Mortgage fraud - Spotting the danger

The Britannia Building Society has announced that it is to launch a specialist unit to recover compensation from lawyers and surveyors for losses arising from fraudulent property transactions; other mortgage lenders are expected to follow suit. This raises the questions of just how widespread mortgage fraud is and how brokers can help clients to limit their exposure to fraud claims.

Organised mortgage fraud can take many forms and it is difficult to measure the extent of the problem accurately. Fraud may be perpetrated by sophisticated criminal groups and involve several properties, while at the other end of the spectrum individuals may commit fraud by providing false information to the lender to secure a bigger mortgage.

According to a recent intelligence report published by the Association of Chief Police Officers, mortgage fraud remains a significant proportion of the UK's annual fraud losses - the report has identified fraudulent mortgage transactions worth approximately £700m. While this figure represents only a small proportion of the annual lending market, mortgage fraud remains a significant problem.

Solicitors will be involved in most property transactions undertaken in the UK. They may incur civil liability if their client commits mortgage fraud, even if they were not aware of the fraud and did not participate in it actively. They may also be committing an offence under The Fraud Act (2006) or a money laundering offence under The Proceeds of Crime Act (2002).The Law Society published a guidance note recently that highlighted the warning signs of mortgage fraud. Particular caution should be exercised where: the client or the property is located some distance from the solicitor's office; the seller is a private company or has owned the property for less than six months; the seller has provided incentives or discounts; the deposit is being paid by someone other than the purchaser, or; there are plans for a back-to-back sale.

Solicitors can guard against the risk of unwitting involvement in fraud by: verifying the identity of the client; undertaking due diligence in accordance with the Money Laundering Regulations (2007); ensuring that contract documents are completed fully and that signatures are witnessed properly; by ascertaining the true net-cash price to be paid and recording it in the contract and transfer documents, and; by asking questions if the client gives unusual instructions.

There can be no doubt that the recent slowdown in the UK property market has exposed a rise in mortgage fraud and the potential for solicitors to be exploited by criminal syndicates. Professional indemnity insurers are well aware of this trend and, with the renewal season for solicitors imminent, brokers should ensure that their clients are familiar with the Law Society's guidance note and that they have acted on it.

Marcus Thompson, professional risks partner, Beachcroft.