Property fraud

Holding page

In separate high-profile cases in 2011, 3 valuers were given custodial sentences for fraud-related activities:

  • 7 years for a £49m fraud involving 6 valuations. One property was over-valued by 1,800%.
  • 6 years for involvement in a £10m mortgage scam in which the surveyor received £1m in bribes.
  • 2 years for the surveyor who valued a £1.2m property at more than 3 times its true value.

Although these examples are extreme, involving valuers who were fraudulent themselves, it is possible for surveyors to become caught up in fraud unwittingly if they fail to spot the signs.

Remember: if you do not take appropriate action, you may create problems for the future, not least a claim against your professional indemnity insurance, bad publicity for your firm and your professional reputation and, in serious cases, criminal prosecution. The conduct of others may also affect your firm’s ability to obtain unrestricted professional indemnity cover, or, in the worse-case scenario, any insurance cover at all.

Risk management

Risk management is increasingly important for all professional services firms. Not only should appropriate systems and procedures be in place, but staff should fully understand them and follow them scrupulously as a matter of course. Managers should review policies regularly and audit compliance by the team.

  • A thorough grasp of the RICS Rules of Conduct is essential.
  • Ensure that the terms of your retainer are carefully documented and that you do not extend your duties by incorporation of additional warranties (see Platform Funding Ltd v Bank of Scotland Plc (formerly Halifax plc) [2008]).
  • Assess the instruction at the outset and throughout a matter.
  • Conduct due diligence to check the accuracy of information or documents provided to you, using comparables and information/ records available in the public domain - for example, filed accounts at Companies House or planning records at the local authority.
  • Carefully document the valuation process and record for your own files how valuation figures were reached, particularly when they are significantly higher than comparable transactions. Ask yourself: if you looked at this file in 3 years’ time, would you understand how and why you reached the reported valuation figures?
  • Seek prior approval for special assumptions, particularly those that have a material impact on valuation figures - for example, where value is being assessed by reference to structures, leases or planning permissions that have yet to be put in place. Ask yourself: are these special assumptions realistic and/or appropriate?
  • Qualify your assumptions and invite further investigation by the lender.
  • Do not ignore the obvious! If something does not make sense, ask questions - e.g. if an empty property appears to have tenants, or if a tenanted property appears to be vacant, raise this with the borrower/lender.
  • If, when you have completed your report, you become aware of material information that may affect your valuation, consider your obligation to notify your instructing client and/or to modify your valuation figure as appropriate.
Common types of fraud
Over-valuation Over-valuation or inflation of a property value, so that the borrower obtains a larger loan than the true value of the property justifies. This involves:
  • using inappropriate or fictitious comparables
  • succumbing to pressure from clients to use higher multipliers
  • adopting an assumption of a sale and leaseback structure to increase the property value artificially, where the valuer cannot be certain that this structure will be implemented before or after drawdown.
Purchaser fraud Use of a fictitious or nominal person to procure the mortgage, who has no beneficial interest in the property. Loan is advanced in full and then the nominated purchaser disappears.
Identity fraud Stolen identity used to procure loan or a fake transaction between related parties. The loan is advanced and then the purchase or remortgage is never completed. The lender may have no registered enforceable security.
Income fraud The borrower overstates income or self-certifies (without supporting documentation) an inflated level of income to procure a higher loan.
Back-to-back fraud Back-to-back transactions involving the same property and taking place on the same day/within a short period (i.e. days or weeks) and at different purchase prices.
Cash-back/incentives Borrower and seller and/or agent intentionally mislead the lender as to the true price of the property and fail to disclose cashback or cash incentives agreed between parties. The borrower is paying less than the stated purchase price and/or making no financial contribution to the purchase at all. In some cases, this has resulted in the lender advancing more than 100% of the discounted purchase price. This is a particular problem in the new-build market, where plots are often sold off-plan before a development has even been constructed. In these situations, it is important to take the reported purchase price as one factor in deciding value, but to support your opinion with other comparables and to understand whether there are incentives in place that might be relevant and/or should be reported to the lender.
Mortgage fraud syndicates Complex multiple-party schemes - often involving multiple purchases in new-build developments (in some cases a complete development) or renovation projects - involving cash-back/incentives, identity fraud or purchaser fraud.
Shotgunning Taking out multiple loans on the same property simultaneously.
Planning permission fraud Valuers supplied with fictitious planning permission documents in order to procure a higher valuation.
Sell-back fraud Setting up a fictitious transaction to acquire or remortgage a property for a higher value and keeping all of the advance, and/or discharging the existing mortgage and making an undisclosed cash profit.

