The rise of so-called cryptocurrency is an emerging risk for the mortgage industry, according to Michael Harris, director of financial crime compliance at research and risk management firm Lexis Nexis Risk Solutions.
Digital money, such as bitcoin and ethereum, can provide financial criminals with a means to move vast sums of money cross-borders, he said.
He told Mortgage Solutions: “Large cryptocurrency movements are a red flag – and should result in deep and thorough due diligence to make sure its legitimate.”
Some lenders have turned down borrowers using bitcoin or other cryptocurrency profits to fund mortgages over concerns money has not come from a legitimate source.
Money laundering is a big challenge for the whole market amid an increasing trend of criminals buying property as a way of moving illicit funds, Harris said.
And beefed up money laundering regulations put into place last year mean there is more onus on financial firms to have rigorous checks in place.
Those found to be in breach could incur penalties.
Harris said: “Are clients who they say they are?
“It’s no longer acceptable to do paper id checks – increasingly it is required to do deeper checks and take a thorough approach.”
Spotlight on mortgage and property industry
There is more of a spotlight on the real estate industry – including brokers and estate agents – and the money passing through it, according to Harris.
All regulated firms are obliged to fill out Suspicious Activity Reports where they suspect money-laundering or monetary crime.
But the amount of reports coming from real estate are not thought to be reflective of illicit funds being moved through the sector, Harris said.
Financial criminals know weak spots in the system and how to exploit them – this is typically where there are breaks or gaps in compliance.
Therefore the “day-to-day practices of brokers” should involve adequate levels of due diligence, according to Harris.
Advisers are giving the area more attention now, but it has been “variable in the past”.
Other red flags to look out for are high-net worth people coming from high-risk countries, as well as politically exposed people, Harris warned.
He said: “It’s about understanding the nature of the risk, taking the right levels of diligence – there is no prescriptive approach.
“If it’s high risk – look at it very closely.”