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Mortgage fraud

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Mortgage fraud practice note – 18 March 2008

1 Introduction

1.1 Who should read this practice note?

All solicitors who do conveyancing work involving a mortgage.

1.2 What is the issue?

Criminals are increasingly exploiting weaknesses in lending and conveyancing systems to gain illegitimate financial advantage from the strong UK property market. This can be either:

opportunistic action using misrepresentation of income or property value to obtain greater loans than a person is entitled to
organised crime syndicates overvaluing properties, using false identities and failing to make any mortgage repayments

A solicitor will be involved in most property transactions undertaken in the UK. You can find yourself criminally liable if your client commits mortgage fraud, because of the extension of the definition of fraud in the Fraud Act 2006 and the anti-money laundering regime in the UK. You can be liable even if you were not aware of the fraud or actively participated in it.

Courts will assume a high level of knowledge and education on your part. They will often be less willing to accept claims that you were unwittingly involved if you have not applied appropriate due diligence.

This practice note highlights the warning signs of mortgage fraud and outlines how you can protect yourself and your firm from being used to commit mortgage fraud.

1.3 Professional conduct

The following sections of the Solicitors' Code of Conduct 2007 (code of conduct) are relevant to mortgage fraud:

1.4 Legal and other requirements

Several pieces of legislation impose obligations on you with respect to property transactions. If these obligations are breached, criminal sanctions can follow.

Fraud Act 2006
Proceeds of Crime Act 2002 (as amended)
Money Laundering Regulations 2007

All links to legislation in this practice note will take you to the Statute Law Database website. The legislation contained in this database may not contain the most current amendments and you should take your own action to ensure you have the most up-to-date version of the legislation.

1.5 Status of this practice note

Practice notes are issued by the Law Society as a professional body for the benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. Solicitors are not required to follow them, but doing so will make it easier to account to oversight bodies for their actions.

They do not constitute legal advice and, while care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them.

For queries or comments on this practice note contact the Law Society's Practice Advice Service: www.lawsociety.org.uk/practiceadvice.

1.6 Terminology in this practice note

Must - a specific requirement in the Solicitors' Code of Conduct or legislation. You must comply, unless there are specific exemptions or defences provided for in the code of conduct or relevant legislation.

Should - good practice for most situations in the Law Society's view. If you do not follow this, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.

May - a non-exhaustive list of options for meeting your obligations. Which option you choose is determined by the risk profile of the individual practice, client or retainer. You must be able to justify why this was an appropriate option to oversight bodies.

1.7 More information and products

best practice training
the Law Society's anti-money laundering practice note
the Council of Mortgage Lenders' Handbook - what's expected of you when working with lenders.
the Law Society's Property Section - join for support and training
other Law Society publications - order from our bookshop
- Solicitors and Money Laundering Handbook - 2nd edition
- Conveyancing Handbook - 14th edition
the Solicitors Regulation Authority's Professional Ethics Helpline for advice on conduct issues

2 How does mortgage fraud occur?

2.1 What is mortgage fraud?

Mortgage fraud occurs where individuals defraud a financial institution or private lender through the mortgage process.

The definition of fraud in the Fraud Act 2006 covers fraud by false representation and by failure to disclose information where there is a legal duty to disclose. False representations can be made explicitly or implicitly and may occur even where you know only that the representation might be misleading or untrue.

The value of a mortgage obtained through fraud is the proceeds of crime. Under the Proceeds of Crime Act 2002, you risk committing a money laundering offence if you acquire, use, have possession of, enter into an arrangement with respect to, or transfer this criminal property.

Read the relevant legislation and the anti-money laundering practice note, Chapter 5.

2.2 Opportunistic mortgage fraud

2.2.1 General methodology

Individual purchasers can commit mortgage fraud by obtaining a higher mortgage than they are entitled to by providing untrue or misleading information or failing to disclose required information. This may include providing incorrect information about:

identity
income
employment
other debt obligations
the sources of funds other than the mortgage for the purchase
the value of the property
the price to be paid and whether any payments have been, or will be made, directly between the seller and the purchaser

2.2.2 Use of professionals

Opportunistic fraudsters will not usually attempt to include their solicitor in the original fraud. However, you may become aware of information conflicting with that provided to the lender as you progress the conveyance.

