Protecting your firm from money laundering fraud

This time last year the SRA published a draft supervision and enforcement strategy setting out its plans to help firms combat fraud and money laundering. It has now started a thematic review of the regulation of conveyancing and holding of client money. As part of this plan, it has started making regular visits to firms that are regarded as more vulnerable to assess the appropriate course of action and provide systems and controls to help them not being taken in by fraudsters.

Conveyancing has been providing consistent cash flow for many small and medium sized firms. It is therefore, for these firms, closely linked to their financial stability, and makes them particularly vulnerable to fluctuations in the economic climate. Measures stipulated by the Money Laundering Regulations 2007 (MLR) as amended by the Money Laundering Regulations 2012 may impose a heavy burden on these firms. For example the appointment of a Money Laundering Officer and provision of requisite staff training will be a heavy drain on the already limited resources of a firm that has, say, one partner, one or two associates and a few legal secretaries. The initiative taken by the SRA should help these firms overcome the administrative obstacles associated with implementing the MLR.

But money laundering is just an addition to the innumerable challenges that property professionals are encountering in today’s volatile economic situation.

Law Society research on mortgage fraud between 2008 and 2010 reveals a spiralling burden on property professionals to comply with the rules imposed by MLR. Failure to comply makes firms and staff criminally liable for even unintentional involvement in fraud committed by their clients. Professional indemnity premiums have been rocketing in direct proportion to the increase in fraudulent activity from £9.23 million in 2008 to £21.2 million in 2010. According to data produced by CIFAS, the membership fraud prevention service, identity fraud jumped 14 per cent between 2009 and 2010. Over the same period, about 50,000 individuals fell victim to impersonation and banks reported an exponential escalation of false documents presented to them. The rise in online transactions globally has made money laundering easier among organised criminal gangs.

Mortgage fraud

Mortgage fraud is the most common money laundering activity that conveyancers encounter. The stagnation of the housing market has helped increase fraud by organised criminals putting professionals at greater risk of exploitation by crime syndicates. Fraud is perpetrated in a number of ways:

a) Criminal syndicates organise finance ?on a number of properties. Reduced ?home ownership has helped accelerate ?the growth of the buy-to-let sector providing fertile grounds for fraudulent activities. This is true for both newly built apartment complexes and large scale renovation projects.

b) They nominate purchasers who may not have any beneficial interest in the property or are fictitious. The solicitor is thus drawn into a contractual relationship with a non-existent principal, which places him at risk of personally implementing the contract.

c) The value of the property is unrealistically inflated and a maximum loan-to-value is taken out against it.

d) Criminals often fail to keep up with the mortgage payments and properties are allowed to deteriorate and used for other criminal activities such as drug production, unlicensed gambling or prostitution.

e) When mortgage repayment becomes due criminals raise another mortgage with a different lender by selling the property to themselves often using virtually non-existent information and a larger inflated valuation. They will manage to pay off the first mortgage with this money and make a substantial profit. The process is repeated several times before the lender realises that it is a victim of a money laundering gang.

f) The property value will usually shrink as a result of its state of disrepair.
 

Ironically these syndicates usually include a professional at the centre of the fraud to provide guidance and reassurance. This can happen either unwittingly or on purpose. This places lenders at risk as they rely on professionals to safeguard their interests. Such reliance will at times extend to not verifying themselves the information they receive. Lenders usually receive loan applications and grant the loan before they instruct solicitors. Solicitors also tend to complete the Certificate of Title using the gross and not the actual price paid for the property, in breach of CML procedures.

In many cases money laundering can be conducted without raising suspicions easily. Many volume firms deal with high value transactions without meeting the client in person thereby contributing to the proliferation of money laundering activity. Firms getting caught up in it find it exceedingly difficult to extricate themselves from it, risking to pay a high price in monetary liability and risk to their jobs. Prevention is the better way forward.

Preventive measures

PII claims arising from fraud and dishonesty are usually a consequence of weak management systems and poor compliance procedures.

