Identifying Mortgage Fraud
What is Mortgage Fraud?
The buy-to-let market is particularly vulnerable to mortgage fraud. Whether through new build apartment complexes or large scale renovation projects. Criminal syndicates will organise finance on a number of properties.
The nominated purchasers, who are taking out the mortgage, are unlikely to have a beneficial interest in the property and may even be fictitious. This possibility is particularly worrying as it creates a real risk that the solicitor may enter into a contract on behalf of an non-existent principal thus making the firm potentially personally liable.
The value of the property is inflated and a maximum loan to value will be taken out for the full inflated valuation.
Often, mortgage payments are not met and the properties are allowed to deteriorate. The properties may be used for other criminal or fraudulent activities such as drug production, unlicensed gambling and prostitution.
When the lender seeks payment of the mortgage, the crime syndicate raises a new mortgage with another bank through further fictitious purchasers and effectively sells the property back to themselves, but at an even greater valuation.
Because the second mortgage is inflated, the first mortgage is repaid together with the arrears, leaving a substantial profit for the criminals. This may be repeated many times, until a lender finally calls up the security, only to find it in disrepair and worth significantly less than the current mortgage and its arrears.
Using the services of professionals
Organised criminals will generally involve at least one professional at the centre of the fraud, providing reassurance and direction to the others instructed to act in parts of the scheme.
Mortgage lenders often rely on professionals to safeguard their interests and verify the legitimacy of a transaction. Some Lenders have sadly taken limited steps to verify the information they receive, especially in a rising market.Self certification of income is one example of this trend.
Solicitors are often approached with completed paper work and packaged transactions. The lender will often have already received the loan applications, and granted the loan before they are instructed. The solicitor will simply be required to carry out the conveyancing work.
The solicitor is often encouraged to complete the Certificate of Title at the gross price and not the actual price paid for the property after allowances and discounts, while being discouraged from complying with obligations in the CML Handbook.
How does this affect you?
If a mortgage has been obtained by fraud, it is then the proceeds of crime. If solicitors complete a property transaction where the mortgage has been obtained by fraud, you risk committing a principal money laundering offence. Courts will assume a high level of legal knowledge and education, and be less willing to accept claims that a solicitor was unwittingly involved in a fraud if they have not applied appropriate Customer Due Diligence to a transaction.
What can you do to reduce the risk?
Know the warning signs for fraudulent mortgage transactions. Ask yourself the following questions:
Has the property been owned by the current owner for less than six months?
Has the value of the property significantly increased in a short period of time?
Does the client usually engage in property investment of this scale?
Does the client seem unusually disinterested in their purchase?
Does the client seem unusually disinterested in the amount of the fee?
Is the mortgage for the full value of the property?
Is the deposit being paid by someone other than the purchaser?
If there is money left over from the mortgage after the purchase price has been paid, are you being asked to pay this money to the account of someone you don't know, or to the introducer, or to someone else on the client's instructions?
Have you been asked to enter a price on the title that is greater than you know was paid for the property?
If any of these warning signs apply, carrying out anti-money laundering checks and applying the requirements set out in the CML handbook will help you establish whether you are involved in a legitimate transaction or if you are being used to facilitate mortgage fraud.
Relevant checks and procedures include:
Know your client and any beneficial owners – ascertain and verify the identity of the purchaser. Ensure the identities you have been given correspond with the information on the mortgage documents and the bank accounts relating to the transaction.
Undertake enhanced due diligence – many organised crime syndicates involved in mortgage fraud provide only paperwork, and avoid meetings. If you do not meet your client you are required under the Money Laundering Regulations 2007 to undertake Enhanced Due Diligence and enhanced monitoring of the transaction.
Relying on other professionals
If you are asked to use the new reliance provisions in the Money Laundering Regulations 2007 to minimise Client Due Diligence activities, consider who you are relying upon.
Are they regulated for anti-money laundering purposes?
Do you know them personally?
Are they from an established firm?
What is their reputation?
Are they able to provide you with the client due diligence material they have?
Even if you rely on someone else, you are still responsible for ensuring due diligence has been appropriately conducted.
Reporting
If you suspect you are being asked to facilitate mortgage fraud, you should make a disclosure to the Serious Organised Crime Agency.
CML Handbook
Have regard at all times to the lenders requirements, for example the requirement by some lenders to disclose all incentives in relation to new build property.
Click here to view the original article by the Law Society of England & Wales.
Go to Anti-Money Laundering Section