Clients engaged in opportunistic fraud may be evasive when questioned on the conflict and may try to dissuade you from conducting relevant checks or advising the lender.

2.3 Large scale mortgage fraud

2.3.1 General methodology

Large scale mortgage fraud is usually more sophisticated and involves several properties. It may be committed by criminal groups or individuals, referred to hereon as fraudsters. The buy-to-let market is particularly vulnerable to mortgage fraud, whether through new-build apartment complexes or large scale renovation projects. Occasionally commercial properties will be involved. The common steps are:

The nominated purchasers taking out the mortgage often have no beneficial interest in the property, and may even be fictitious.
The property value is inflated and the mortgage will be sought for the full inflated valuation.
Mortgage payments are often not met and the properties are allowed to deteriorate or used for other criminal or fraudulent activities, including drug production, unlicensed gambling and prostitution.
When the bank seeks payment of the mortgage, the fraudsters raise mortgages with another bank through further fictitious purchasers and effectively sell the property back to themselves, but at an even greater leveraged valuation.
Because the second mortgage is inflated, the first mortgage and arrears are paid off, leaving a substantial profit. This may be repeated many times
Eventually a bank forecloses on the property, only to find it in disrepair and worth significantly less than the current mortgage and its arrears.

2.3.2 Use of non-bank lenders

Fraudsters may use private sources of funding such as property clubs, especially when credit market conditions tighten. These lenders often have lower safeguards than institutional lenders, leaving them vulnerable to organised fraud. Property clubs can be targeted particularly in relation to overseas properties where the property either does not exist, or it is a vacant piece of land, not a developed property.

2.3.3 Use of corporate structures

Sometimes fraud is achieved by selling the property between related private companies, rather than between fictitious individuals. The transactions will involve inflated values, and will not be at arm's length.

Increasingly, off-shore companies are being used, with the property sold several times within the group before approaching a lender for a mortgage at an inflated value.

You may be asked to act for both the seller and the purchaser in these transactions.

2.3.4 Flipping and back-to-back transactions

Investors will always look to re-sell a property at a profit. However, fraudsters may seek to re-sell a property very quickly for a substantially increased price. This process is called flipping, and will usually involve back-to-back sales of the property to limit the time between sales. Variations on this fraud include:

The first mortgage is not registered against the property, and not redeemed upon completion of the second sale.
The second purchaser may be fictitious, using a false identity or be someone vulnerable to pressure from the fraudster.
A mortgage may only be obtained by the second purchaser and for an amount significantly higher than the value of the property. The profit goes to the fraudster.

2.3.5 Use of professionals

Fraudsters will usually use at least one professional at the core of the fraud, to direct and reassure other professionals acting at the periphery. Mortgage brokers and introducers have been used in this role in the past.

Mortgage lenders often rely on other professionals to verify the legitimacy of a transaction and safeguard their interests. Lenders may not extensively verify information they receive, especially in a rising market. Institutional lenders will subscribe to the Council of Mortgage Lenders' Handbook and expect solicitors to comply with these guidelines. Private investors will rely on compliance with the Solicitors' Code of Conduct to protect their lending.

You may be approached in any of the following ways:

You may be asked to simply transfer the title to exchange and complete the transaction. A lender who has received the loan applications and already granted the loan may approach you with packaged transactions and completed paper work.
You may be encouraged to alter the value on the Certificate of Title for the Land Registry.
You may be encouraged not to comply with obligations in the CML Handbook.
You may be offered continued work at a higher margin to encourage less diligent checks.
Fraudsters may attempt to recruit you into the fraud, especially if you have unwittingly assisted previously, or have developed an especially close relationship with other participants in the scheme.

