about what constitutes "reasonable steps" in conducting a VOI that cannot be carried out according to the VOI Standard (as specified by the Australian Registrars National Electronic Conveyancing Council (ARNECC)) has not been expressly considered in this decision. This decision focusses on whether the person whose identity needed to be verified was indeed the person who executed the mortgage, as required by s 87A. Section 87A requires a mortgagee not only to take reasonable steps to verify the authority and identity of a mortgagor, but to take these reasonable steps to ensure that the person executing the mortgage as mortgagor is the same person who is the registered proprietor. The mortgagee's failure in Karbotli related to this second aspect of its obligations under s 87A.