Articles

The Fraud Squad

Release Date:	23 November 2007
Author:	Mark Jansen
Original Publication:	Property Week

Property Week and law firm Mishcon de Reya joined forces to form a crack team to probe property fraud.

This month, the Land Registry was forced to remove sensitive documents from its website after a series of mortgage frauds; Erinaceous said it was suing its former head of valuation in the City; and Mohammed Luqman was ordered by a court to pay back £16m in bank loans taken out by his son.

Thus the timing of a seminar on fraud and corruption in property, jointly organised by law firm Mishcon de Reya and Property Week earlier this month, was perfect. Speakers from the police, private investigators, lawyers specialising in commercial fraud and academics spoke to a packed room about key issues: why do people commit property fraud, what are the warning signs and how can it be prevented?

Gary Miller, founding partner of Mishcon de Reya’s fraud group, reeled off a string of examples of ‘deal-stealing’, such as when developer Crown Dilmun successfully sued former director Nick Sutton in 2004 for passing up a chance to buy Fulham Football Club’s stadium in order to buy it himself.

Miller said there are many misconceptions around deal-stealing, such as the belief among perpetrators that it does not count as theft if the company they were working for when they first spied the opportunity did not have the money to act on it.

“That is not relevant,” said Miller. “The [law] is very simple: not to profit from your position. It is pretty damn strict - even if the firm you are working for can’t afford the deal, or has a policy not to acquire any more property, you can’t do it, not even if you resign and do it afterwards.”

Miller said employers faced with deal stealing by former employees have plenty of weapons to fight them.

“You can get homes searched, freeze orders on the proceeds if a property is flipped, and get the books of surveyors opened with disclosure orders,” he said. “Do not accept deal-stealing as a fact of life. You should do something about it.”

He urged employers to make copies of all the information held on the laptops of departing executives, so they can check what’s on there if they later suspect that deals are being stolen.

“Wiping [computers] is a classic sign of people with something to hide,” added Miller.

DATA THEFT

He also advised employers who suspect deal stealing to hire experts in tracing emails and information on computers. “Bring in people who can examine your machines, otherwise you’re just shooting in the dark,” he said.

Bob Lewis, computer forensics manager at the Risk Advisory Group, gave a live demonstration of how easy it is to steal data from company hard drives and also how to tap into other people’s mobile phones.

Detective chief inspector Oliver Shaw, of the Economic Crime Department in the City of London Police, freely admitted that the police do not have the resources to investigate fraud. Investigations are lengthy and complex and tie up resources.

“Mortgage fraud is not a priority for the British police,” he confirmed.

Instead of investigating cases, the police are concentrating on providing research that will be circulated to businesses to provide examples and warnings of what can go wrong. A National Fraud Reporting Service is to be launched next year for this purpose.

Miller estimated that only 1% or 2% of clients call in the police when they suspect fraud. “People in the regional police forces don’t have the experience to deal with commercial fraud,” he added. Instead of going to the police, most victims prefer to hire private investigators who can preserve reputations by keeping the matter confidential.

Marcus McCafFrey, head of corporate investigations at the Risk Advisory Group, said typical property frauds include undervaluation of houses by estate agents, who then sell the property cheap to an accomplice, while applicants for mortgages lie about their income, give false work references and conceal poor credit ratings, sometimes with the help of corrupt mortgage brokers.

This was evident from the US subprime mortgage crisis, where billions of dollars in home loans defaulted because the borrowers could not make the repayments.

DC1 Shaw said mortgage fraud is so rampant that it has spawned it’s own subculture of people who alert fraudsters to opportunities.

“We know there are criminals who will provide fraudsters with information about which banks are easy game, and which intermediaries will turn a blind eye,” he said.

Although police lack the resources to concentrate on individual cases, Shaw said the force plans to secretly film mortgage brokers who are suspected of encouraging applicants to lie about their income or credit history. News of the initiative will spread among brokers.

“Hopefully it will keep them on their toes,” he said.

CAPITAL LIES

On the commercial property side, McCafFrey said firms often lie about how much capital they have at their disposal in order to commit fraud.

McCaffrey warned that it is ‘extremely difficult’ to recover stolen money as the fraudsters tend to move it out of the country in just a few hours. Investigations have to be subtle so as not to alert the fraudsters to the fact that they have been spotted.

David Canter, professor of psychology at Liverpool University and an expert on why people commit fraud, told the audience that fraudsters are unique. While most crime is committed by people who are in their teens or 20s and from difficult backgrounds, the fraudster is usually someone in their 30s, likely to be a property owner, and is often helpful with the initial inquiries.

Most fraud occurs because people see an opportunity, and if they get away with it once, it tends to escalate.

His students have interviewed convicted fraudsters at Ford Open Prison about their motives and experiences. Canter gave the example of a former senior executive in a firm with cash flow problems who took money from an account earmarked for spending on property and used it to pay the wages.

“He got away with it, so he did it again and again,” said Canter. “People often think that what they’re doing is not illegal. Very often, they move on to falsifying documents. They become expert in all the possibilities, they start setting up false companies and creating situations in which fraud can be perpetrated.”

Canter’s students have also carried out experiments to forge signatures. “It is remarkably easy, no great skill,” he said.

SUSTAINING DECEIT

On a brighter note, Canter said fraudsters often give themselves away in the end.

“The most difficult thing about deceit is sustaining it, because it’s a fabrication,” he said.

Canter warned that many companies leave themselves open to fraud by reducing identity to a number, which can easily be impersonated.

“Think of fraud as an industrial accident. There is usually a build-up before it happens, when the possibilities are in place, and when it happens, people often say they could have predicted it,” he said.

McCaffrey pointed out that much fraud occurs simply because companies fail to carry out proper due diligence. “How many do it correctly, in enough depth and at the right time?” he asked.

Canter and McCaffrey agree the most effective way to stop fraud is to prevent employees from having too much autonomy, especially those who have access to money. Canter pointed out that in casinos, “everyone is constantly checking what everyone else is doing”.

McCafFrey added: “Look at the responsibilities of the managers. Is there one person able to write large cheques without having to refer them to someone equal, or more senior than themselves? Autonomy is always an issue, and too much of it is never a good thing.”

It is a lesson many will learn the hard way.