Mortgage fraud update

We are in the longest downturn in many lawyers' working lives, though no longer a recession. House prices in London and the south east are rising again. However, this pattern is not reflected elsewhere in the UK. Remove the south east effect, and house prices are still stagnating.

The coalition government has introduced its Help to Buy scheme to assist first-time buyers in particular, geared towards the new-build market, in conjunction with approved lenders. Although it remains to be seen if this will give the UK housing market the boost it badly needs.

Prime target

Will an upturn in the property market see the return of property fraud? The fact is property fraud never went away.

Solicitors have long been a target for fraudsters. As solicitors can hold large sums of money for their clients, they are in a special position of trust akin to the banking industry. This makes solicitors vulnerable to fraudulent activities such as money laundering and property fraud.

The Law Society has issued guidance about mortgage fraud since 1990, starting with the Green Card. It is a source of constant surprise just how many lawyers undertaking residential conveyancing claim not to know about this guidance.

All those involved in property transactions must know what to look for. We should be familiar with mortgage fraud involving back-to-back transactions, substantial price uplifts, large (fictitious) direct payments from buyer to seller, transactions between connected parties and so on. The buy-to-let market between 2005 and 2008 was particularly susceptible to mortgage fraud.

Mortgage fraud rings are a good example of exploitation of the buy-to-let market. One or two people, sometimes a mortgage broker, would buy up a number of properties, often new-build developments, taking advantage of sales incentives. The properties would be sold on at once at a higher price to another member of the ring.

The buyer would default on the mortgage and disappear. The ring would pocket the proceeds of the price uplift, with the assistance of a compliant surveyor to value the property at a higher price and a solicitor, both of whom were happy not to tell the lender what was really happening.

Following the recession, lenders are far more wary now when it comes to lending 80 per cent of the value of a property, let alone 100 per cent or more, which was common in the heady days of 2007. For the moment lending procedures are tight.

Lenders must not return to the cavalier, cut-throat practices of 2005-2008 in search of quick profits. These practices only help the fraudsters, ultimately to the detriment of the rest of us.

Advanced technology

The ready accessibility of advanced technology is likely to mean that identity fraud will expand with the increasing sophistication of today's fraudsters.

There have always been examples of individuals impersonating sellers, hoodwinking the real sellers (especially those who are vulnerable due to ill-health) and fooling solicitors with forged identification documents. Some solicitors are more easily fooled (or prepared to be fooled) than others. Evidence suggests a marked increase in examples of such fraud recently.

A variant on this is bogus law firms, or bogus branch offices of real firms. The Court of Appeal decision in Nationwide Building Society v Davisons Solicitors [2012] EWCA Civ 1626 involved a bogus branch office of a genuine firm of solicitors. Could we see bogus solicitors' firms as pop-up shops?

Sadly, there will always be those lawyers who are willing participants, or are prepared to turn a blind eye to the obvious. Many solicitors are struggling financially, and not just sole practitioners or high street firms. The temptation is there for many solicitors to cut corners, to keep the practice going.

The Solicitors Indemnity Fund was a casualty of the large number of claims in the late 1990s, arising from the last period of boom and bust in the residential property market. The Law Society then turned to the open insurance market in the hope of reducing premiums.

While some insurers have stayed the course, many have come and gone in the last 12 years or so, as they do not see the solicitors PII market as profitable.

Quinn is the largest casualty of the open market era, but given a lack of established insurers, we have also seen unrated insurers come, only to leave at alarming speed, such as Lemma and Balva. Berliner's withdrawal from the market last September left more than 1,000 firms with just weeks to find cover.

It is understandable that many solicitors look for the cheapest quotes provided by unrated insurers. The Law Society is trying to help with the creation of Chancery PII, but there is little evidence to suggest there may be a white knight insurer on the horizon.

Mitigating risk

Solicitors concerned over the cost of run-off cover, and the prospect of having to close a firm if insurance cover cannot be obtained, may consider selling their practice. This is another opportunity for the fraudster to exploit.

More can be done by practitioners to mitigate that risk. Greater vigilance is required on checking the authenticity and veracity of clients and other solicitors. Meeting clients in person, with their original documents in hand, is a good start.

Constant reference to the Law Society website and the SRA when dealing with a new firm will help to ring any early alarm bells.

Regulators can help by, for example, requiring training to ensure greater awareness of the risks of property fraud to all those practising in this area. This includes paralegals who often handle large parts of conveyancing transactions. There must be regular, ongoing checks of firms who become causes for concern.

Frankly, there are not enough prosecutions in relation to property fraud either by the SRA to the Solicitors Disciplinary Tribunal (SDT) or by the CPS. Although the number of solicitors struck off in 2013 rose to 75, compared with 52 in 2012, the number of applications to the SDT went down from 216 in 2012 to 133 in 2013.

Is there reluctance on the part of the SRA to pursue allegations of dishonesty against those involved in property fraud? Are regulatory settlement agreements reached instead?

It is even rarer to hear of criminal prosecutions. In September 2013 four people were jailed for their involvement in a mortgage fraud perpetrated in north Wales worth about £24m. This included a solicitor and surveyor each jailed for four years. This is very much the exception. It is more common to hear of police fraud units being scaled back or closed to save money.

Where is the deterrent in that? History has to repeat itself because not enough of us want to listen or to learn.

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