Fraud is broadly divided into fraud for shelter and fraud for profit. The motive behind fraud for shelter is gaining ownership of a house by providing false information. Fraud for shelter includes misrepresentations to mortgage lenders regarding employment status, assets and home value to qualify for mortgages to buy a home, refinance or pay debts. The frauds that have gained attention recently are not for shelter, but schemes by fraudsters aimed at stealing value from members of the public by setting up fraudulent real estate transactions. Frauds for profit are simply for the purpose of acquiring large sums of money as quickly as possible. This type of fraud is generally more complex than fraud for shelter.
Types of Fraud
This type of theft is probably the most widely known. Generally, one or more fraudsters use forged identification to impersonate existing property owners, or the directors and officers of a corporate owner. In the latter case, the fraudsters may make false corporate filings and even produce a forged minute book. The fraudsters then purport to sell and/or mortgage the property. Another well-known form of identity fraud involves the fraudulent discharge of a mortgage from title, and its replacement by a new mortgage from another lender. This can be repeated several times with the same property, using different lenders and lawyers each time. When each transaction closes, the lawyer pays the proceeds to the client, who makes a few mortgage payments, then disappears with the funds. A subset of identity fraud that has garnered much attention over the past few years is “rent/steal fraud”. A defining feature that allows this type of fraud to be so effective is that the fraudster is able to get physical possession of the house, thereby avoiding any problem associated with the lender inspecting the property. This type of scheme will usually involve the fraudster renting a home that is free of any mortgages. Typically, several months’ rent will be paid in advance to ensure that the real owner does not have his or her attention directed to the property during that time. The fraudster may then agree to sell the property, or arrange a mortgage. In either case, the fraudster impersonates the true registered owner. When the transaction closes, the proceeds will be paid to the fraudster, who vanishes. The true owner usually does not become aware of the fraud until the prepaid rent runs out, and he or she visits the property, to find it either abandoned, or occupied by an innocent purchaser. To prevent “rent/steal fraud”, clients who intend to rent a property should be advised to visit it at regular intervals. If the clients cannot check up on the property personally, a friend or neighbour should be asked to help out. Clients should obtain and check references from prospective tenants before renting to them. If clients intend to leave a property vacant for several months, they should arrange for someone else to check the property regularly, as vacant properties are often the target of fraud.
In this type of fraud, a fraudulent agreement of purchase and sale is prepared in which the
“purchaser” is either non-existent or complicit in the fraud. The property is usually transferred at a price exceeding its real value. The fraudster then obtains a mortgage from a financial institution or other lender based on the inflated property value, and finances most or the entire purchase price. A few payments are made, and then the fraudsters disappear with the funds. In this case, the lender obtains a valid mortgage on the property and will usually sell it under Power of Sale, but will not recover all of its investment in the property. Value fraud is usually easier to perpetrate in an active real estate market.
“Straw Buyer” Fraud
A relatively new trend in mortgage fraud in Canada is the use of “straw buyers”. The usual scenario involves a fraudster paying a few thousand dollars in cash to someone who is in need of money, such as an unsophisticated, unemployed or homeless person. The fraudster promises that the buyer will have no liability, and merely asks him or her to attend at a lawyer’s office to “sign a few papers”. The buyer becomes the owner of a property, often one that is undesirable or in bad repair. The fraudster provides the buyer with forged employment letters and other material to support the granting of a large mortgage to finance the purchase. In some cases, the “straw buyer” is an accomplice in the fraud. “Straw buyer” fraud is often found in concert with value fraud.
