The fellowship of fraudsters

Lending Strategy Dec/Jan 2009 | By Natalie Thomas

If financial companies don’t police their employees properly they are always going to be vulnerable to gangs using someone on

the inside simply because they haven’t checked their documentation

The past 12 months have brought many challenges. From liquidity issues to increased regulation, lenders have had a lot on their plate.

But one of the biggest problems facing the financial sector is fraud. It seems that barely a week goes by without the Financial Services Authority banning or fining another broker for committing mortgage fraud.

In the boom times mortgage fraud was probably the last thing on a lot of lenders’ minds as they raked in the deals and watched business volumes shoot through the roof.

But while Experian’s quarterly fraud index showed a slight drop in mortgage fraud in Q3 2009, the figures are still significantly up on the 16 in every 10,000 identified in pre-crunch Q3 2006.

Following three quarters when around 30 in every 10,000 applications were discovered to be fraudulent the number of frauds attempted in Q3 2009 declined slightly to 25 in every 10,000.

Chief inspector Paul Barnard of the City of London Police is an expert on the subject of mortgage fraud, so bearing in mind the growing number of brokers adjudged to be involved I start by asking him about the sort of people who commit this crime.

Q: Who are you finding is getting involved in mortgage fraud?
A: We are seeing a lot of what we call complicit professionals turning to fraud. This includes professionals such as solicitors, conveyancers and valuers. All these have a role to play in ensuring the wheels of mortgage fraud keep turning.
But if firms in the mortgage industry carried out the appropriate checks and worked according to their respective industry codes of practice fraud should not be happening at all.
When the checking system breaks down complicit professionals get into areas such as overvaluation.

Q: Don’t you find that lenders check for overvaluations and other frauds?
A: It would be fair to say that lenders in the past never got to grips with recognising overvaluations as well as they could have done.

The most telling indicator we see of overvaluation is when a price is so inflated that it can’t possibly be right. That really should involve a check at the front end of the lending process but again, that’s about having systems in place. You can have whatever lending policy you want but the important thing is how it works on the front line.

To combat fraud effectively, what we need to see are triangular relationships within financial organisations whereby the human resources department works with the marketing function and they both operate in concert with the internal compliance department.

This triangle needs to work together - if you take any part of it out of the equation the system will not function properly and the company will be left open to vulnerabilities including employing the wrong type of staff.

If financial companies don’t police their employees properly they are always going to be vulnerable to gangs using someone on the inside simply because they haven’t carried out the right checks on their documentation. If firms aren’t too fussed about carrying out these checks it’s a big enabler of fraud.

It only takes a couple of dodgy people to spot that a firm has left the gate open and it’s not long before a lot of others start piling through it.

Q: What are the most prominent types of fraud coming to light?
A: Buy-to-let fraud has been one of the biggest areas of activity in recent years.
Most of the serious mortgage fraud cases against financial institutions we are currently investigating involve residential properties, although some are commercial deals.

When it comes to residental ones we see a split, with two-thirds being what we call normal mortgage frauds and the others involving buy-to-let properties.

But it’s frauds that are committed in bulk that we are most concerned about. This could involve, say, a group of people who have discovered they have relatives or friends who are mortgage brokers, solicitors or accountants. Suddenly, a substantial number of people have a handy route into mortgage fraud.

Q: Do you find that fraudsters tend to target certain lenders?
A: It varies. There are some stronger lenders but I would encourage all of them to balance their understandable desire to be competitive with the need for security.

This is a stiff challenge for lenders and that’s one of the reasons we plan to hold a forum - to consider tactics everyone can employ to combat the problem of complicit professionals.

We are also working with the Council of Mortgage Lenders to try and find an avenue that works for all its members.

But we have to be careful about competition and lenders having the rights to different packages. Lenders should pool their knowledge and try to learn where mistakes have been made and how they can stop these recurring.

Q: When is fraud committed and what are the proceeds used for?
A: Mortgage fraud tends to mirror the economic cycle. It is largely committed at the peak of the good times and discovered in the trough of the bad. If there’s one lesson we’d love to learn it’s how to break that cycle.

The proceeds are often used for money laundering or to buy drugs. But it can also be used to buy luxuries such as season tickets for Premier League football clubs. Unfortunately, it can also be invested in further criminality, which is more worrying.

Q: Are some lenders simply oblivious to mortgage fraud?
A: It could be argued that some have taken their eyes off the ball when it comes to fraud. We all need to look at what’s gone on and learn lessons quickly so we can minimise the chance of criminality being repeated.

Q: Is there any difference between building societies and banks in this regard?
A: It’s pretty much an even split, I don’t think any particular type of lender is being targeted at the moment but I do know those that have strict rules and carry out appropriate checks are less likely to be affected.

Q: So what’s on the cards for next year?
A: Well, last September we had four or five mortgage frauds on our books and now it’s around 16. I suspect next year’s figures will depend on how successful we are in our prosecutions.

But one positive is that some banks take robust civil action quickly. We’ve had good support from the CML and its members, and we’ve had some frank conversations with all parties about how we can prevent fraud escalating.

We recently invited a number of lenders to see us that we felt might be interested in what we are doing and we fin- ished the session by asking them all to go back and look at their own systems to check whether they had been targeted by fraudsters.

Next year I’d like to see more checks being undertaken within lenders to discern if there are any faults or weak spots, LSbut that’s a question of governance.