Real Estate WS1 – Taking Instructions TIFF LIAO
Law Society Practice Note: Mortgage Fraud
Practice note highlights the earning signs of mortgage fraud and outlines how you can protect yourself and your firm from being used to commit
mortgage fraud.
1 Introduction
1.1 Who should read this practice note?
All solicitors who do conveyancing work involving a mortgage.
Solicitors responsible for supervising others doing conveyancing work should ensure those staff have read this practice note.
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
did NOT actively participate in it.
Courts will:
assume a high level of knowledge and education on your part
will often be less willing to accept claims that you were unwittingly involved if you have NOT applied appropriate due diligence.
NATURE OF A MORTGAGE FRAUD
Mortgage Fraud = occurs where individuals defraud a financial institution or private lender through the mortgage process
Definition
- In the Fraud Act 2006
- Covers fraud by false representation and by failure to disclose info where there is a legal duty to disclose
- The former can be made:
explicitly or implicitly
may occur even when you know only that the representation might be misleading or untrue
- The money obtained through fraud will be proceeds of crime
- Under the Proceeds of Crime Act 2002 as amended, you risk committing money laundering offence if you:
(a) Acquire, use, have possession of, enter into agreement with respect to, or transfer this criminal property
(b) Fail to report suspected money laundering
WAYS MORTGAGE FRAUD
MAY BE COMMITTED
OPPORTUNITIST MORTGAGE FRAUD
GENERAL - By obtaining a HIGHER value mortgage than they are entitled to by:
METHODOLOGY Providing untrue or misleading info
Failing to disclose required info
- This many include providing INCORRECT info 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
USE OF - Will NOT usually attempt to include their solicitor in the original fraud
PROFESSIONALS
- But solicitors may become aware of conflicting info with that provided to the lender as conveyance
progresses
- Clients may be evasive when questions on the conflict and try to dissuade you from conducting
relevant checks or advising the lender
1
TIFF LIAO
, Real Estate WS1 – Taking Instructions TIFF LIAO
Law Society Practice Note: Mortgage Fraud
LARGE SCALE MORTGAGE FRAUD
GENERAL - Usually more sophisticated + involves several properties
METHODOLOGY
- Buy-to-let market particularly vulnerable (through new-build apartment complexes or large-scale
renovation projects)
- Common steps:
(1) the nominated purchasers taking out the mortgage often have no beneficial interest in the property and
may even be fictitious
(2) the property value is inflated, and the mortgage will be sought for the full inflated valuation
(3) mortgage payments are often not met, and the properties are allowed to deteriorate or used for other
criminal or fraudulent activities, including drug production, people trafficking, unlicensed gambling and
prostitution
(4) 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
(5) because the second mortgage is inflated, the first mortgage and arrears are paid off, leaving a
substantial profit – this may be repeated many times
(6) eventually a bank forecloses on the property, only to find it in disrepair and worth significantly less than
the current mortgage and its arrears
USE OF NON-BANK - using private sources of funding, such as property clubs, especially when credit market conditions
LENDERS 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
Is a vacant piece of land, not a developed property
USE OF CORPORATE - Achieved by selling the property between related private companies RATHER than fictitious individuals
STRUCTURES
- Transactions will involve inflated values and will NOT be at arms 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.
FLIPPING AND BACK- - fraudsters may seek to re-sell a property very quickly for a substantially increased price. This process is
TO-BACK called flipping and will usually involve back-to-back sales of the property to limit the time between sales.
TRANSACTIONS
- Variations of this fraud:
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, allowing the profit to go to the fraudster
USE OF - usually use AT LEAST ONE professional at the core of the fraud, to direct and reassure other
PROFESSIONALS professionals acting at the periphery.
e.g. 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.
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.
Explanations are often given about former solicitors being unable to act due to delay or not being on the
new Lender’s mortgage panel. A lender who has received the loan applications and already approved the
loan may approach you with packaged transactions and completed paper work
encouraged to alter the value or give other misleading information on the Certificate of Title given to
the lender
encouraged NOT to comply with obligations in the UK Finance Mortgage Lenders’ Handbook or the
BSA Mortgage Instructions
offered continued work at a higher margin to encourage less diligent checks
attempted to be recruit into the fraud, especially if you have unwittingly assisted previously, or have
2
TIFF LIAO
Law Society Practice Note: Mortgage Fraud
Practice note highlights the earning signs of mortgage fraud and outlines how you can protect yourself and your firm from being used to commit
mortgage fraud.
