Mark Jenner & Co Limited – Forensic Accounting Services

The “credit crunch” was named after the irresponsible lending practices by the banks and other financial institutions that were out of control when they reached their peak in around 2007. It had become possible for virtually anybody to approach a property developer and start buying properties without having any capital to invest. The driving force behind this was the ease with which the lenders would provide the money and the lack of control over who they would lend to. In the UK many property developers abused this credit glut and many even conspired with lawyers, surveyors and mortgage brokers to defraud the buyers and lenders of vast sums of money.

The USA has seen similar problems, with mortgage fraud again being one of the major contributors to the present downturn in the economy. In the late 80s and early 90s there was a similar crisis in the economy – albeit on a much smaller scale – with a collapse of confidence in the savings and loans system. The FBI geared up strongly following this in attempts to deal with the mortgage fraud and other financial crime that was firmly embedded within the crisis. A strike force based in 27 cities was staffed by more than a thousand FBI operators and forensic accountants, together with teams of federal lawyers to manage the resulting prosecutions. This thrust alone was responsible for over 600 successful convictions and confiscation orders amounting to $130,000,000.

Today’s financial downturn dwarfs its forerunner in the USA, as it does just about everywhere else in the world. In the USA the financial institutions have reduced their assets by an almost incomprehensible $1.2 trillion this time round. This is of course a massive reduction in value and one which crystallises the frauds and financial malpractices that were taking place almost unchecked. It compound problems in a crisis by, for example, causing investors to lose faith and requiring much higher returns from their investments – in this case the mortgage backed securities are the relevant investments that become expensive. The result is increasing interest rates and fees for bone fide borrowers who are chasing limited funds when compared to the previous glut.

What is mortgage fraud?

Mortgage fraud for profit is a planned attempt to remove equity from others for illegal profit. White collar criminals will purchase property using loans and then sell these properties on. If they inflate the value of the property borrowed, they can borrow more than the property is worth. Some times they will even borrow on fictitious property. This type of fraud usually operates in its various guises as a conspiracy to commit fraud between property developers, conveyance lawyers, mortgage brokers and property surveyors (property valuers). The victim can be either or both of the following:

1. The individual who buys an overpriced property using a mortgage and ends up with negative equity

2. The mortgage lender whose security does not meet the level of the amount loaned

Very often the mortgage lenders will pursue the individuals who owe them money even though they lent to them as a result of a fraud conspiracy or the sharp practice of the property developer. Many individuals can be bankrupted by this and in the end the mortgage companies also lose out.

Mortgage fraud can also be committed by a borrower, typically with the help of estate agents or property developers. In this way they are able to obtain a house that is perhaps more valuable than their situation would otherwise allow - they falsify their income in order to borrow more money. Although they do not qualify for a loan and are committing mortgage fraud, many of these types of borrowers happily service their loans and the mortgage lenders remain ignorant. It is only when the borrower is unable to repay a monthly installment or sell on to settle the loan that such fraud becomes apparent.

Trends in US Fraud

In the USA the FBI receives Suspicious Activity Reports as do the authorities in the UK – derived from the Department of Housing, the Urban Development Office and from the industry at large. However, a large part of the US mortgage industry does not have mandatory reporting and so the exact level of this type of fraud is unknown. The trends in those reports that are made do show an increase – for example during 2008, reported mortgage frauds were up 36% to 63,173 incidences.

It is a recognised fact that a financial crisis such as the current downturn will expose fraud schemes that had been thriving during the former boom years. As the financial markets deteriorate, fraud come to light – witness the number of Ponzi schemes (such as the Bernard Madoff scam) we are learning about seemingly daily!

The FBI investigated 566 major corporate frauds in 2006 – rising to some 2000 in 2008.  These frauds include mortgage frauds, accounting fraud and insider trading. The increases are apparently stretching the FBI’s white collar crime resources.

The mortgage frauds seen include scams such as equity skimming and property flipping, where the fraudsters use corporate shell companies and corporate identity theft to appear bone fide followed up by threats of bankruptcy proceedings and foreclosure on clients and individuals to trick householders and investors to release their assets.

The FBI is gearing its approach to detecting and prosecuting mortgage and other forms of financial fraud which are seen to be a currently emerging threat to the stability of the US economy. Specialist software has been developed to detect incidence of property flipping in some hard hit areas such as Baltimore and Washington – searching databases for companies and persons showing patterns of property flipping (i.e. back-to-back purchases and sales or successive sales with very different sales prices over a short time). Undercover operations and wire taps are being used to good effect also, thus allowing criminals to be caught “in the act”.

