Mortgage fraud: not just a matter of consent?

This article was first published in the November 2009 issue of the Legal Compliance Bulletin.

Is it still an issue?

With media reports suggesting that the housing market may slowly be picking up and banks becoming willing to lend a little bit more, do solicitors still need to be on their guard for mortgage fraud?

There are two main types of mortgage fraud: fraud committed opportunistically and fraud committed as part of criminal enterprises.

People who are usually law abiding may commit opportunistic fraud, by fudging their income and other details to get a mortgage which they think they can pay but which they probably wouldn't get if the true state of affairs were known. In the current economic climate, where recovery is slow and greater deposits or higher incomes are required by lenders, people who are desperate to remortgage or struggling to get onto the property ladder may be more tempted to commit this type of fraud.

In addition, criminal enterprises will still be looking to exploit any opportunity to make money. So they will seek to:

• gain mortgages over properties which are vacant due to repossession or where the owner is deceased,
• be willing to take mortgages at lower loan to value ratios and use criminal monies to fund the deposits, or
• buy the properties cheaply, allegedly renovate them and seek a mortgage some months later, on which they then fail to make payments.

Lenders are now reporting that they are seeing increased levels of fraud in new mortgage applications. Clearly mortgage fraud remains an important issue for solicitors.

Solicitors in the firing line

While banks, building societies and mortgage brokers are required by law to identify and verify their clients and make enquiries about the source of their funds, this does not mean you can leave it to them. You are required under the Money Laundering Regulations 2007 to undertake these checks and you should be doing so diligently, to protect yourself, your firm and the reputation of the profession.

Lenders are increasingly taking action to recover the loss of fraud from solicitors. If it turns out that your client has engaged in mortgage fraud, and you could have helped prevent it had you undertaken proper due diligence, you may find yourself on the receiving end of such a claim. Such claims are particularly likely where property values have fallen and the lender can no longer cover the loss by selling the property.

There is an increasing perception among lenders, rightly or wrongly, that solicitors, or certain groups of solicitors, have insufficient systems in place to combat fraud or are vulnerable to corruption themselves. This may lead to a view that the chances of recovering the loss from the solicitor are less likely and the risks of using the services of some solicitors has increased. Some lenders have already taken steps to restrict their panel membership in an effort to mitigate those perceived risks.

In the current climate, the profession as a whole needs to be ever more vigilant in preventing their services being used to facilitate mortgage fraud, and to demonstrate that vigilance.

How is mortgage fraud perpetrated?

The main methodologies utilised are outlined in the Law Society's practice note on mortgage fraud. It is not proposed to repeat those here.

However with most methodologies you will find that the criminals have used fake identities or mortgage mules and they have provided other false information on the mortgage application. It is simply not enough just to have the secretary or the receptionist take a photocopy of a passport, put it on a file and never look at it. You should consider the identity information you have on file and compare it with what you know about the client and the transaction. If something does not add up, you should ask questions until you are satisfied with the answers.

You cannot assume that a transaction is completely fine just because it would not seem to make an obvious profit.

In the case of a criminal enterprise, if they have to provide a £40,000 deposit to get a £60,000 loan on a £100,000 property, you might think that there is no scope for profit as all the funds have gone into the property. This is not the case.

If the £40,000 is the proceeds of crime, they are not entitled to it anyway. In this scenario, they have invested £40,000 and a little bit of time and effort in making the mortgage application. If the purchase is from a genuine seller, they have layered that £40,000 and made use of it in the legitimate economy. This of itself is a benefit. They now have a property from which to carry out further criminal activity and make more money. They can then sell the property to themselves, at a higher value and get a fresh mortgage on it. Because they are selling it to themselves, the whole of the second mortgage advance then becomes profit.

If they are simply remortgaging a property they don't actually own, the whole lot is profit rather than debt.

Take steps to protect yourself

While solicitors cannot be expected to take on the role of detective, there are a number of steps you can take to minimise the risk of a client using your services to facilitate mortgage fraud.

Look carefully at the identity verification information you are provided with so that you can assess whether it is consistent with the identity details that the client has given you.