3 Warning signs

Criminal methodologies are continually changing. However, there are several known warning signs.

3.1 Identity and ownership

The client or the property involved is located a long distance from your firm. If bulk long distance instructions are not in your normal work, you may ask why they chose your firm, especially if they are a new client.
The client seems unusually uninterested in their purchase. You should look for other warning signs suggesting they are not the real purchaser.
The seller is a private company or they have recently purchased the property from a private company. You should consider whether the office holders or shareholders of the private company are otherwise connected with the transaction you are undertaking, and whether this is an arms length commercial transaction.
The client does not usually engage in property investment of this scale. You should ask why they are undertaking this new venture and where they are getting the financial backing from.
The current owner has owned the property for under six months. You should ask them to explain why they are selling so quickly.
The client's credit history is shorter than you would expect for their age, when you run a credit check. Fraudsters will often run a fake identity for a few months to give it legitimacy. You should ask your client about this.
There are plans for a sub-sale or back-to-back transactions. You should ask your client why they are structuring the transaction this way and seek information on the identities of the second purchaser, their solicitor and the lender.

3.2 Value

The property value has significantly increased in a short period of time out of line with the market in the area
The mortgage is for the full property value. While this is less likely in tighter credit conditions, you should consider it in light of the other warning signs.
The seller or developer have provided incentives, allowances or discounts. These may include cash back, free holidays, household fittings, payment of legal fees, help with mortgage repayments or rental guarantees, among others. You should consider whether this information has been properly disclosed to the lender.
The deposit is being paid by someone other than the purchaser. You should ask why, where the money is coming from, and whether this information has been properly disclosed to the lender.
The purchaser has paid the deposit directly to the seller. You should ask for evidence of the payment and consider whether this information has been properly disclosed to the lender.
There is money left over from the mortgage after the purchase price has been paid, and you are asked to pay this money to the account of someone you do not know, or to the introducer. You should ask why, and remember that you must not use your client account as a mere banking facility. See note ix to Rule 15 of the Solicitors Accounts Rules 1998.
You are asked to enter a price on the title that is greater than you know was paid for the property. You should ask why the prices are different. Read more about recording property value in section 4.6.

4 Protecting your firm

4.1 Ask questions

You should ask questions if you receive unusual instructions from your client, if any of the warning signs are present or there are inconsistencies in the retainer. You will better understand your instructions and be able to effectively assess the risk of the retainer to your firm.

Criminal methodologies change constantly, so you should remain alert to transactions that are unusual for a normal residential or commercial conveyance.

4.2 Identify and verify the client

You must find out and verify the identity of the purchaser and where relevant, any beneficial owners. You are not expected to be experts in forged documents, but you should ensure the identities you have been given correspond with the information on the mortgage documents and the bank accounts relating to the transaction.

Where a private company is the seller, or the seller has purchased from a private company in the recent past, and you are concerned that the sale may not be an arms length transaction, you should conduct a search of the Companies Register. You should find out the names and addresses of the office holders and the shareholders, which can be cross referenced with the names of those connected with the transaction, the seller and the buyer.

You should consider both the anti-money laundering practice note and the CML Handbook when deciding what information needs to be obtained to identify and verify the client and others.

4.2.1 Enhanced due diligence

Many mortgage fraudsters provide only paperwork and try to avoid meetings, particularly with the named purchasers. If you do not meet your client in a property transaction, you must undertake enhanced due diligence, as required under the Money Laundering Regulations 2007.

Read about enhanced due diligence in our anti-money laundering practice note, Chapter 4.9.

4.2.2 Reliance

Fraudsters will try to limit scrutiny of their identity and the transaction. They may ask you to use the reliance provisions under the Money Laundering Regulations 2007 to minimise the number of due diligence checks that you conduct.