The problem with mortgage fraud is that, as in the UK, many US property developers simply took advantage of the ease with which credit could be obtained. Put this alongside human greed to make large sums of money very easily and many investors previously lost any caution when entering the property investment business. They would buy property unseen, to rent out or sell on, relying on the fact that the values of property were bound to increase – as history had shown property does increase but there are “blips” and cycles that need to be accounted for. There are commentators that are currently saying that property prices will not rise for another 10 years! The successful property speculator will plan for this, only paying market value or less and certainly not relaying on the hype that was circulated by many of the property development companies during the boom years.

Read these other articles on mortgage fraud:

Don’t Always Blame The Conveyance Process For Mortgage Fraud

Mortgage Fraud in the Buy to Let Market

This article is grateful for facts and information presented by Mr J Pistole of the FBI in a statement before the House Committee of the Judiciary on 1 April 2009.

Most fraud cases investigated by Mark Jenner & Co involve some interaction with a bank. It may be simply through the examination of bank statements for an account used to launder proceeds of crime or it might be an investment scam used to steal large sums of money from high value clients in a Ponzi scam involving the offshore banking system. The banks are very skeleton of the financial system worldwide and are seen as both prime tools and targets of the fraudster.

Banks have always been the target of criminals for their very nature is to hold large amounts of money. However, in the 21st century we are not as concerned about bank robbers or bullion heists as about the risk of fraud. It is not that physical bank robberies do not happen, it is just that the robbers almost always get caught and fraud is increasingly seen as a much less risky option. Just about every fraud or money laundering activity will need interaction with a bank somewhere along the line. Stolen cash is very difficult to spend in large quantities but cheques and credit cards can afford the lavish lifestyles the criminals seek.

Within the bank there is the problem of embezzlement by the staff. Key members of staff are in a position to know the inner workings of the accounting controls put in place to prevent fraud by corrupt members of staff. Corruption can, and often does occur by a third party bribing a member of staff to obtain information concerning customers’ accounts. Identity theft and identity fraud are key areas where losses can occur. But id theft and embezzlement is not the only area of concern in the area of bank fraud.

The need for interaction by the criminals with banks to facilitate their spending of their proceeds of crime gives rise to the issue of anti money laundering controls that every bank must have in place. The bank is effectively tasked with acting as a whistle blower for law enforcement, reporting any suspicious customers or transactions that take place.

Criminals, fraudsters and even terrorists are finding it ever harder to use banks to move their money around the globe. Anti Money Laundering Regulations place restrictions on the ease with which money once was moved. The criminals often turn to fringe banks away from the high street to transact their proceeds of crime in an attempt to escape the gaze of the authorities. Corruption in second tier banks is well reported in the press. For example the Bank of Curacao was closed down at one stage as most of its customers were found to be involved in VAT fraud activities. Companies based in Europe would trade with each other, but the financial transactions were conducted remotely in Curacao. The bulk of the money never left the country, exchanging hands many times as the fraudsters conducted deals with each other. In one case where Mark Jenner & Co was involved, the only clue that a company was conducting fraudulent deals worth £millions on a regular basis was a single transaction in their UK based bank account showing a small payment of a modest sum settling a local expense in Curacao.  This was a slip by the crooks as legitimate looking accounting entries were normally recorded in the UK, France or Germany or wherever the management of the business was physically taking place.

Other fringe banking systems prone to the attention of the fraudster or money launderer are the money transfer systems that operate world wide. The Hawala banking system is notorious for not leaving any audit trail – transactions between countries at opposite ends of the world are conducted by worth of mouth. The word ‘Hawala’ means ‘trust’.

Hawala banking is traditionally used for ex patriot Asians residing in the West to send money back to their families, for example in Pakistan and India. It uses the transfer of ‘value’ or exchange of debt as one means for moving wealth. Other more formal systems such as Western Union will transfer small sums of cash in the same way, for a price. Both Hawala Banking and some of the transfer businesses such as Western Union have been associated with fraud and money laundering in recent years.

However, a number of more respectable money exchange systems are operating legitimately and taking more and more trade from the large high street banks. PayPal and the Revolution Money Exchange have been carving a growing slice of financial activity in recent years. The allegations of a Revolution Money Exchange Scam reported in 2008 was unfounded and this major USA bank backed organisation is probably less prone to bank fraud and corruption than most leading high street banks. Indeed it was probably because the Revolution Money Exchange was paying $25 to new clients opening an account and $10 for each referral brought in that cries of fraud and scam were made. Yet people do not realise that a leading bank such as Lloyds or Barclays might pay $100s and even $1000s to secure a new customer!