1.1 Who should read this practice note?
All solicitors who do conveyancing work involving a mortgage.
1.2 What is the issue?
Criminals will exploit weaknesses in lending and conveyancing systems to gain illegitimate financial advantage from the 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.
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 6.
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:
- 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 SRA Handbook to protect their lending.
You may be approached in any of the following ways:
- You may be asked to complete the transaction and simply transfer the title in accordance with already exchanged contracts. A lender who has received the loan applications and already approved 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 given to the lender.
- You may be encouraged not to comply with obligations in the CML Lenders Handbook or the BSA Mortgage Instructions.
- 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.
2.4 Other methodologies
Fraud methodologies regularly evolve, particularly in changing economic circumstances.
2.4.1 Equity release fraud
In difficult economic times, clients may struggle to meet mortgage repayments, and turn to an equity release scheme, to be able to remain in their homes. This scheme sees home owners receiving an offer from a third party to purchase the property while the home owner is allowed to rent the property. The home owner is given the option to purchase the property back when their financial position improves.
However, criminal involvement can result in the following:
- The home owner sells the property to someone who is actually a member of the criminal syndicate, a mortgage mule, or an entirely fictitious person.
- A mortgage will be taken out by this investor for an inflated value against the property.
- The original loan will be paid out and the money representing the equity in the home will be taken by the criminal syndicate. No payments will be made towards the mortgage.
- The original home owner will be unaware of the lack of payments being made until the bank seeks to repossess the property and evicts them a mere tenant.
- The value of the mortgage will be far greater than the original mortgage and it will be impossible for the original owner to purchase the property back.
2.4.2 Application hijack
Application hijacking involves criminals intervening before completion of a mortgage, falsely claiming to be the new representatives for the purchaser. They thereby obtain the mortgage advance in place of the real purchaser.
The lender is contacted later by the real representatives looking to complete the transaction, only to find the funds have already been paid away and have now disappeared.
The criminals will generally pose as solicitors or conveyancers, taking the details of someone who is on the professional register. They will then use fake or cloned letterhead to write to the lender as the representative, providing their own account details for the client account.
Solicitors who have unknowingly undertaken work for criminal syndicates previously may find that they are at greater risk of this type of fraud as the syndicate will have access to their genuine letter head and standard mortgage correspondence.
2.4.3 After the event mortgaging
While re-mortgaging and re-financing may be common during an economic downturn, the use of apparent equity to access mortgage funds is an avenue also exploited by criminals.
- Fraudsters will use private funds, often of criminal origin, to purchase a property. Often the purchase will be through an auction and may involve repossessed properties, to ensure a discounted purchase price.
- After the purchase is completed, and usually within 12 months, the fraudster will seek external funding against the property.
- They then take the mortgage advance and disappear, failing to make any payments.
Another variation on this methodology is that the fraudster will pose as a property developer and will seek bridging loans to cover the purchase of a number of properties. These may be properties which the fraudsters previously used as part of a flipping scheme and have finally been repossessed by the bank. The bridging loan is only sought after the purchase has been registered and possession has been taken of the property.
2.4.4 Claiming deceased estates
Criminals will make use of the notices section of their local papers to identify deceased estates that can be exploited for criminal gain, either because there are no known heirs or probate has been delayed. They will seek to either falsely establish their identity as a long lost heir or will pose as the deceased person. In both scenarios they will seek a mortgage over the existing equity in the property and then disappear with the funds.
2.4.5 Court orders for sale
In an economic downturn, more properties are repossessed or are unable to be sold. They are then left unoccupied and boarded up.
- Criminals will seek out these properties and details of the owners.
- They will then apply to the County Court for a judgment against the owner over a non-existent debt.
- They will not actually give the owner notice of this application.
- Once obtained, this judgment is converted into an order for sale.
- The property is sold either directly to the person claiming the debt or to one of their associates at an inflated price, using criminal money.
- A mortgage will be obtained over the property at the inflated value.
- The mortgage advance will be taken and no payments will be made.
3 Warning signs
Criminal methodologies are continually changing. However, there are several known warning signs, which may be indicators of mortgage fraud.
You should remain alert to warning signs in the information and documentation which are in your possession. You should pay particular attention to transactions which exhibit a number of 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 an electronic identity check, which may include credit history information. 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.
- There is a last minute change of representative on the other side.
- The property has a history of being re-sold quickly or mortgages settled quickly.
- A transfer of title to land is requested with respect to only some of the seller's holdings and the properties are not grouped together.
- Finance is sought after the property has been registered in the buyer's name.
- The property has been registered to an owner for a significant period of time and the person claiming to be the owner does not appear to be of an age to have held the land for that length of time.
- The other conveyancer or solicitor allegedly involved in the transaction has an e-mail address from a large-scale web based provider.
- There is a County Court judgment against the property.
- The land is transferred following a court order, but the mortgage is sought some time later.
- 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 or a developer. 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 See Rule 14(5) of the SRA Accounts Rules 2011 and Guidance Note 5.
- 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 the anti-money laundering practice note, Chapter 5.6.
- There has been a recent transfer of land where no money has changed hands or the price was significantly less than the full market value.
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 your client and where relevant, any beneficial owners. This is important whether you are acting for the purchaser or the seller. 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.
If you have concerns about a person's identity, you should consider checking whether the person is listed on a negative database, such as the register of deaths or a list of known fraudsters.
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 the anti-money laundering practice note, the joint Land Registry and Law Society practice note on property and registration fraud, CML Lender's Handbook and BSA mortgage instructions 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.
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 either party 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
You can also check a solicitor's details with the SRA over the telephone. Their contact number is 020 7320 5675.
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. You may consider contacting the firm directly by the contact details on the registry if you have concerns about the bona fides of the representatives on the other side to the transaction, particularly if there is a last minute change of representative.
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.
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.
You should consider whether the identity you have been given is consistent with the actual presentation of the client and the transaction as a whole.
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.
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 Lenders Handbook, BSA Mortgage Instructions 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:
- 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 and section C3 of the BSA mortgage instructions say you must report such changes to the lender. However, individual lenders may vary this obligation, either by using part two of the CML 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, the CML Handbook part two or the BSA mortgage instructions to assess your obligations to disclose this information to the lender.
5 Confidentiality and disclosure
5.1 SRA Handbook obligations
5.1.1 Chapter 3
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 Chapter 4
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. 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 National Crime Agency (NCA). You must also consider your duty of confidentiality and legal professional privilege before you do so.
Importantly, making a disclosure to the NCA 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 the NCA, see the anti-money laundering practice note.
For further information on whether legal professional privilege prevents you from making a disclosure to either the NCA 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 the NCA's Financial Intelligence Helpdesk on 020 7238 8282.
6 More information and products
6.1 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.
6.2 More information and products
6.2.1 Training and support
6.2.2 Law Society publications
6.2.3 Practice Advice Service
The Law Society provides support for solicitors on a wide range of areas of practice. Practice Advice can be contacted on 020 7320 5675 from 09:00 to 17:00 on weekdays.
6.2.4 Professional Ethics Helpline
Solicitors Regulation Authority's Professional Ethics Helpline for advice on conduct issues.
6.2.5 Law Society Consulting
If you require further support, Law Society Consulting can help. We offer expert and confidential support and guidance, including face-to-face consultancy on risk and compliance. Please contact us on 020 7316 5655, or email firstname.lastname@example.org.
Find out more about our consultancy services