Thursday, 20 November 2008

The implications of mortgage fraud for brokers

In the second of our third-part series on mortgage fraud, Anthony Riem, a specialist in multi-jurisdictional frauds and asset recovery with PCB Litigation, outlines the implications for brokers who can easily get caught up in fraudulent applications.

An individual who intends to commit a mortgage fraud will generally seek to involve one or more professionals in the fraud to provide the transaction with an air of legitimacy in the eyes of the lender. Brokers may therefore find themselves targets of the fraudster.

Fraud is defined in the UK Fraud Act 2006 as including fraud by false representation and by failure to disclose information where there is a legal duty to disclose. A broker who makes representations to a lender on behalf of a customer may therefore find himself unwittingly committing a criminal offence if he has reason to believe that the representations being made might be misleading or untrue.

Proceeds of mortgage fraud are criminal property. Under Section 328 of the Proceeds of Crime Act 2002, a broker may commit a money laundering offence by being involved in an arrangement that facilitates the acquisition of criminal property. Where a broker has knowledge or suspicion that a customer intends to use him to perpetrate a mortgage fraud on a lender he may avoid liability by refusing to undertake the work.

Alternatively, if the broker decides to proceed with the application in such circumstances, his only defence to a money laundering offence (under s.338) would be to make the appropriate disclosure to the Serious Organised Crime Agency (‘SOCA’). If nothing further is heard from SOCA within seven days of making the disclosure then the broker may proceed with the transaction safe in the knowledge that he has a defence to any possible money laundering offence.

If, however, consent is withheld within the initial seven day period, then the authorities will have a further 31 days in which to take further action. No further steps may be taken by the broker during this period. If upon the expiry of the 31 day period nothing further has been heard, then the broker may proceed with the transaction once again safe in the knowledge that he has a defence to any possible money laundering offence.

The broker must not tell the customer (or any other person for that matter) that a disclosure concerning them has been made to SOCA. This may be difficult whilst applications are delayed pending SOCA’s consent, but to do otherwise will result in the broker committing a ‘tipping off’ offence under Section 333.

The Financial Services Authority operates a system with lenders under which they can confidentially pass to a Mortgage Intelligence helpline at the FSA details of loan applications received from brokers which they suspect to be fraudulent. The information received may be the catalyst for an investigation by the FSA. This is turn may result in proceedings of the nature of those brought against Mr Fawole and Oasis.

Finally, a broker may face the prospect of civil proceedings being brought against him by a defrauded lender.

In our next installment on mortgage fraud we will tackle the warning signs brokers should look out for.

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