You should consider reliance as a potential risk in itself. You remain liable for any breach of the regulations if the checks you rely on have not been conducted properly. To protect your firm, you should ask the following questions of the firm or individual you are being asked to rely on:

Are they regulated for anti-money laundering purposes? Mortgage brokers are currently not regulated under the Money Laundering Regulations 2007.
Have you done business with them previously?
Are they from an established firm?
What is their reputation? A general web search may reveal this.
Are they able to provide you with the client due diligence material they have?

You should ask for copies of the due diligence conducted, so that you can cross reference documents within the retainer and satisfy yourself as to the identity of the purchaser and, where relevant, beneficial owners.

Read more about reliance in our anti-money laundering practice note, Chapter 4.3.4

4.3 Identify other solicitors or conveyancers

Fraudsters may pose as a solicitor or a conveyancer acting for the seller to add greater legitimacy to the transaction. If you do not know them, you should check the recognised directory of their professional body.

Find a Solicitor
Directory of Licensed Conveyancers

Some fraudsters will try to assume the identity of professionals who actually exist. You should check that both the details and the final destination of documents match the details in the directory.

4.4 Consider all information on the retainer

4.4.1 Sources of information

The following information may be relevant in assessing the risk of a retainer, in monitoring of the retainer, and in resolving concerns when mortgage fraud risks appear:

documents involved in the retainer
comments by the client in interviews
correspondence or telephone conversations
comments by other parties to the transaction or their representatives
previous retainers for the client

4.4.2 Does it all add up?

You should consider whether the property and mortgage are consistent with what you know about the financial position and sources of income available to the client.

Example

You may have prepared a will for a client and done conveyancing on the purchase of a modest family home. If, a few years later, they then instruct you in the purchase of a holiday home that appears to be beyond their means according to earlier retainers, this would warrant closer inspection of the mortgage application. You should ask questions of the client to verify this information.

You should check all mortgage and contractual documentation carefully. Seek explanations from the client for any discrepancies in the document. It may be a simple misunderstanding of the documents or an inadvertent error needing correction.

4.4.3 Ensure documents are fully completed

You may receive contract documents that are not fully completed. For example, dates may be missing, the identities of parties not fully described, or financial details not fully stated. You should ensure all relevant sections of documents are completed before your client signs them, to avoid incorrect or fraudulent information being added later.

4.5 Signatures

You must ensure that you and your staff only witness signatures where you have actually seen the person signing the document. If any contract or mortgage documents have been pre-signed, you must either:

verify it was pre-signed in the presence of a witness
have the documents re-signed in your presence

You should take note of all signatures on transaction documents and consider examining and comparing signatures with other available documentation if:

you notice a discrepancy between signatures on the documentation
you have concerns about the identity of any of the parties to the transaction
the transaction is higher risk because it exhibits a number of the warning signs of mortgage fraud

4.6 Recording the property value

You should ascertain the true net cash price to be paid, to comply with the CML handbook and Land Registry requirements. You should consider any direct payments, allowances, incentives or discount in ascertaining this price.

You should state this amount as the consideration in all of the following documents:

contract
transfer documents
mortgage instructions
certificate on title to the lender
Land Registry forms

You should seek to understand any discrepancy between the value recorded in any of these documents, or if you are asked to enter a different value.

If you discover discrepancies in the valuation of the property between any of the relevant documents, you should consider your obligations to disclose this information to the lender.

Part one of the CML Handbook says you must report such changes to the lender. However, individual lenders may vary this obligation, either by using part two of the handbook, or through the specific instructions they provide.

Also consider your obligation to the lender to disclose any direct payments between the buyer and seller either already made, or proposed, that are not included in the mortgage instructions.

4.7 Changes to the retainer

You should stay alert to any changes in the circumstances of the retainer that may affect the agreed basis of the mortgage provision. These may include changes to the purchase price or previously undisclosed allowances, incentives or discounts.

Such arrangements may mean that the purchase price is different to that in the lender's instructions. In general, lenders will reasonably expect to receive such information, as it may affect their decision to grant the mortgage, or the terms of granting the mortgage.

You should ask questions to understand any changes. You should consult the lenders instructions or the CML Handbook part two, to assess your obligations to disclose this information to the lender.

