Fraud

Fraud in the property world

Beginnings and endings are always traumatic. Whether it’s birth and death, marriage and divorce or commencing and liquidating a business. Economic cycles are no exception. The end of a boom cycle contains all the ingredients of a cyclone. The beginning of a bust cycle is the fallout from the cyclone’s first strike with business owners and employees alike in a panic but too shocked to know what to do for the best.

Fraud, albeit perpetually present, increases exponentially in times of trauma, going into frenzy whenever extreme conditions prevail. This is because the main stabilising force that guides and controls the way humans behave, what I call the ‘moral compass’, gyrates uncontrollably and causes people to behave in ways that they would not normally consider acceptable or honest.

Over the last 12 to 18 months we have seen the tail end of a boom cycle. As with every boom cycle, this one has created its own flurry of mortgage/over valuation frauds that have hit the headlines and the courts e.g. Dunlop Haywards. Once a trend of land price rises emerges, the virtually insatiable appetite to acquire, lend on, rent and develop real estate at any price sets in. This creates the ideal conditions for fraud. The professional fraudsters know that developers and lenders are so preoccupied with ‘securing the deal’ that they will take risks. The opportunistic fraudster (which in my humble opinion accounts for about 80% of us) sees the risk of being caught as reducing, the benefits of committing a fraud as increasing and justifies his behaviour as being ‘savvy business practice that everyone else is doing anyway’. In other words the ‘moral compass’ of the floating 80% of opportunistic fraudsters stops working.

The thing that I believe differentiates this particular fraud cycle is the increasing involvement of fraudulent professionals, using their professional status to create and perpetuate fraud. In some cases an unholy alliance of crooked valuers, lawyers, accountants, surveyors, mortgage brokers, bankers as well as buyers and sellers have created the ‘perfect mortgage fraud’. Perfect, until prices start to drop and banks start to realise they’ve been stung.

The other type of property fraud that has been gaining steam and notoriety over the last 12 months is ‘deal theft’ of the kind alleged in J.D.Wetherspoon v Van de Berg. This is not new, as stealing business opportunities has always been part and parcel of the business world, property or otherwise. The availability of basic and inexpensive forensic IT skills allows companies to detect deal theft, report it and take aggressive action to obtain compensation. The Courts have been increasingly willing to assist victims of deal theft, readily granting far-reaching search, seizure, and asset freezing orders where necessary to protect businesses.

As land values increase dramatically, the prospect of being able to commit just one act of fraud in order to set oneself up for life increases proportionately. So the temptation to err increases and the ‘moral compass’ collapses. When you add to this equation an employment market place that is increasingly fluid, you have a recipe for fraud which is irresistible to the weak-willed.

Conversely, companies who may not have previously deemed it worth taking action against deal theft, now realising that they have been deprived of millions of pounds of lost profits, are taking more aggressive action to recover their losses.

What then for the remainder of 2008 and 2009? Clearly, it must get worse before it gets better. Frauds come to light in a bust cycle because businesses have time to focus on risk management and their very survival will be threatened by failure to address fraudulent misconduct. Add to this the incredible pressure on the ‘moral compasses’ of those who risk losing their livelihood during a bust cycle. Add a healthy dash of an entire generation who have never seen a bust cycle and don’t have the experience to prevent or detect fraud. Set this in the context of a government whose message on fraud and corruption in the British Aerospace and Marconi Electronic Systems debacle is at the least unhelpful and who have effectively abdicated responsibility for policing the property sector, and you have to concede that the next 12 to 18 months are going to be tough.

Gary Miller
gary.miller@mishcon.com

Property Matters! 09