Money laundering through real estate

In the post financial crisis era, when anti-fraud units from various law enforcement agencies stepped up activity to prosecute real estate related crimes; real estate continues to be a vehicle for scammers and fraudsters.  Although mortgage fraud and identity theft have been the mainstay, money laundering through real estate has not received the same attention.  That is until this year, when a pilot program was initiated to identify money laundering in residential real estate.  The program was ordered through the Financial Crimes Enforcement Network of the US Department of the Treasury (FinCEN), which is tasked with the protection of our financial system by primarily combating money laundering (fincen.gov).

FinCEN’s concern is the laundering and/or structuring of money through all cash deals into luxury real estate, primarily through shell companies.  Through the use of LLC’s or other business structures, individuals can hide assets anonymously.  According to FinCEN, “Money laundering” is the disguising of funds derived from illicit activity so that the funds may be used without detection of the illegal activity that produced them.

A 2008 FinCEN report (Money Laundering in the Residential Real Estate Industry: Suspected Money Laundering in the Residential Real Estate Industry; April 2008) found that suspicious activity reports (SAR) remained steady through 2002.  However, began to increase in 2003, and sharply rose through 2005; the increase was significantly more than the rapidly expanding real estate market at that time.  Findings of the report indicated that over 75 percent of those engaging in money laundering activities were unaffiliated with the real estate industry.

The program to identify money laundering in residential real estate seemed to be the next logical step in a series of investigations.  As a result, FinCEN announced Geographic Targeting Orders (GTO) on January 13th of this year.   The GTO was enforced from March 1st, 2016 through August 27th, 2016.  And required title companies to report the individuals behind the companies buying high end real estate without financing (all cash deals), located in Manhattan and Miami-Dade County.

In an April 12th FinCEN news release, former FinCEN director Jennifer Shasky Calvery stated “The analysis and DOJ forfeiture cases continue to show corrupt politicians, drug traffickers, and other criminals using shell companies to purchase luxury real estate with cash. We see wire transfers originating from foreign banks in offshore havens where shell companies have established accounts, but in many cases we also see criminals using U.S. incorporated limited liability companies to launder their illicit funds through the U.S. real estate market.”

On July 27th, FinCEN announced the expansion of the GTO, beginning August 28th and lasting for 180 days.  The geographic areas were expanded to include: New York City; Miami-Dade, Broward and Palm Beach counties; Los Angeles County; San Francisco, San Mateo, and Santa Clara counties; San Diego County; and Bexar County, Texas.

Increased scrutiny of money laundering in residential real estate compelled the National Association of Realtors® to issue Anti-Money Laundering Guidelines for Real Estate Professionals (realtor.org; November 15, 2012).  The voluntary guidelines state that the real estate agent’s exposure is generally “mitigated” because most real estate transactions involve financing and mortgages (which are regulated).   However, when encountering risk factors that fall outside the norm, NAR encourages due diligence and reporting of suspicious activity.

By Dan Krell
Copyright © 2016

Original published at https://dankrell.com/blog/2016/08/05/money-laundering-and-real-estate/

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Mortgage fraud persists and is local

mortgage fraud persistsMortgage fraud persists and may never go away. Frankly it seems as if the fraudsters are becoming increasingly creative and brazen. The 2014 LexisNexis® 16th Annual Mortgage Fraud Report (lexisnexis.com) seems to agree with the sentiment, saying: “The reduced volume of consumers who are able to qualify for mortgage loans has led to a fiercely competitive and, in some ways, familiar Fraud for Profit marketplace… Ultimately, fraud and misrepresentation, especially in the mortgage application process, is likely to remain a serious and ongoing national problem.”

Looking into why mortgage fraud persists, the LexisNexis® Mortgage Fraud Report indicated that 74% of reported loans in 2013 involved some form of application fraud or misrepresentation. The increase included the misrepresentation of credit information, including credit history and references. Appraisal fraud was reported to be at a five year low; which is most likely due to the implementation of the appraisal Home Valuation Code of Conduct that reformed the relationship between the lender and the appraiser.

Mortgage fraud persists throughout the country. Although the LexisNexis® Mortgage Fraud Report ranked Florida and Nevada number 1 and 2 respectively for mortgage fraud during 2013, don’t think that other regions are immune from scammers and schemers. Mortgage fraud can pop up anywhere.  For example, I am local to the Maryland area, which is ranked 9th in mortgage fraud; which has a Mortgage Fraud Index of 110, that indicates there was more fraud than would have been expected from the number of mortgages originated.

Mortgage fraud persists and is local.

A July 21st news release from the Maryland District of the U.S. Attorney’s Office (justice.gov/usao-md) reported that a Bethesda MD man pleaded guilty to conspiracy, wire fraud, and aggravated identity theft that stemmed from a mortgage fraud scheme. The scheme defrauded lenders to the tune of $3.8 million by using the names of immigrants and students, as well as false financial information, to buy almost three dozen row houses in Baltimore – all are in default or foreclosure.

