You have a conflict of interest which is NOT your fault: declare it officially
You have been nominated for a duty in respect of which there is a conflict of interest of which the persons responsible for ratifying your nomination for said duty may be unaware. Given that you did not consent to the nomination, this is not your fault, but you have an ethical obligation to declare the conflict of interest officially and in writing. Once the conflict of interest has been declared and recorded officially, responsibility for adjudicating the appropriateness of your nomination rests with the persons responsible for ratifying your nomination.
Whether the conflict of interest is acceptable depends on local regulations and custom, but what you describe strikes me as problematic enough to disqualify you from being an external reviewer. But, based on how you describe things, the situation is not your fault. The professional response is to raise the issues with the person responsible for organising the review/examination/defence. I will address your four numbered points individually.
- Re §1: being "from the same lab" strikes me as failing to meet the criterion of being "outside of the Students’ Educational Program" (but maybe the institution has a different interpretation? To be honest, I find their definition already very lax, since I would consider "external" to mean "not working at the same institution").
- Re §2: in many places, the custom is for the external examiner/reviewer to be approached prior to being nominated, but this is not universal; at the same time, unless there is something in your contract about taking-up examining duties of this sort whenever requested, you should feel free to refuse.
- Re §3: the short notice is not your problem, so you should feel free to refuse on that basis alone.
- Re §4: this is the most serious issue, but it is not your fault, so you should be completely open about it.
Q1: I would consider it dishonest if a reviewer/examiner failed to declare a conflict of interest, which is to what the problems you describe amount.
Q2: Contact the relevant office/convenor/official, and disclose the conflict of interest in writing. Explain that you did not agree to be nominated for the role of external assessor duty. Then:
option A (ask either to be excused or for confirmation to proceed)
Ask the office/convenor/official either
- to excuse you from the assessment duty (this is the professional course of action if a conflict of interest is deemed unacceptable) or
- confirm in writing that you can undertake the assessment duty despite your conflict of interest (if this happens, keep the relevant letter/message, and bring it to the defence -- that way, if you are challenged about acting as external assessor, you can show the letter/message and thus not be blamed for the situation).
option B (say you are excusing yourself on the grounds of conflict of interest)
If you feel strongly that the conflict of interest is unacceptable, you can, alternatively, simply notify the office/convenor/official that you refuse to act as external reviewer due to the conflict of interest. It is perfectly reasonable and professional to say this, unless you have misunderstood the nature of the role.
option C (say you cannot do it in the timeframe)
If you feel the institution does not take conflicts of interest seriously, you may wish to refuse due to the short notice of the examining engagement.
Do not keep quiet about the conflict of interest out of some desire to protect the Master's student. He/she may have acted inappropriately by nominating you; if so. it would be far better for him/her if this mistake is rectified before the defence, not after.
If you keep quiet and somebody else discovers this conflict of interest, it could have serious ramifications for the Master's student and you may be regarded as having behaved unprofessionally or even unethically. If, on the other hand, you declare the conflict of interest officially, then any blowback would be to the person/official who permitted you to serve as external assessor despite being told about the conflict of interest (because, when questioned about it, you would say, "yes, of course I was aware of the conflict of interest, and declared it accordingly to the dean and the rest of the panel; as you can see from this message dated ___, the dean confirmed that I can still act as external assessor; I was a bit uneasy about it, but I was not about to argue with the dean").