The large sums of money involved in property transactions and investment have long attracted a high level of fraudulent activity. However, the explosion in internet use over the last decade has led to vastly increased fraudulent activity and with that fraudsters have become more creative in their attempts to steal money.
The new reality is that frauds can now be run from remote locations anywhere in the world and people or businesses have no way of knowing who they are dealing with, unless they check it out. Carrying out due diligence on who you are dealing with, is a vital first step in ensuring prevention is better than cure.
The volume of property transactions has soared in the UK, inviting fraudsters to prey on the financial opportunity
Fraudsters prey on financial opportunity and the volume of property transactions in the UK has soared recently due to the Stamp Duty holiday, which began in July 2020. For conveyancers this has meant more monies passing through their accounts and being paid out to counterparty legal teams and mortgage lenders. Fraudsters know the legal conveyancing cycle, whether it is commercial or residential property transactions, and the law firms involved. Armed with this knowledge they will target firms and individuals to acquire knowledge of pending transactions and can use sophisticated cyber tactics to obtain email information about completion, funding amounts and transmission of completion monies. This naturally lends itself to impersonation attacks where false banking co-ordinates are provided using slightly altered but fake email addresses purporting to come from the real parties to a transaction. In this way they can divert funds to their own accounts from where it will be transferred, almost instantly and often to foreign jurisdictions.
The Law Society warned of this risk in a practice note to solicitors in June 2020. Specifically, the note described how fraudsters are impersonating law firms, intercepting client emails and duping them into sending money. It also estimated that across the economy, over £300 million per year has been lost to fraudsters using these tactics to defraud innocent victims. Banks were due to tighten their own practices by creating new processes around “Confirmation of Payee” but the Covid impact may well have slowed this down and in any event it was only intended to cover the six largest high street banks.
However payment diversion fraud is not a new threat
This is hardly a new threat. Back in November 1999 the Wall Street Journal carried an article about UK companies being plagued by ‘payment diversion fraud’. In July 2016, ActionFraud warned of fraudsters hacking into emails to divert house purchase payments. Despite this, such frauds have continued to be perpetrated and in March 2020 five online fraudsters were convicted of precisely this scam, taking over £9 million from victims between 2014 and 2019. The fraudsters managed to infiltrate the victims’ email systems by using malware, which gained access to live transactions, many of which were property related. Spoof emails were then sent out so that funds could be redirected to the fraudsters’ accounts. Reflecting the increased globalisation of fraud, the criminals all had overseas connections and the funds were sent offshore when received.
Prevention is the best way to stop these frauds. Most property legal teams should now be well aware of the risks posed by such fraud and should already have taken action to tighten up processes and monitoring systems. For example, two-step ID authentication checks, similar to those used by banks, can help. Ensuring that bank co-ordinates match from beginning to end of a transaction can also reduce risks. Even the slightest change in bank details or an email address should be spotted and checked by direct oral communication between the relevant parties – if you send an email to the changed, but wrong address, asking the fraudulent recipient to confirm who they are, then you may not get the right answer! There are still gaps at some law firms that fraudsters are more than happy to exploit.
The explosion of the internet is increasing the opportunities available to online fraudsters
The explosion in internet use over the past decade, and more recently during the pandemic, has also increased the opportunity for online fraudsters to run fake property-based investment schemes, often run as ‘boiler room’ frauds. These enterprises operate in much the same way as a legitimate business. For example, they will hire people to market their investment opportunity and will acquire marketing lists to target individuals with a high level of disposable income. However, they do not have something legitimate to sell, or invest in…
Some creative examples of fraud based on property investment have emerged recently, targeting individuals who might be planning for retirement. For example, this could involve selling off multiple plots of land on one site when there is no planning permission or redevelopment rights in place. Alternatively, it could involve being offered an opportunity to buy into a scheme to receive rental income from say parking or storage plots where there is no underlying business to support the scheme. Sometimes such schemes are marketed through pension advisors as an opportunity to invest through a SIPP. Several such schemes are currently under investigation by both the Financial Conduct Authority and the Serious Fraud Office and while it is likely to be too late for these individuals to obtain full recompense for their investments, it must be hoped that enforcement action will at least bring them some justice.
Such schemes typically offer potential investors returns that far exceed standard saver rates. As such, the old adage that ‘what looks too good to be true, probably is’ should be considered. If it is an investment opportunity, then it is also important as a basic check to look at the FCA website to see if the offering company has regulatory approval to sell or market investments. This, in itself, would not protect an investor against the rarer occurrence of regulated companies offering fraudulent investments. However, if the firm is not even listed on the FCA website, then people should be very wary of investing and always seek professional advice outside the nominated advisors connected to the scheme itself.
Property-based fraud is not going away and conveyancers and investors alike need to remain vigilant in the future. Some of the most common types of fraud are becoming more well-known and can be prevented through robust governance and adherence to best practice. However, the fraudster is constantly coming up with new ideas to part property investors from their cash.