A fraudster may use the same “straw buyer” several times, with different properties and lenders. The fraudster takes the mortgage money, makes few or no payments, and the buyer never moves in. Upon default under the mortgage, the buyer has no assets to satisfy the mortgage debt, and will often declare bankruptcy. One of the greatest challenges regarding “straw buyers” is that until the fraudster behind the scheme is exposed, s/he can use multiple “straw buyers” to carry out numerous frauds. Royal Bank of Canada v. Welton8 illustrates the sheer volume of fraudulent transactions that can be carried out in this way. In this case, it is alleged that the defendant solicitor for the bank, together with a number of co-defendants, fraudulently deceived Royal Bank into giving 33 mortgage loans for over $5 million on generally run down properties. The bank alleges that in 22 instances, the properties were transferred to the straw person at well above market value. Additional properties were purchased at market value, and then sold to other straw buyers. The outcome of these allegations has yet to be decided, but the case highlights the danger of this type of fraud.
This type of fraud occurs when a spouse who is going through a separation seeks to encumber property and take the proceeds for him/herself, so that the equity in the property is not subject to the other spouse’s property claims. Equity stripping is not new, but can still be factor in situations that make it possible. For example, where a spouse owns investment properties in his/her own name and a separation from the other spouse is imminent, the titled spouse may seek to place new mortgages on the properties without the other spouse’s knowledge. Equity stripping may also occur in a business context, when partners or business associates have come to a parting of the ways. Power of Attorney Fraud This mode of fraud can either involve a genuine power of attorney that is being used improperly, or a form of identity theft in which the fraudster forges a power of attorney to allow him/her to sell or mortgage a property. This form of fraud has been identified in case law over the past few years and there is some uncertainty surrounding it. The case of O’Brien v. Royal Bank of Canada9 provides an example of how a power of attorney can be fraudulently used to affect title. In this case, title to a condominium was held in one-third interests by a husband, wife and daughter. The father had left Canada. The daughter was going through financial difficulties and wished to mortgage the property further, but the mother objected. The daughter held a valid power of attorney from her father, and forged a power of attorney from her mother authorizing her to enter into transactions on her behalf. In 2005, the daughter transferred the interests of her parents to herself and refinanced the property with Royal Bank of Canada. This mortgage went into default, and the mother challenged the validity of the mortgage. The court held that the mother was entitled to have the mortgage set aside, but that the bank was entitled to an equitable charge to preclude the mother’s enrichment at the bank’s expense. However, the bank was not permitted to enforce its equitable charge against the mother’s interest in the property.
Reverse Mortgage Fraud
Reverse mortgages are becoming more common. They are designed for older people who have significant equity in a property, but lack income. The mortgage allows the owners to use their home equity to generate the income they need. The mortgagors are not required to make payments under the mortgage; instead, they receive regular or lump sum payments from the lender. The accumulated principal and interest becomes due when the homeowners sell, move, die, or fail to pay taxes or insurance on the property. The fraudster in a reverse mortgage fraud may impersonate an elderly or deceased person who owns a property, or use a power of attorney. The fraudster then steals the proceeds of the reverse mortgage. This kind of fraud is often committed by relatives, caretakers or financial advisors who are familiar with the older person’s affairs and may have access to their records. Because no regular payments are due under the mortgage, a fraud of this type may not become known for several years.
While real estate fraud often involves cunning clients or detailed schemes, it can also involve lawyers, law clerks or other support staff in law offices who have access to information, documents and money. Internal frauds may be motivated by the need for cash, generated by:
· personal stress, such as divorce, business reversals, gambling or substance abuse;
· unrealistic lifestyle expectations; or
· feeling that the person is overworked and underpaid and is “setting things right”.
Opportunities for internal fraud occur when lawyers:
· work in “silos” isolated from other parts of the firm;
· only inform staff of what they are doing;
· are able to avoid or override internal controls; or
· deal with suspicions or complaints through direct client contact, and when staff:
· take advantage of flaws in internal controls; or
Some signs of possible internal fraud include:
· not taking holidays, especially for several consecutive days;
· sudden change in a staff member’s lifestyle or personality;
· receiving mail for a corporation that has no client file;
· receiving past due account notices;
· changes to documents or cheques; or
· missing original documents.