5 Confidentiality and disclosure

5.1 Code of conduct obligations

5.1.1 Rule 3.16

You must not act for a buyer and a lender if a conflict of interest exists or arises between them. You have a conflict of interest if you have information about the conveyance that the lender would consider relevant to granting the loan, but the client does not want you to tell the lender.

5.1.2 Rule 4.02

You must disclose relevant information to the lender client. Any change to the purchase price, or information reasonably expected to be important to the decision to grant the mortgage, will be relevant to the lender.

However this obligation of disclosure to the lender client is overridden by your duty of confidentiality to the purchaser client in Rule 4.01. This duty of confidentiality can only be waived with the consent of the purchaser client, or if it is required or permitted by law.

While you should always seek clarification from your client if you discover any discrepancies in relevant information, you may wish to streamline the consent process. You may include a section in your standard terms and conditions for conveyancing clients, which provides that you will advise the lender client of any relevant information arising during the retainer. To rely on this approach for consent, you should:

specifically bring this term to the client's attention at the outset of the retainer
have them sign to signify acceptance of the terms and conditions

5.2 When can you tell the lender?

Where you believe a purchaser client has provided incorrect or incomplete information to a lender during the mortgage process, you must seek consent from them to provide the correct information to the lender. If your purchaser client refuses, you must refuse to continue to act for them and the lender.

You must still consider legal professional privilege and your duty of confidentiality before passing information to the lender, even after you have ceased to act for a client.

You are only released from your duty of confidentiality where you are satisfied of a strong prima facie case that the client, or third party, was using you to further a fraud or other criminal purpose. This test may be satisfied if a client has made deliberate misrepresentations on their mortgage application.

If you are not released from the duty of confidentiality, you should simply return the mortgage documents to the lender and advise that you are ceasing to act due to professional reasons, without providing any further information.

For further advice on whether you need to cease to act in a matter and whether you can provide information to the lender, contact the SRA's Professional Ethics Helpline, or seek independent legal advice.

5.3 When can you tell law enforcement?

You must consider the money laundering risk if you discover or suspect that a mortgage has been obtained fraudulently, and the funds have been received by the client, either into their account, or your client account.

You must consider making a disclosure to the Serious Organised Crime Agency. You must also consider your duty of confidentiality and legal professional privilege before you do so.

Importantly, making a disclosure to SOCA is merely a defence to money laundering offences. It is not a crime report. You may also make a report to your local police if you feel an investigation is warranted.

For further information on money laundering offences and making disclosures to SOCA, see the anti-money laundering practice note.

For further information on whether legal professional privilege prevents you from making a disclosure to either SOCA or the lender you may take legal advice. You can find a list of solicitors offering such advice in the Law Society's AML directory.

For further advice on whether you need to cease to act in a matter, contact the SRA's Professional Ethics Helpline.

5.4 Alerting your insurer

Banks are increasingly trying to recover mortgage fraud losses from professionals involved in conveyancing. If you suspect mortgage fraud has occurred, you should consider your obligations to your professional indemnity insurer. For further information on possible civil liability see the anti-money laundering practice note, Chapter 10.

5.5 Tipping off

You may be concerned about tipping off offences under the Proceeds of Crime Act 2002, in talking to the lender, insurer, or your purchaser client.

A key element of these offences is the likelihood of prejudicing an investigation. The risk of this is small when disclosing to a reputable lender or your insurer. They are also regulated for the purposes of anti-money laundering and subject to the same obligations. There is also a specific defence of making a disclosure for the purposes of preventing a money laundering offence.

In relation to asking further questions of your client and discussing the implications of the Proceeds of Crime Act 2002, there is a specific defence for tipping off for legal advisors who are seeking to dissuade their client from engaging in a money laundering offence.

For further advice on tipping off, see anti-money laundering practice note, Chapter 5.8.

For further information about avoiding tipping off in a particular case, contact SOCA's Financial Intelligence Helpdesk on 020 7238 8282.