How to avoid being a victim of fraud

 

Fraud not only costs money but can also seriously damage your company’s reputation and lead to action from the Financial Services Authority against you. Any organisation in the financial services sector is at risk from fraud – where there is money there is fraud.

Protection against mortgage fraud has markedly improved in the past few years with heightened anti- money laundering awareness and enhanced regulatory requirements. Information sharing between lenders is one of the most important tools in spotting potential fraudsters.

The Council of Mortgage Lenders says 30% of mortgage applications are rejected because they don’t meet the criteria of high street lenders. Many of these are genuine applications that for one reason or another fall short of approval but a percentage are rejected because they are found to be fraudulent. This can be due to an applicant lying about their salary or property value, or providing false information to obtain a higher mortgage.

Mortgage fraud is a thorn in the side of the industry with many fraudulent applications succeeding. This is hardly a surprise. Mortgage lending currently stands at tens of billions of pounds a month and there is a huge incentive for fraudsters to circumvent systems. Let’s face it, obtaining a 500,000 mortgage on false information is easier than robbing a bank. The chances of being caught are less and the penalties derisory in comparison.

Mortgage fraud tends to fall into two categories – private mortgage applications that contain false information usually to obtain a higher mortgage and applications by professional fraudsters usually involving the collusion of other parties. It is this latter category that presents serious problems for the industry because where a staff member is colluding with external fraudsters, routine controls and safeguards are more easily bypassed.

Most commonly, deceptions involve significant inflation of the value of the property, obtaining loans for people who do not exist, mortgages on properties that do not exist (using forged title deeds), obtaining multiple loans from different lenders on the same property and submitting bogus contractors’ invoices where funds are released in stages on self-build or redevelopment projects.

Lenders should remember that organised criminals are professionals and will always look for the soft target. It falls to each lender to make sure it is a difficult target. One way is to have an accredited financial investigator carry out a risk assessment to identify the prevailing level of control on a scale of one – as near to watertight as you can be – to 10 – a financial sieve. Having identified weaknesses it is possible to build in controls that will substantially reduce risk and increase fraud detection rates.

Of course, it is people who commit fraud and so the most important checks should be directed at the people involved in an application. A good starting point is your own staff as the one way to be sure you will be defrauded is to recruit a crook. Pre-employment screening is a must. Checks well beyond box-ticking and accepting written references must be applied. Vetting of potential borrowers should include verification checks on applications. Checks for undisclosed relationships should also be conducted.

Other areas worthy of examination are fraud detection training for staff, manual checks, borrower interview procedures, due diligence checks on advisers and surveyors, supervisory checks, new business vetting, anti-money laundering procedures, audit procedures, staff rotation, a whistle blowing policy, and a staff responsibility and accountability policy.

Getting your organisation to number one in the risk assessment scale is perfectly possible and in carrying out such an assessment you will send out a signal to staff about the consequences of stepping over the line. But to remain unattractive to fraudsters it is necessary to remain finely tuned through regular audits to highlight weaknesses and eliminate complacency.

Those charged with identifying the symptoms of fraud should look for patterns such as the approval panel lawyer who seeks to work with specific advisers or surveyors. The best way to avoid such collusion is to implement a panel rota system. This means you should change the panel regularly.

In carrying out a risk assessment the assessor has to think like a fraudster. Using innovation, lateral thinking and a degree of cunning, they should look across the board at your organisation and its defences, testing controls and exposing loopholes through targeted attack. They should then make recommendations for procedural improvements.

Due diligence on the borrower is vital. This means knowing your customer and their business, but other fraud that can take place is collusion between the buyer and the seller, particularly with high value properties. Checks for any prior links between the two can be worthwhile.

Financial institutions should instil a feeling of fraud awareness. Staff should realise it is the responsibility of everyone in the organisation to prevent fraud. If one individual is designated the responsibility, complacency sets in among other staff.

Unfortunately mortgage fraud, like most other forms of fraud, may not be a police priority. All mortgage companies should have a fraud response plan in place. This should involve immediately appointing an experienced project manager to run a covert investigation aimed at assimilating evidence prior to confronting suspects. A need to know policy should be applied, a full log of events should be kept and documentary evidence should be immediately secured to prevent tampering or loss.

With a professional investigative response you can recover from fraud or, even better, avoid it in the first place.

The main types of mortgage fraud

Mortgage lending stands at tens of billions of pounds a month so there is a huge incentive for fraudsters to find a way round the systems that are in place. Organised criminals are professionals that choose their targets carefully. The most common types of mortgage fraud in this country include:

– Over-valuation of a property to achieve a higher loan. This may involve obtaining a loan for someone who – or a property that – does not exist.
– Providing false information on a mortgage application. This may involve the assistance of external or internal parties.
– Submitting false invoices to release stage payments from a lender. This applies where a property is subject to extensive refurbishment or is a self-build.