“Red Flags” of Fraud
Some “red flags” involving the client include:
· new client (offshore or otherwise);
· client presses for closing quickly, sometimes promising more business in return;
· client having no interest in the property, price, mortgage interest rate, legal or brokerage fees, or the lawyer’s explanation of mortgage documents;
· cell phones are the only contact numbers provided;
· client cannot produce title documents, survey, reporting letter, tax or utility bills for property;
· client cannot produce photo identification;
· funds are directed to one or more third parties with no apparent connection to the transaction;
· client’s mailing address is a post office box;
· client is “out of sync” with property (i.e., does not appear to be the type of person who usually purchases property of this type); or
· client refuses to allow contact with prior lawyer.
The transaction itself can present “red flags”, such as:
· repeat activity on a single property, or by a single client or set of clients;
· someone other than the buyer appears to control the transaction;
· client makes no inquiry about picking up keys or moving in;
· deposit not held by real estate agent or lawyer;
· no deposit, or small deposit relative to purchase price;
· immediate resale without re-listing;
· one lawyer acting for many parties;
· tenant paying more than 1 or 2 months’ rent in advance;
· title shows several recent mortgage discharges, without reasonable explanation;
· Agreement of Purchase and Sale with no handwritten changes;
· Amendments to the original Agreement of Purchase and Sale, lowering the price or granting credits to the vendor;
· municipality or utility companies have no knowledge of client’s ownership of property;
· funds provided to lawyer by way of temporary cheque without a pre-printed name or address;
· name of purchaser spelt differently throughout the transaction;
· unusual adjustments in favour of the vendor, or large vendor take back mortgage;
· purchaser supplies little or no of his/her own money to close;
· lack of access by purchaser to property, or unusual restrictions on access;
· “private agreement” with no real estate agent involved, or real estate agent named in agreement has no knowledge of deal; or
· Agreement of Purchase and Sale between relatives or business associates.
Detection and Prevention
Some simple and effective methods that real estate lawyers can use to assist in detecting and preventing fraud include:
· Comply with the Law Society of Upper Canada client identification and verification requirements;
· Insist on the client producing original documents and identification, not just photocopies;
· Hold the card or document – if it is forged, there may be a burning sensation due to chemicals used;
· Review date of birth, picture, address and other personal details to ensure they match the client;
· Check for misspellings, in client’s name or in standard form wording – they may mean the document is a fake;
· If in doubt regarding the authenticity of an Ontario driver’s licence, check it on the Ontario Ministry of Transportation website at: https://www.dlc.rus.mto.gov.on.ca/dlc/OrderForm.aspx or call 1-900-565-6555 The charge is $2.00 for a website check and $2.50 for a check by phone;
· Ask questions on deals where the client is pressing to close quickly;
· Do not allow documents to be taken outside your office for execution;
· If a party cannot come to the office and you cannot meet with them, have them execute documents before another lawyer or notary who is qualified in the jurisdiction where they are located. If documents are signed in another lawyer’s or notary’s office, obtain evidence of compliance with Ontario’s Law Society of Upper Canada’s identification and verification requirements; and
· Be alert if the price or type of transaction is inconsistent with market trends in the area.
While it is difficult to completely prevent the occurrence of fraud, familiarity with the common methods of fraud and an understanding of how to recognize and avoid fraudulent transactions will thwart many attempts.
Real estate fraud is always evolving, but value and identity fraud remain the most dominant, sometimes combined with straw buyer or power of attorney frauds. A strong understanding of these two modes, coupled with an awareness of the new approaches and techniques and their associated red flags, will help in detecting real estate fraud and controlling its spread. A commitment to vigilance against fraudulent transactions together with new government initiatives will help ensure that real estate remains a sound and secure investment. For more information and red flags concerning all types of fraud, see the fraud section of the LAWPRO website at http://www.practicepro.ca/fraud and the Law Society of Upper Canada website at http://www.lsuc.on.ca.