The scheme used “straw purchasers” to purchase the homes. The defendant told them that he would prepare mortgage applications, manage the property after purchase, and promised 80% of proceeds of a future sale. Besides paying the straw buyers cash after buying homes, the defendant also paid them for referrals of other potential straw purchasers.

In another case, a former Maryland real estate agent was recently sentenced to 57 months in prison and ordered to pay $2,482,856.05 in restitution for conspiracy to commit wire fraud and aggravated identity theft that stemmed from a mortgage fraud scheme. According to a March 31st news release from the Maryland District of the U.S. Attorney’s Office, the defendant and his co-conspirator help straw buyers obtain mortgages by “using stolen or false identities, false documents – including W-2 forms, earnings statements, and bank statements – and false credit information…” Straw buyers’ credit worthiness was fraudulently enhanced by creating fictitious lines of credit. The scheme also included inflated appraisals and false contract addenda to direct payments for repairs that were never made.

And it’s not just the usual suspects who are the perpetrators. The MERS scandal that erupted in 2010 not only let us see behind the wizard’s curtain of mortgage lending, but it also brought to light the notion that mortgage fraud can occur at any level. An asset manager, of a commercial mortgage special servicer located in Bethesda MD, pleaded guilty to wire fraud “in connection with a scheme to steal over $5 million from his company,” according to the Maryland District of the U.S. Attorney’s Office. The April 22nd news release described how he redirected funds intended to be applied to defaulted commercial mortgages.

Original published at https://dankrell.com/blog/2015/08/01/mortgage-fraud-persists-and-is-local/

Copyright © Dan Krell
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Don’t give in to temptation: Mortgage fraud on the rise

There’s no getting around the fact that qualifying for a mortgage has become more difficult. Although most home buyers accept their mortgage fate handed to them by underwriters, some are tempted to embellish their mortgage application so as to appear more qualified to receive a loan. Even though you may be tempted to cross over the line, don’t give in to temptation just to buy a home.

If you think that mortgage fraud is only about taking part in some elaborate conspiracy with others for financial gain – think again. “Fraud for profit” typically involves “Gross misrepresentations concerning appraisals and loan documents…”; and is one of two categories of mortgage fraud described by the Federal Bureau of Investigation’s latest mortgage fraud report, titled “2009 Mortgage Fraud Report ‘Year in Review’”(FBI.gov).

The other category is “Fraud for property;” and entails the exaggeration of personal information that is included in a mortgage application (including providing false supporting documents) to buy a home. If you think that fudging a little on your mortgage application won’t hurt anyone because you intend to repay the loan, think again. The FBI states that mortgage fraud “is a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan…”

Since the FBI reports that the usual suspects perpetrating mortgage fraud are typically “industry insiders” (such as lenders, appraisers, underwriters, real estate agents, settlement attorneys, etc.), it is possible that your loan officer or real estate agent might attempt to “recruit” you to be a participant or victim of mortgage loan origination fraud. Mortgage loan origination fraud involves falsifying a borrower’s information to increase the likelihood of qualifying. Besides falsifying information such as bank statements, W-2 forms, and tax returns; mortgage origination fraud could also include the use of a false identification, false asset rentals, backward applications, and the use of credit enhancement schemes.

Additionally, affinity fraud is reportedly a growing issue, such that co-conspirators are often recruited within the same ethnic group or gang. Although, affinity fraud could be an element of any mortgage fraud scheme, it is sometimes devised to launder money.

To alert consumers, the FBI’s mortgage fraud report also cites emerging trends. The list includes schemes such as commercial mortgage loan fraud, condominium conversion fraud, bankruptcy fraud, foreclosed property theft/fraudulent leasing, tax-related fraud, the resurgence of debt elimination/redemption schemes, first time homebuyer tax credit schemes, and flopping/short sale fraud (fraudulently lowering the value of a distressed property).

The FBI’s assessment is that mortgage fraud activity is likely to persist due to continued poor economic indicators (including employment and housing). The environment is not only ripe for perpetrators to implement the typical mortgage frauds (such as loan origination fraud); they are also devising new ways to circumvent mortgage guidelines and laws for personal gain. The FBI states that detecting fraud can sometimes lags behind industry indicators for up to two years, so increased fraud reporting efforts will not indicate any immediate changes.

Don’t let your desire for the American Dream turn into a nightmare. If you suspect that you are a victim or are being recruited for mortgage fraud, file a report with the local FBI field office. Additional resources are offered by the Financial Fraud Enforcement Task Force website, StopFraud.gov; including how to report suspected mortgage fraud.

By Dan Krell
Copyright © 2011

Original published at https://dankrell.com

This article is not intended to provide nor should it be relied upon for legal and financial advice.  Using this article without permission is a violation of copyright laws.

The fight against mortgage fraud

by Dan Krell © 2010

Last week, the United States Attorney for the District of Maryland, Rod J. Rosenstein announced recent results from local efforts of Operation Stolen Dreams. Coordinated through the Financial Fraud Enforcement Task Force, Operation Stolen Dreams has been described by the Department of Justice as the “largest collective enforcement effort ever brought to bear in confronting mortgage fraud.”