Inadequate systems often lead to failures in obtaining a clear title or identity defects. Other causes include improper advice on title or failure to obtain appropriate registration. The time gap between completion and registration at the Land Registry also encourages illegal activities; e-conveyancing may mitigate this significantly when it is fully up and running. There must be a proper system of implementation of the Money Laundering Regulations 2007 with commensurate facilities to monitor such implementation.

Risk management procedures are a must in all conveyancing firms. With the introduction of outcomes focused regulation the responsibility for a dedicated risk management and compliance function has become more crucial.
Dedicated quality assurance tools are an effective risk management measure offering a source of comfort to lenders, other clients and insurers who will be tempted to provide a discount on premiums of they find the firm more reliable.

Introduction of the Conveyancing Quality Scheme in December 2010 is expected to improve the risk management procedures for the clients’ protection. The SRA has brought down the time limit for firms to remain in Assigned Risk Pools (ARP) from one year to six months and from July 2012 liability for claims incurred by firms without insurance will be met by the Compensation Fund. With effect from 2013 there are proposals to replace the ARP with a system whereby insurers will offer a three-month extended policy period for firms that are unable to obtain PII cover for the following year. Although this has disappointed the insurance industry as too little too late, it should aid with risk management procedure.

Basic everyday procedures

In addition to the wider aspects of risk mitigation, solicitors who adhere to some basic everyday procedures can prevent small issues turning into a full-blown fraud.

It is imperative to check the client’s identity in all transactions even if the client has been known to the firm for a long time. Appropriate checks must be carried out before any funds or initial payments on account are received from the client. The solicitor’s bank details must never be supplied to the client until identity is established to the firm’s satisfaction. Where the client is unable to provide his current address, an updated bank statement is sufficient to establish his credentials.

The existence of organisations offering electronic verification is a further source of support for firms. They have access to a range of information including credit histories, electoral roll, National Insurance (NI) records and passport records. With the information provided by the client it is possible for the firms to compare records and confirm identities.

It is risky to accept large sums in cash and any cash transaction in large amounts must raise the alarm bell. Firms are under an obligation to set limits on amounts received in cash.

Funds received from a client’s savings account to finance the deposit or the full purchase must also be considered carefully unless the solicitor is certain about the reason for the affordability of such large sums.

Funds received from an unknown third party must be fully investigated, particularly if the fund is expected from the client direct

Danger signals are raised if a new client pays a substantial sum of money into a firm’s client account for a transaction only to withdraw from the transaction. This could be a sign of laundering ‘dirty money’. The firm must take immediate appropriate action to stop any further damage.

MLR stipulates the appointment of a Money Laundering Officer for every firm. This is usually a senior partner and all suspicious incidences are reported to him. He is responsible for deciding whether it is safe to proceed with transactions that appear skewed at the outset. He has the power to refer matters to the Serious Organised Crime Agency (SOCA) if necessary.

Land Registry involvement

The Land Registry (LR) is bound by the provisions of the Freedom of Information Act 2000 (FOI). It may only refuse disclosure of information in its possession if this prejudices the prevention or detection of crime or administration of justice and it is not in the public interest under section 2(2)(b) of FOI. If it is in the public interest LR will supply such information to the law enforcement agency or other relevant organisation requesting such information.

As part of its general role to promote the benefits of registration of land, LR insists on clients keeping an up-to-date contact address to help reduce the risk of fraud. Documents supplying identity are necessary for substantive applications requiring registration such as a transfer, lease, mortgage or first registration of land. The introduction of electronic conveyancing through secure computer networks with built-in validation and security measures will help to ensure that applications are genuine and appropriate identity checks are undertaken.

Money laundering is likely to be rampant as long criminals are able to find loopholes in the legal systems and invent new methods to make substantial profits for themselves at the expense of their victims. For now, the onus remains on law firms to follow guidance and support provided by its representative body and regulator to guard themselves from unwittingly becoming embroiled in conveyancing fraud.