Mortgages have not been typically viewed as a high-risk service when it comes to the subject of money laundering. But, as money-laundering as a practice becomes more and more widespread throughout various countries, more industries are now being targeted and brokers and advisors need to be aware of the growing risks appearing in the mortgage industry.
The risk was deemed so low that up until August 2012 in the US, a segment of the financial industry known as non-bank residential mortgage lenders and originators (RMLOs) were exempt from the anti-money laundering requirements imposed upon commercial banks, broker-dealers, money services businesses and other areas of the finance industry.
Even up until now, mortgages have still not been regularly used as a way for people to launder money, but there have been warnings that mortgaged properties being used as vehicles for money laundering may have become more popular.
So, even though mortgage brokers and advisers are under no obligation to sign up for anti-money laundering supervision by regulators like lenders, solicitors and estate agents are, systems and controls still need to be in place to prevent financial crime and protect businesses and their customer base.
In the UK, the Financial Conduct Authority (FCA) warned that without processes for reporting suspicious activity, advisors could potentially be at risk of committing money laundering offences or breaking the Proceeds of Crime Act of 2002.
What Fraud is Being Committed?
There are a variety of mortgage frauds that RMLOs have to be on the lookout for, and could prompt the filing of a Suspicious Activity Report (SAR). These can be placed under three different categories:
Fraud Perpetrated on the Mortgage Lender
This category applies to fraud deemed to have been committed without criminal intent and can be executed through two types of fraud.
Occupancy Fraud: The borrower is purchasing a vacation home or investment property, but applies for a primary residence loan, which typically offers more favourable terms.
Liability Fraud: Lying about the extent of one’s financial liabilities.
Fraud Perpetrated on the Mortgage Lender With a Criminal Purpose in Mind
This category applies to fraud that has been deemed to have been committed with criminal intent as the purpose and can be enacted through one of the following:
Identity Theft: Lying about one’s true identity when applying for a loan using the identity stolen from another individual in order to obtain a mortgage fraudulently.
Income Fraud (Understating): Lying about one’s true income to qualify for hardship concessions or possible government assistance for low-income families applying for a mortgage.
Appraisal Fraud: One version of this type of fraud is obtaining an overly high property appraisal to profit from refinancing.
Fraud Perpetrated on the Borrower (The Individual)
Unlike the previous two categories, this category covers fraud that is committed against the borrower rather than by the borrower and can be committed under the following types of fraud:
Debt-elimination schemes: Might involve false promises to assist homeowners in reducing or eliminating their mortgage obligations, but typically charge huge fees upfront
Foreclosure Rescue Scams: Another form of consumer fraud whereby a homeowner unknowingly transfers title to a criminal third party, in the belief that they can stop or delay an imminent foreclosure on their home.
Reducing the Risk
As a result of these rising risks, many mortgage and insurance brokers opt to introduce controls similar to those implemented by other property finance firms who are subject to money laundering regulations and anti-money laundering (AML) rules.
AML programs are designed to be risk-based and take into account the specific nature of, and the services offered by, financial lenders. Therefore RMLOs are urged to recognise mortgage fraud as a more pervasive problem than the traditional money laundering and terrorist financing that banks and brokerage firms have to address.
RMLOs have to be aware of risks, in particular, that criminals may attempt to launder proceeds of crime by incesting them in real estate. RMLOs must report suspicious activity including, but not limited to, fraudulent attempts to obtain mortgages or attempts at money laundering through the purchase of residential real estate.
How We Can Help
Regulatory compliance is growing at a faster rate than ever before, and that’s why we are creating cutting edge solutions to keep pace and help our clients protect themselves. As a result, we have a robust suite of technology used throughout various finance sectors that can help in the fight against money laundering and the finance of terrorism.
Our Sekur.Transact module provides AML protocols, along with KYC, KYB, KYT and sanction screening all under one roof. Using the Sekuritance RegTech platform, brokers can implement automated systems pivotal to AML and counter-terrorism financing (CTF) and make them key elements of their infrastructure to protect themselves and their clients.
Our platform can gather data for analysis to better understand the risk of transactions to better assess whether or not fraud is occurring.
Although it’s not an integrated part of mortgage brokers processes, it doesn’t need to be daunting or a difficult component to embed. All you need is to use advanced technology implemented by experts, who can keep you abreast of what you need to watch out for, with the agility to keep up as the landscape changes.
If you would like an effective and dynamic AML solution to protect your business, why not get in touch? We’ll be happy to discuss how we can make our tech work for you.
The Sekuritance RegTech platform provides a single platform for every eGRC need, including end-to-end AML/CTF, CECL, FCPA, vendor management, beneficiary onboarding, investor check, card processing MFA checks, blockchain wallet checks, cyber-risk assessments, and other RegTech or Business Process Management requirements.
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