Many property owners and landlords are currently in a desperate position due to tenants not paying rent, but continuing to face overheads and taxes against their properties. This makes them more vulnerable to criminals, and is an important reminder that landlords must understand who they’re dealing with, who they’re selling to, and that proper background checks, even in a crisis, are more important than ever.
One classic tactic that fraudsters have been reportedly using simply involves approaching landlords at their most vulnerable. The conversation might go something like: “while your property was worth £1 million last year, it is unlikely you will be able to sell it in the current climate, so I am willing to purchase it, but at a lower price.”
If the landlord is willing to sell, the fraudster may then offer, for example, £700,000, however, they will ask to pay for the property through a different route to usual. This may involve officially ‘agreeing’ that the property is only worth £400,000, so the landlord can avoid paying higher sales tax than would be paid normally.
The buyer would then provide the further £300,000 in cash. That way the landlord receives a tax-free lump sum and hasn’t done anything technically ‘illegal’.
This simplified approach demonstrates how a criminal can get a great bargain on a property, which they can now use as a legitimate front for laundering large volumes of illicit cash.
Most likely the fraudsters will have picked properties where large numbers of tenants might tend to pay cash, such as migrant or low-income workers, and soon after the sale, rents will almost certainly increase, on the books at least.
They’ll also likely find a host of other maintenance and repair costs that need to be paid, as well as wage rises for any staff, and other fictitious costs.
In the eyes of the bank and utilities companies meanwhile, this landlord is a model customer – always paying on time and holding healthy cash balances, so they don’t necessarily see cause for concern or need to question where the money is coming from.
A combined approach
This initial example is just one way that fraudsters are targeting the property sector currently, but they are becoming more and more sophisticated in their methods – if one route doesn’t work, then they will simply try another.
Europol, for example, has highlighted the risk of highly-organised crime gangs who will target a specific local area to commit a number of crimes in a short period of time.
Currently, empty properties are a prime target, especially where the usual occupiers have been unable to visit the property due to travel restrictions. The criminals leverage diaspora communities that have built up across the EU member states to create support networks to then facilitate their criminal activities.
However, once travel restrictions are lifted, fraudsters will simply adopt another tactic and begin targeting another community.
Therefore, to successfully detect fraud we must use a combination of common sense and the right due diligence, looking into any anomalies when they arise. For example, if there’s a change in ownership, questions much be asked to ascertain who is really buying it: what other property do they own? What other businesses are theirs? Who do they know and do business with? Do they have adverse media? Are the people really who they say they are? How do they have large cash sums to buy property – where have these funds come from?
You can bet that when an organised crime group is buying a property or businesses as a front to launder cash, it’s not the only one they own.
Problems of the pandemic
When we look back on the evolution and impact of the Covid-19 crisis, we will most likely see it in terms of different waves or phases. The first phase was a physical health emergency that required drastic action. This saw the switch to online and digital methods of communication and engagement, due to the implementation of social distancing measures and the need for remote working.
While this period may feel like a long time, it will turn out to be a relatively short – but sharp – phase.
The next phase is one that will last much longer – the ‘economic impact’ phase. It involves a period of business ‘survival’ where, for as long as reserves allow, businesses adjust to the new circumstances and then either successfully trade out, stagnate, or decline and eventually collapse.
The property market has and will feel all of these changes acutely, being at the front line for a number of reasons:
• New remote working patterns are causing a significant reduction in demand for commercial office space
• The likely impact on retail is yet to feed through into a change in demand for retail property
• Tenants in both residential and commercial properties are falling into arrears
• Residential demand is changing, possibly favouring commuter rural areas over more urban areas
Looking at the impacts of phase one specifically, the property sector has been particularly exposed to risks due to the ongoing prevalence of paper-based processes that are no longer fit for purpose in the remote working world.
Failure or resistance to digitisation not only puts the sector at a significant disadvantage now in terms of pace and effectiveness of processes, but it is also a future business risk, should the sector find itself in another lockdown situation.
While the sector may be able to weather this storm, can it weather multiple instances of stalling completely?
Lack of digitalisation also increases the opportunity for identity scamming, with scammers impersonating solicitors, for example, and winning trust based on a false identity in order to perpetrate a fraud.
A recently-reported scam involved fraudsters hacking conveyancing solicitors and then using the information gained to send highly convincing emails to customers, instructing payments to be made to the attacker’s account.
Huge sums of money are often involved in property transactions which makes the sector all the more appealing to criminals.
Fraudsters are also adopting new techniques, particularly variations of social engineering fraud. The scammers will research the contacts and social media background of targets in order to infiltrate their trusted social network and work communities.
They will absolutely take advantage of the difficulties and financial stress that people, including those in the property market, will encounter.
Solutions and protections
The resolution, particularly to problems of identity, must involve a more robust checking and controls regime.
This means stricter identity checking, document verification and checking the name and details against official lists of conveyancing solicitors, such as RICS or LawyerChecker.
This may sound like standard advice, but as firms reorganise themselves to cope with the economic pressures they are under, they have an opportunity to improve all business processes, and these should be no exception. Where paper-based processes are becoming digitised, the opportunity is ripe to examine anti-fraud procedures in their entirety and bring them up to scratch.
Property companies also need to take a pragmatic risk-based approach, ensuring they understand what the risks really are. What was once considered suspicious may not be so now, and vice versa, which means businesses have to educate themselves to the evolving risks and be extra vigilant at this critical time.
It has never been more important to know who the person being dealt with is, especially with the reduction of face-to-face opportunities, so carrying out an appropriate level of checks on each participant in a property transaction is vital.
A further way to detect fraud is to thoroughly check the sources of the funds used in the property transaction. The sums of cash involved in purchasing a property are typically huge and there is a need to ensure they are from legitimate sources.
Looking out for tell-tale signs such as money coming in from third parties that are seemingly unrelated to the buyer, offshore accounts, overseas intermediaries, or companies with complex corporate structures is critical.
Seizing the opportunity
Across all sectors, we are seeing a rapid rise in the risk of fraud, and property is no exception. Everyone has to raise their guard, but there is an opportunity to use this crisis to drive forward the digitisation of your business and in so doing improve all your processes to the benefit of both your staff and your clients.
Data-led solutions for example, use global databases to carry out robust identity checks to ensure individuals know who they are dealing with and provide enhanced due diligence (EDD) checks on businesses to understand any adverse media associations, which provides confidence that the transaction is not fraudulent.
AI also allows data to be processed more effectively, and can be used to fulfill KYC regulations, again allowing individuals or businesses to understand who they are dealing with, and be able to spot suspicious activity.
Today’s solutions enable you to reduce fraud, while simultaneously allowing businesses to increase the efficiency and effectiveness of their processes.
So, while the current landscape has been incredibly challenging on a personal and business level for almost everyone, it has also provided an opportunity for businesses to stop, review and reset their processes in a way that makes them far more digital-ready and future-proof.
*Angus Sim is a consultant at LexisNexis® Risk Solutions