Consider verifying the signature of the client and undertaking electronic identification checks as well. The Council of Mortgage Lenders' handbook requires that signatures must be verified. Electronic checks can however alert you to specific mortgage fraud warning signs such as:

• the purported client is actually deceased,
• county court judgements have been registered with respect to the address,
• there are previous reports of suspected fraud,
• there are two people with the same name connected with the property, and
• the length of time that the person has been on the electoral roll at the address is different to the time the property has been registered to them

Understand the source of funds for the transaction and why any unusual payments are being structured the way they are. Pay particular attention to any ‘off contract' payments which have not been brought to the lender's attention.

If something in the transaction does not look right, do not underestimate the importance of asking why. Keep asking questions and requesting evidence to support the answers until you are happy with the answers or have formed the view that mortgage fraud is being committed.

What do you do if you suspect mortgage fraud?

Solicitors may be tempted to simply take the approach of reporting their client to the Serious Organised Crime Agency (SOCA), on the basis that they will get consent to proceed and it will all be ok. That is far from the case.

Unless you suspect that a deposit is being paid with the proceeds of crime, it is only after the mortgage advance has been paid into your account that criminal property comes into existence. So until that point you do not have criminal property and would not be making a suspicious activity report (SAR).

The only basis on which you would be making a SAR is to seek consent to have a fraudulently obtained mortgage advance paid into your client account at a future date and to proceed with the transaction on the basis of that fraud.

This is a rather odd request for a solicitor, who is an officer of the court and bound by ethical rules, to make.

Consent from SOCA is only a defence to money laundering. It is not a defence to a charge of fraud, or a charge of aiding and abetting fraud, or a charge of handling. Aside from the criminal sanctions, under Rule 1 of the Code of Conduct you are also required to uphold the rule of law. Continuing with a transaction which you know facilitates criminal conduct is likely to result in a breach of Rule 1.

So where does that leave you?

If you know or suspect your client may be attempting to obtain a mortgage by fraud:

• You should discuss your concerns with the client to assess whether or not they have provided incorrect information to the lender.
• You should explain to them the consequences of such an action and that you will not be able to continue to act for them if they persist in providing the incorrect information.
• You should encourage them to amend the application so that it provides accurate and honest information.
• If they refuse to amend the application, you should consider your own position with respect to the criminal offence of fraud, your ethical obligations and any possible civil actions. You may need to cease acting.
• You should consider your obligations of confidentiality and whether you are able to advise the lender and the police of the fraud, without your client's consent.

If, after the mortgage advance has been received, you come to know or suspect that your client's mortgage has been obtained by fraud:

• You now have possible criminal property and you should consider making a SAR to avoid a failure to disclose offence and to obtain consent for possessing the money in your client account and doing anything with it.
• You should consider whether you can discuss with your client the particulars of the suspected fraud and provide them advice about the consequences of such action and the need to make appropriate disclosure to the lender.
• You should consider your own position with respect to the criminal offence of fraud, your ethical obligations and any possible civil actions. You may need to cease acting.
• You should consider your obligations of confidentiality and whether you are able to advise the lender of the fraud, without your client's consent.
• You should consider contacting your insurers.

It is also possible, though less likely, you may be acting for the seller, and come to know or suspect that the buyer's mortgage has been obtained by fraud.

If so, you should consider whether your client has had any part in the fraud or attempted fraud (ie non-declared off-contract payments).

If your client is involved in the fraud or attempted fraud,

• You should consider whether you can discuss the particulars of the fraud with them and encourage them to take steps to make appropriate disclosures to the lender.
• You should consider your own position with respect to the criminal offence of fraud, your ethical obligations and any possible civil actions. You may need to cease acting.
• You should consider whether you can make a report to police about any attempt fraud, or whether you need to make a SAR for a completed fraud to avoid a failure to report offence.
• You should consider contacting your insurers.

If your client is not involved in the fraud,

• You should discuss the particulars of the fraud with your client and advise on the consequences of proceeding with the transaction. You should encourage them to allow you to raise the matter with the lender.
• Your client may a have a defence to a money laundering charge due to the adequate consideration defence.
• You should consider your position with respect to offence of fraud, your ethical obligations and any possible civil actions. You may need to cease acting.
• You should consider making a SAR (if the mortgage advance has been paid) to avoid a failure to report offence.

More information

For more information on mortgage fraud methodologies, how to protect your firm and making suspicious activity reports, you can read the Law Society's practice notes on Mortgage Fraud and Anti-Money Laundering which can be located on the practice notes homepage.