1 Introduction
1.1 Who should read this practice note?
All solicitors who do conveyancing work involving a mortgage.
Solicitors responsible for supervising others doing conveyancing work should ensure those staff have read this practice note.
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
did NOT actively participate in it.
Courts will:
assume a high level of knowledge and education on your part
will often be less willing to accept claims that you were unwittingly involved if you have NOT applied appropriate due diligence.
NATURE OF A MORTGAGE FRAUD
Mortgage Fraud = occurs where individuals defraud a financial institution or private lender through the mortgage process
Definition
- In the Fraud Act 2006
- Covers fraud by false representation and by failure to disclose info where there is a legal duty to disclose
- The former can be made:
explicitly or implicitly
may occur even when you know only that the representation might be misleading or untrue
- The money obtained through fraud will be proceeds of crime
- Under the Proceeds of Crime Act 2002 as amended, you risk committing money laundering offence if you:
(a) Acquire, use, have possession of, enter into agreement with respect to, or transfer this criminal property
(b) Fail to report suspected money laundering
WAYS MORTGAGE FRAUD
MAY BE COMMITTED
OPPORTUNITIST MORTGAGE FRAUD
GENERAL - By obtaining a HIGHER value mortgage than they are entitled to by:
METHODOLOGY Providing untrue or misleading info
Failing to disclose required info
- This many include providing INCORRECT info 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
USE OF - Will NOT usually attempt to include their solicitor in the original fraud
PROFESSIONALS
- But solicitors may become aware of conflicting info with that provided to the lender as conveyance
progresses
- Clients may be evasive when questions on the conflict and try to dissuade you from conducting
relevant checks or advising the lender
1
TIFF LIAO
, Real Estate WS1 – Taking Instructions TIFF LIAO
Law Society Practice Note: Mortgage Fraud
LARGE SCALE MORTGAGE FRAUD
GENERAL - Usually more sophisticated + involves several properties
METHODOLOGY
- Buy-to-let market particularly vulnerable (through new-build apartment complexes or large-scale
renovation projects)
- Common steps:
(1) the nominated purchasers taking out the mortgage often have no beneficial interest in the property and
may even be fictitious
(2) the property value is inflated, and the mortgage will be sought for the full inflated valuation
(3) mortgage payments are often not met, and the properties are allowed to deteriorate or used for other
criminal or fraudulent activities, including drug production, people trafficking, unlicensed gambling and
prostitution
(4) 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
(5) because the second mortgage is inflated, the first mortgage and arrears are paid off, leaving a
substantial profit – this may be repeated many times
(6) eventually a bank forecloses on the property, only to find it in disrepair and worth significantly less than
the current mortgage and its arrears
USE OF NON-BANK - using private sources of funding, such as property clubs, especially when credit market conditions
LENDERS 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
Is a vacant piece of land, not a developed property
USE OF CORPORATE - Achieved by selling the property between related private companies RATHER than fictitious individuals
STRUCTURES
- Transactions will involve inflated values and will NOT be at arms 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.
FLIPPING AND BACK- - fraudsters may seek to re-sell a property very quickly for a substantially increased price. This process is
TO-BACK called flipping and will usually involve back-to-back sales of the property to limit the time between sales.
TRANSACTIONS
- Variations of this fraud:
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, allowing the profit to go to the fraudster
USE OF - usually use AT LEAST ONE professional at the core of the fraud, to direct and reassure other
PROFESSIONALS professionals acting at the periphery.
e.g. 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.
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.
Explanations are often given about former solicitors being unable to act due to delay or not being on the
new Lender’s mortgage panel. A lender who has received the loan applications and already approved the
loan may approach you with packaged transactions and completed paper work
encouraged to alter the value or give other misleading information on the Certificate of Title given to
the lender
encouraged NOT to comply with obligations in the UK Finance Mortgage Lenders’ Handbook or the
BSA Mortgage Instructions
offered continued work at a higher margin to encourage less diligent checks
attempted to be recruit into the fraud, especially if you have unwittingly assisted previously, or have
2
TIFF LIAO
