Advice and Information related to Identifying Mortgage Fraud
The recent slow down in the UK property market has exposed a rise in mortgage fraud by organised criminals and the potential vulnerability of professionals to be exploited by organised crime syndicates.
How is the fraud perpetrated?
- A criminal syndicate will usually organise finance on a number of properties. The buy-to-let market is particularly vulnerable to mortgage fraud, whether through new build apartment complexes or large scale renovation projects.
- The nominated purchasers, who are taking out the mortgage, are likely to have no beneficial interest in the property and may even be fictitious. This creates a real risk that a solicitor may enter into a contract on behalf of a non-existent principal and thus raises the possibility that the solicitor may be personally liable to implement the contract.
- 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 can also 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 mortgages with another lender through further fictitious purchasers and effectively sells the property back to themselves, but at an even greater leveraged valuation.
- Because the second mortgage is inflated, the first mortgage is repaid together with the arrears, leaving a substantial profit. This may be repeated many times, until a lender finally calls up the security, only to find the property 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, to provide reassurance and direction to the other professionals instructed to act around the periphery. There is evidence that mortgage brokers and introducers have been used in this role in the past.
Mortgage lenders often rely on professionals to verify the legitimacy of a transaction and safeguard their interests. Lenders may not extensively verify the information they receive, especially in a rising market. They will subscribe to the CML Handbook and expect their solicitors to comply with their guidelines as a means of protecting their lending.
Solicitors are likely to be approached with packaged transactions and completed paper work. The lender will often have already received the loan applications, and granted the loan before the solicitor is instructed. The solicitor will simply be required to carry out the necessary conveyancing work to transfer title and complete the transaction.
The solicitor will be 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 specific obligations in the CML Handbook (e.g. Para. 4 which requires solicitors to have had sight of the valuation report in every case; Para. 5.9 which requires solicitors to reporting every case where the balance of the purchase price is not being provided by the borrower from his own funds; and Para.6.4 which requires disclosure of all incentives).
How are you affected?
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 due diligence to a transaction.
How can you protect yourself?
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?
Where any of these warning signs exist, applying anti-money laundering checks and applying the requirements set out in the CML handbook will help you to understand 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 any bank accounts relating to the transaction.
- Undertake enhanced due diligence - many organised crime syndicates conducting mortgage fraud provide only paperwork, and avoid a meeting. 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 asked to use the 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 money laundering, you should consider making a disclosure to the Serious Organised Crime Agency.
- Disclose material facts - inform your lender client providing the mortgage of all material facts as required under the CML Handbook.