What to do if you suspect fraud?

  • If in doubt, ask questions.
  • If satisfactory clarification is not provided, refer to the RICS Rules of Conduct and/or seek guidance from your internal risk management officer, or RICS, or both.
  • Consider whether you should refuse or discontinue the instruction and/or whether you need to report the situation to the lender, the police, the Financial Services Authority or any other regulatory body.

Potential indicators

Change of surveyor

  • If another surveyor has already valued the subject property for the same lender and borrower, why has this instruction come to you? Do you need to see the previous valuer’s report?
  • Are you suddenly getting an influx of instructions from a specific borrower, introducer, for a particular development? Why?

Out-of-area valuations

If the property is in Bradford and you are based in Bognor Regis, why has the instruction come to you?

Unusual instructions/information

  • Unusual instructions or requests for divergence from the Red Book standards.
  • Inconsistent and changing instructions.
  • Incomplete/incorrect borrower details and/or property details.
  • Communications filtered via a third party and no direct contact with lender or borrower.
  • The instruction does not disclose the identity of the lender. Ask yourself: who is this report for and why is that information not in the open? Who might rely on my report? Am I assuming any legal duties or obligations to that party?
  • Documentation disclosing high loan-to-value ratio, if it has been made available to the valuer.
  • No evidence of property marketing.
  • Indications that this is not an arm’s-length transaction: connected parties, family relationship, same contact details, etc.
  • Inflated estimates of value or rental income provided by the borrower.
  • No evidence of rental income for buy-to-let properties.

Short-term ownership or changes to ownership

If the property has been owned for less than six months, why is it being sold or remortgaged now, with a different lender and for a reported purchase price significantly higher than the price six months ago? Carefully consider whether the value has changed and carefully document your comparables, calculations and assumptions.

If a property is changing ownership after a short time (i.e. a back-toback transaction) involving different purchase prices, again consider whether the value has really changed and document comparables, calculations and assumptions. Also check whether this really is an arm’s-length transaction.

Delays or changes to proposed transactions

It is a commercial reality that not all proposed transactions go ahead. If a transaction is delayed or changes in structure in a material way, consider why (and ask questions of your client and his solicitor) and whether you need to do a new report to reassess the new structure, value, etc. Consider whether using a side letter to your previous report and incorporating your old assumptions is appropriate. If the new transaction is materially different, or the market has changed in the intervening period, old assumptions may not be relevant.

Deadlines

It is a reality that deadlines must be met and are sometimes tight. Do not be forced into unrealistic deadlines if you cannot properly undertake the necessary assessment and investigation. Why is the job so urgent? Are there unusual circumstances or features that the parties are trying to keep under the radar? Remember, if a fraud is identified later, your conduct may be challenged by the lender. You will not be able to defend the claim on the basis that you were asked to do a quick job. Your professional obligations remain the same, whether you have three months or 24 hours, and you will be judged by the court against the same high standard.

Of course, compliance with the RICS Valuation - Professional Standards (the Red Book) is the first responsibility of chartered surveyors and the basis of all professional valuation standards.

Clive Brett is a Partner and Niya Phiri is Legal Director of Clyde & Co LLP