Residential property fraud: money laundering

The weakest links

8 September 2017

Emma Vigus warns that if it feels wrong, it probably is

Fraudsters continue to exploit flaws in the homebuying process, increasingly targeting rented, mortgage-free properties. Although it is far from the only financial crime that affects property, an increase in cash purchases and buying to let could make it more prevalent.

The following categories are particularly vulnerable:

  • property belonging to those who have been the victim of identity theft;
  • mortgage-free properties that have been let;
  • empty homes, such as holiday homes or property belonging to those who are in long-term care;
  • the estimated 20–30% of property that is not registered with the Land Registry; this is most likely to have an impact on homes where ownership has not changed for several decades.

Why the increase?

The rise in residential property fraud is often blamed on changes in the Land Registry system, for example, dispensing with traditional paper certificates. Designed to improve efficiency and transparency, the changes have also made it easier to establish ownership of property and charges over it.

The availability of convincing false identity documents, greater access to personal information via the internet and gaps in anti-money laundering checks have made it easier to commit property fraud. In many instances, the professionals involved have also made basic errors.

The case of Purrunsing v A’Court & Co & Anor [2016] EWHC 789 (Ch) provides a damning judgment on the actions of the seller’s conveyancer who, it was found, made 'no serious attempt' to carry out risk-based due diligence and comply with anti-money laundering regulations. The firm did not obtain documentation linking the seller to the property and failed to make further enquiries even though several issues should have caused alarm. Taken collectively, these factors give the process a multitude of vulnerabilities.

Fraud in practice

A well-publicised example of residential property fraud involved a £1.3m house in Fulham, west London, belonging to Lady Penny Hastings.

The criminals used a common approach: they established that the property was mortgage-free, rented it on a long lease and covertly assumed the owner’s identity, with an accomplice changing her name by deed poll to obtain ‘legitimate’ ID. Armed with the necessary documentation, the property was put up for sale to cash purchasers only, and once it had sold, the proceeds were transferred to an overseas bank account. The alarm was only raised when Lady Hastings visited the property to be greeted by the ‘new’ owner.

Shared responsibility?

It is not surprising that victims will take action to recover their money. The professional indemnity insurance (PII) policy of the conveyancer is typically their first target, but agents are increasingly being named as co-defendants.

Agents also need to be aware of the potential for subrogation. The public protection remit of the Solicitors Regulation Authority and the Council of Licensed Conveyancers means PII providers covering conveyancing risk will find it difficult to restrict cover, which is mandated by the respective regulator, for fraud cases.

However, given the substantial sums involved, conveyancers’ PII providers may be increasingly unwilling to continue bearing the loss alone, in which case one might reasonably expect subrogation against agents.

Fraudsters continue to exploit flaws in the homebuying process, increasingly targeting rented, mortgage-free properties

The judgment in P&P Property Ltd v (1) Owen White & Catlin (2) Crownvent Ltd t/a Winkworth (see Property Journal May/June, pp.44–5) is useful reading. The judge found in the co-defendants’ favour, but Winkworth would have invested significant time and money in defending the matter. An RICS-compliant PII policy should have provided it with adequate cover for the cost of defending the claim, but those agents that do not benefit from such a policy may not receive the same level of cover.

In reaching a decision, the judge commented that there was nothing in principle to prevent a claim for breach of warranty authority against an agent.

Robert Crossingham, a partner with Weightmans LLP, said:

'It would depend on any specific representations the agent makes; that is, if they represent that they act for the property owner and that, if the transaction proceeds, the purchaser will have good title.'

Commenting on the potential liability of the letting agent, he added:

'Typically, in these cases the fraudsters will place a tenant in the property prior to sale. That tenant will almost always be complicit in the fraud and will on occasion assume the identity of the real owner. It is well established that the letting agent owes a duty of care to the landlord in respect of taking up appropriate references and credit checks on a tenant.

'However, given the increasingly sophisticated fake ID that is available, the extent to which a letting agent could be reasonably expected to spot, for example, a forged passport is unclear.'

Fraudsters in these cases typically target mortgage-free properties and cash buyers, and a surveyor is unlikely to be involved unless commissioned to provide a condition survey. In so doing, they are not expected to comment on the tenure of ownership; any requests to do so should be resisted.

The figures

Shows the figures on fraud

Duty to report

Apart from the threat of a negligence allegation, the obligations to report financial crime under the Money Laundering Regulations 2007, the Proceeds of Crime Act 2002, and the Terrorism Act 2000 must not be ignored.

For example, those in the regulated sector are required under the 2002 and 2000 acts to submit a suspicious activity report (SAR) in respect of information that comes to them in the course of their business if they know, or suspect or have reasonable grounds for knowing or suspecting, that a person is engaged in, or attempting, money laundering or terrorist financing.

The regulated sector incorporates professionals, including estate agents, considered at high risk of being used by criminals to launder money. Surprisingly, the decision has been taken not to include letting agents, but firms that are not in the regulated sector may also be required to submit an SAR.

A professional who fails to file their suspicions in an SAR is committing an offence with sanctions ranging from fines to criminal prosecution, but the National Crime Agency’s 2015 review of SARs revealed that very few are filed by estate agents. When the figures were issued, a spokesperson for law firm Kingsley Napley said:

'There is clearly still a lot of room for improvement, particularly among the legal, estate agency and accounting sectors.'

Is the industry able to fight?

Although millions are spent tackling economic crime, it remains a persistent and serious issue.

The fifth Money Laundering Directive was scheduled for implementation in June. Among other things, it tightens up customer due diligence requirements. This has highlighted concerns that professionals do not have access to the tools to identify increasingly sophisticated criminal behaviour.

The validity of this view is confirmed by evidence that fraudsters do not pick their ‘professional’ advisors at random, and often appoint firms whose procedures may lack the sophistication of a larger business supported by the latest technology. There are tools such as iris recognition technology that can verify identity more accurately. However, they are used by an isolated few rather than the whole profession and with increasing pressure on margins, are unlikely to be affordable for many smaller firms.

Broader use of appropriate technology can help to combat fraud, as would greater collaboration across the professions, but in many cases, simple human error is a contributory factor. The true cause of mistakes is rarely clear, but failure to follow process cannot be corrected by technology alone.

Property professionals can take relatively simple steps to prevent fraud. These range from recommending to their clients that charge-free property is registered with the Land Registry Property Alert Service to insisting on meeting sellers face to face. But the best advice is quite simple: if it feels wrong, it probably is.

Emma Vigus is Director of Professional Indemnity at Howden Insurance Brokers

Further information