At the recent Financial Crime Conference, the FSA outlined its thematic review of lenders’ systems and controls to detect and prevent mortgage fraud.
This review was carried out over a 15 month period (during 2010 to 2011) and was specifically targeted at five major lenders and 15 small to medium building societies. The findings helped to reinforce many long-held views.
Much was made on the day as to the involvement of mortgage brokers in fraudulent behaviour, but little was mentioned about how solicitors and valuers are a major contributory factor.
The follow up document ‘Mortgage Fraud against Lenders’ did address the balance and highlighted the involvement of solicitors.
Indeed, one large lender considered solicitor fraud to be their greatest area of concern, with approximately 50% of their mortgage fraud losses attributed to the action of solicitors.
Fraudulent activity by some solicitors has had a major impact on how lenders manage their legal panels. Changes are either being made or have been implemented to reduce fraudulent behaviour.
Through the thematic review, the FSA has established that lenders need to be more collaborative with the sharing of information within the industry, especially with the information from lenders (IFL) scheme.
The IFL scheme means that lenders will share information, not only with the FSA and other lenders, but also with the National Fraud Forum.
This sharing of information will mean that any mortgage intermediary involved, party to or suspected of fraudulent behaviour will be reported to the FSA, which could ultimately result in enforcement, fines or banning orders.
With this in mind, mortgage intermediaries must take even more responsibility within their respective businesses to understand what constitutes fraudulent behaviour and how to better train staff throughout their businesses.
Some lenders, notably Lloyds Banking Group and Abbey for Intermediaries, are very good in sharing their experiences and understanding of mortgage fraud with key intermediaries.
However, questions have been raised about the degree to which this information is filtered down to all staff in the business – a point that has been raised by the FSA.
Whilst senior management understand mortgage fraud, less training takes place with middle managers and junior staff to help identify what is fraudulent behaviour.
Regular mortgage fraud training is the starting point for all mortgage intermediaries.
This is an area where lenders can provide the material to assist. This information should be part of the staff induction and training manual, together with case studies and fraud examples with the types of documentation that can easily be produced from the internet.
This demonstrates to staff how easily this information can be obtained, hopefully examining the real information more carefully with an eye to spotting what is different and what is fraudulent.
Knowing your client is an obvious statement and at the cornerstone of the financial services industry from the mid-1980s.
However, all too often mortgage intermediaries have bought or been referred a lead from a lead generation company and, from there, have done little or no due diligence on that client or his advisers.
Experience tells us that fraudulent clients employ their own solicitors and accountants and are often part of the same family.
Unfortunately, some clients are not who they first appear to be.
This is why face-to-face meetings with clients to formalise their identification is now so important. The key point is that, if there is any doubt about the applicant, then walk away.
The latest issue for the mortgage industry to contend with is the ‘mortgage mule’.
This is where a genuine property owner or person gives their personal details and property to the fraudster. The fraudster then substitutes the genuine paperwork, using the mule’s credit rating, voter roll and bank account.
The fraudster is either working with the solicitor or is the solicitor purchasing a property, very often in the £1m to £2m price range, with a view to absconding with the mortgage monies, leaving the unfortunate person to face the music.
There is also some evidence that these solicitors are often not paying any Stamp Duty to HMRC.
A major concern at the Financial Crime Conference was money laundering.
One issue raised was around ‘politically exposed persons’ who are exploiting the opportunities to buy properties in the London area, often for cash, but are clearly working through certain banks and obliging solicitors.
Intermediaries have a legal duty to inform their Money Laundering Reporting Officer (MLRO) if they suspect or can’t identify the origin of the money involved. This is particularly the case where large deposits on properties are being made.
The MLRO similarly has a duty to inform the Serious Organised Crime Agency.
The FSA has stated that money laundering is an area they are currently focusing on.
With political unrest in many North African countries, coupled with financial unrest in the Southern European countries, there are increasing risks of illicit monies entering the country from a variety of routes, looking for a ‘home’ in the UK.
With the FSA more determined than ever to keep the crooks out of finance, the mortgage industry has an opportunity to play its part.
Lenders and intermediaries working closely together can help to put the trust back into the sector and reduce the losses the mortgage market has been experiencing.
