News on this topic goes in waves. A few years ago Identity Theft and Mortgage Fraud got public attention when scams we detailed of perpetrators identifying a typically older single person who owns a home with a very small existing mortgage. The criminal will fake the homeowner’s identity and pay off that mortgage, and then remortgage the property to almost its full value. The homeowner does not find out about the fraud until the payments go into arrears and the lenders come calling, or until they attempt to pay-down their small mortgage and find it was already paid-off and a new credit search shows a very large amount owing to a different lender.
Now, the Oklahoman or Skip Transfer. A group, or several different groups, conspire to purchase lower priced homes in a given neighbourhood and then flip them to “straw buyers” for inflated prices. The straw buyers are paid a few thousand dollars for the use of their identity, their financial position is forged, and they get mortgages from mortgage lenders at prices typically $40,000 or more in excess of the property’s market value.
One of the big Canadian banks, in their Alberta operations, has recently announced a mortgage fraud involving $120 million in property. Many news organizations have been reporting on this, here, here, here. This scam could involve many interrelated organizations in many countries, and include many institutions, and, by fraud or negligence, many Canadian lawyers, mortgage brokers, and bank employees. Some reports suggest that irregularities were identified as early at 2006.
My experience is that fraud is not contingent on new space-age technology or extraordinarily complicated strategies. One recent claim example was a loss of almost a half million dollars to a relatively small private company that, like many organizations, had a holding company and an operating company, where only the operating company was audited. A mid level employee in the finance department very simply included herself as an employee of both the holding company and the operating company. When senior finance requested a run of T4 slips she provided only photocopies, removing sequential numbering, and pulling one of the two T4 splits. This complex plan, diabolical in its brilliance, lasted ten years. When a new senior finance employee requested original sequential T4 slips, the criminal mastermind admitted guilt and offered to pay back the money.
Rarely in cases of Fraud (and for that fact, employee injury, general liability, product liability, etc.), is the Loss Control activity a new or original device. The Loss was likely dependent on lax oversight or application of long existing policies and procedures. Safety bars removed, eye protection not enforced, emails with sensitive information sent to former employee addresses, vendor lists not audited, not witnessing signatures, overlooking questionable behavior, not performing regular or periodic background checks, etc. etc. Any one of these can easily contribute to losses in the six and seven figures, but individually, they are just plain boring. Even in the case of a nine figure mortgage fraud, the sophistication of the scam is not based on 21st century listening devices, or some form of computer hacking, cross-site scripting, malware implanted virus, it is likely based on taking advantage of lax oversight of mundane operating activities, which individually are completely lackluster transactions, within multiple parties.
If you want a good history of mortgage fraud in Canada, I refer you to a May 6 article by By Jen Gerson, in the Calgary Herald, here. The article makes important distinction between Alberta real estate law, and says that “…because in a boom economy, it’s often easier to hide fraud because actual boom time values can quickly match fake inflated values. Banks, in this case, can recoup their losses. But when property values stabilize or fall, fraud becomes more apparent.” The article also provides an estimate by the Quebec Association of Real Estate Agents and Brokers that “fraud could cost $1.5 billion per year across the country.”
Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626
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