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The Numbers Game

4 September 2014

Here, we look at the risks accountants can face if their clients resort to misrepresentation when applying for mortgages.

Mortgage fraud is estimated to involve about £1 billion per year in the UK.

In years now long gone, mortgages were difficult to obtain. The process was slower than it is now – way too slow in many cases – but such a plodding approach was abandoned well in advance of the years of crazy lending.

It cannot be said with any certainty whether the old-style approach would have dramatically reduced the amount of mortgages obtained through fraud in the past decade or so. One reason for this is that the banks were never forced to make those loans.  Many banks that had their fingers burned did so because they made insufficient checks or turned a blind eye to the risk.

The property boom years were followed, almost inevitably, by investigations and recriminations. The Serious Fraud Office (SFO) is increasingly interested in large-scale mortgage fraud involving huge sums. It is often the case that a major mortgage fraud operation will involve a large number of people; many of whom are likely to be professionals. Which is where the risk lies for accountants.

Accountants have to be careful not to fall foul of the law because a client acted dishonestly in order to secure a mortgage they should not have been granted.

Numbers Game

Mortgage fraud is like many other types of financial offence: investigators will look to establish a chain of personnel and determine their roles. Many mortgage fraud cases that go to trial have involved fake leases, identification documents and valuation reports. Others have heard evidence of lenders being duped by an applicant who claims to earn or possess assets worth far more than they do in reality. In such cases, the lenders are free to claim they were hoodwinked and that they never suspected that anything untoward was being practised. But, if you are the accountant of such an applicant, you cannot use that excuse.

Accountants, like other professionals, have to be able to show they acted impeccably in carrying out their work. Yet in cases as carefully planned as a mortgage fraud, any professional who becomes involved, however unknowingly, will find it hard to prove their innocence. We say this as a firm that has extensive experience of property and mortgage fraud cases; including what has been described as the UK’s largest mortgage fraud case in a decade. And our experience has led us to believe that prevention is better than cure.

An accountant’s client could exaggerate his assets to secure a loan or be involved in an over-valuation fraud with a chain of professionals – possibly estate agents, surveyors or builders – to hoodwink a lender into handing over huge amounts of money. If this wrongdoing is discovered, much of the pressure falls onto the person who “did the books’’. How much did they know? Were they satisfied with their client’s explanations? Why did they not report any suspicions? What checks did they carry out? These questions and more will be asked of accountants by those investigating a mortgage fraud allegation. Such investigations can be long, drawn-out affairs as the authorities are looking for any impropriety or link to other illegality, such as money laundering. Accountants in such a situation need to be able to provide answers that will satisfy the authorities and exonerate them from any blame.

But that can only happen if the accountant has already taken precautions to make sure that their client is not involved in wrongdoing. Being responsible for the accounts is, obviously, part and parcel of the job. But how the contents of those books are presented to outside parties can present a risk for the accountant. In the case of mortgage fraud, a potential lender will look to the mortgage applicant to disclose their income and assets openly and honestly. If the applicant makes dishonest statements regarding their wealth in their application this could be seen either as an innocent mistake, a little white lie to ensure a successful application or dishonesty on a scale that merits prosecution.

Should dishonesty be suspected, it can be confirmed quickly: the Mortgage Verification Scheme, introduced three years ago, allows would-be lenders to check an applicant’s income with HM Revenue and Customs records. Should dishonesty be proved, it will mean the end of an applicant’s application and possible criminal charges; depending on the scale and nature of the dishonesty.

If the accountant was involved in, turned a blind eye to or even encouraged a client’s false representations to carry out mortgage fraud then they too are likely to be prosecuted.

When investigators are looking for information to confirm such suspicions it is vital that even the most innocent accountant knows exactly where they stand legally. Both they and their client will have great need of the right legal advice and the strong, pro-active defence that a bespoke legal team can offer. Such legal representation has to involve a considered, tactical approach from the outset; employing commercial acumen and in-depth knowledge of how to deal with investigating authorities in order to challenge any allegations and establish a client’s good character

Section 2 of the Fraud Act 2006 states that a person is guilty of fraud by false representation if they dishonestly make a false representation and intend to do so to make a gain for themselves or another. A representation is false if it is untrue or misleading and the person making it knows it to be. It may be expressed clearly or implied. The implications for the applicant making a dishonest mortgage application are fairly clear. But what of the accountant? Can they argue that they were not involved as they were merely on the sidelines when the fraudulent application was made? Unlikely. Section 2 of the Act explains that “For the purposes of this section a representation may be regarded as made if it (or anything implying it) is submitted in any form to any system or device designed to receive, convey or respond to communications (with or without human intervention).’’ Or to put it in simpler terms, anyone involved in the compiling and submission of the dishonest submission can be held liable for it; including accountants.

Alternatively, failing to disclose information is an offence under Section 3 of the Act. Classed as being where a person fails to disclose any information to a third party when they are under a legal duty to disclose such information, the section is a further reminder that turning a blind eye is not an option for accountants when it comes to their clients’ mortgage applications.

For a mortgage application to be fraudulent, it has to be what the law regards as both dishonest and operative, as per the case of R v Doukas (1978). As an example, if someone lies about their age when applying for a mortgage they are being dishonest. But that lie may not be considered operative as the money may well have been loaned to them whether they were 28 or 36 years old. Lying about your income on a mortgage application, however, could be operative. Accountants would do well to remember this whenever their clients do make such applications. The law gives the authorities considerable powers to punish anyone involved in misrepresentation when it comes to mortgages.

Accountants should always be aware of the need to make their own checks if they are to avoid the house coming down on their activities. They could face as severe a financial or custodial punishment as their client if a mortgage fraud is proved. But they will also lose their professional standing.

They may even find it more difficult to counter the allegations than their client, as it could be argued by prosecutors that such a professional who failed to identify the potential fraud before it happened must have had the intent for it to be committed. This may be a harsh interpretation of the circumstances. But not being aware of either a client’s activities or the law regarding mortgage fraud is no real defence for accountants should the authorities come knocking.     

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Numbers Game


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