For those who don’t remember, the Financial Fraud Enforcement Task Force (StopFraud.gov) was established in November 2009 by President Obama as an interagency effort to “hold accountable” those who contributed to the recent financial crisis and to prevent a future crisis. Comprised of 20 federal agencies and 94 United States Attorneys’ Offices, as well as state and local authorities, the Task Force is the broadest coalition ever established to combat financial fraud.

The June 17th U.S. Attorney press release was not a final declaration but rather an interim report to make the public aware of the success of recent cases pursuing and prosecuting those who engaged in financial fraud, which includes mortgage fraud, mortgage modification scams, and other activities. Not only has Operation Stolen Dreams succeed in criminally prosecuting 1,215 defendants nationwide, civil enforcement efforts have recovered more than $147 Million.

Recent fruits of the operation include the superseding indictment of a Bethesda man and the conviction of a College Park/Laurel duo. On June 16th, a superseding indictment was issued against a Bethesda man who allegedly used his position as a mortgage originator for a Laurel mortgage company to allegedly participate in a mortgage fraud scheme that defrauded lenders (and others) of over $7.4 Million. The seventeen count superseding indictment chronicled the alleged mortgage fraud activities from 2005 to 2007.

On Jun 10th, a College Park/Laurel duo, were convicted of multiple counts of wire fraud. Testimony recounted how the two, who were employed in the mortgage industry, used straw buyers and stolen identities to purchase properties which almost immediately went into foreclosure- resulting in a loss of $664,493 for a local lender.

In addition to assisting the Financial Fraud Enforcement Task Force in Federal cases, the Maryland Mortgage Fraud Task Force also investigates State and local financial crimes. Among the many cases that have been investigated, some have resulted in the closing of mortgage modification and loss mitigation businesses that allegedly defrauded home owners seeking financial relief.

Recently, a case investigated by the Maryland Mortgage Fraud Task Force resulted in an indictment that was issued against a Montgomery County real estate agent for allegedly defrauding the County. It is alleged that the real estate agent used straw buyers to purchase moderately priced dwelling units (MPDUs are homes that are made available to homebuyers who meet specific requirements to purchase through Montgomery County). Additional allegations include mortgage fraud as well as allegedly violating the MPDU program guidelines by renting out these homes.

U.S. Attorney Rod J. Rosenstein was succinct when he stated, “…Our goals are to punish con artists who have committed mortgage fraud and deter others from following in their footsteps.” Mortgage fraud is being pursued as never before. It is without a doubt that federal and local investigations are making an impact on fraudsters and scammers. To assist consumers to protect themselves from fraud, the Financial Fraud Enforcement Task Force website, StopFraud.gov, has many resources; including how to report suspected mortgage fraud.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 21, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.

Are you selling a home or a contract?

In a recent home showing, the listing agent remarked that the seller is the “contract seller.” As it turned out, the seller of the home was not on title, but rather had a contract on the home and wanted to sell the contract. The listing agent, trying to explain the situation as best as he could, stated that the seller’s contract gave hime equity in title which allows him to sell the home.

I had to wonder where this agent received his real estate license because, as a title attorney confirmed, equity in title does not permit one to sell a home they do not yet own. Never mind the fact that our local MLS (Metropolitan Regional Information Systems, Inc.; MRIS.com) requires listed properties to be listed by the legal owner of the property. So what are these guys trying to do?

The number of home flipping transactions are increasing as the market recovers. Home flipping received a lot of bad press in the 1990’s when fraud was prevalent in such transactions. Flipping a home per se is not illegal, it is fraud and other irregularities that raise eye brows and get the attention of local (and sometimes national) authorities.

Not all property flips involve fraud and deception. During the heyday of the sellers’ market earlier this decade, real estate investors capitalized on the frenzy of home buyers eager to own a home in the seemingly never ending appreciating market by quickly flipping properties. Of course, many real estate speculators lost a lot of money as the market receded.

A flipping technique that has been thought to be dubious by some and now making a comeback is the simultaneous closing (or double closing); a similar term/technique is selling the contract. Rather than take ownership of a property and obtain the title to a home, investors most likely resort to the double close or contract sale to save on transfer, property, and other taxes.

A local attorney (requesting not to be named) trying to close such a deal was contacted by the buyer’s lender Fraud Investigation Department. Although he felt there was nothing wrong with the deal and he was not withholding any information, the deal was denied by the buyer’s lender. Although the buyer qualified for the loan, the lender’s Fraud Investigation Department nixed the deal. Growing concerns of stolen homes where homes are sold without the knowledge of the legal owner are raising additional red flags.

To avoid such deals, FHA (among many conventional lenders) require that the title to be “seasoned” (the owner must be on title for a required period of time) before they will lend on the property. Finding a lender to finance a simultaneous closing or contract sale is often difficult.

Although the “contract seller” of the home I showed was most likely legitimate, it reminded me that even seasoned agents need to be on their toes. Buying a home is an investment of time and money, so don’t be afraid to exercise due diligence; asking who the seller is and why they are selling the home is often a good place to start.

By Dan Krell
Copyright © 2010

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.