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Industry in depth
The cost of crime
23 June 2007
Alan Cleary explains why co-operation across the industry is key to halting the onward march of mortgage and identity fraudsters
It is difficult to assess the cost of crime. We can count the numbers and tot up the financial statistics, but it’s much harder to assess the personal costs of fraud for affected individuals.
It is virtually impossible to put the price on the time, energy and personal angst – not to mention actual money – of falling victim to identity fraud, the crime of our post-modern time. In a world where our identities are defined by information on computer databases from Derby to Delhi, the scope for its crime has become almost boundless. With the ever-quickening expansion of e-commerce we must not forget that there will always be people trying to crack the system. While this may worry us on a personal level, it should concern those in the financial services industry, too. Every business should be aware of the growing need to invest in fraud prevention, investigation, research, IT, and staff training.
Identity theft
Identity theft is hitting Britain at an alarming rate. What used to be the arena of the clever conman is fast becoming the unscrupulous techie’s playground. One in four people have already have been victims. Last year identity theft hit the British economy to the tune of more than £1.7 billion and financial authorities are naturally concerned with the growing scale of the problem.
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CIFAS - The UK's Fraud Prevention Service, states that fraud is already being prevented at a rate of £94,000 an hour. While this sounds commendably large, the year-on-year statistics make less comfortable reading. Fraud is up £20,000 per hour on the same period in 2006.
Unfortunately, identity fraud has expanded as e-commerce has mushroomed, but we have learned that we have to shred our bills and destroy our PIN numbers – it’s become second nature. However, this is old-school identity theft. Now the old-fashioned conman has morphed into a computer phantom, and identity thieves can hack into your home PC while you key in your personal details. This can provide them with more than enough information to impersonate you at a later date, giving them access to your finances. It’s all done at the click of a mouse.
Fraud on a corporate level
On a corporate level, newly savvy computer con artists can hack into Companies House records and commit staff fraud. Phishers attempt to acquire sensitive information such as usernames, passwords and credit card details fraudulently by masquerading as trustworthy entities in e-mails. eBay and PayPal are two of the most targeted companies, and online banks are also common targets.
As these crimes become more convoluted and complex, investigations into fraud become more lengthy and inconclusive, and that’s not even considering the copious quantities of red-tape police have to wade through. Even if a fraud case reaches court, there is a very real chance the jury won’t be fully equipped to deal with the technical intricacies of a the trial.
Fraud involving your previous address used to be the most popular way of stealing your identity. But recently, fraud involving the theft of current personal details has increased – as a result the threat of fraud within the mortgage arena has risen. The possibility of an impostor remortgaging homes and being granted top-up loans without the victim’s knowledge is maybe unlikely but possible.
An increase in online applications, the ease with which false documentation may be obtained and less restrictive lending policies makes a fraudster’s job that much easier. Undetected fraud might still be slipping through the net – even with all mortgage applications now subject to the Proceeds of Crime Act (POCA).
Co-operation is key
In the battle against fraud, co-operation is key.
This means that we must focus on how we as an industry can effectively combat the threat of fraud. They aren’t stupid. Fraudsters are smart and skilled at undermining the protective IT systems put in place. That’s why lenders need to stay one step ahead. The key to effective fraud prevention – and staying that one step ahead – is data sharing.
Most businesses thrive in the competitive environment our economy promotes. But within financial institutions fraud prevention, detection and recovery of funds is an area in which co-operation between companies helps to reduce the potential for identity theft. There is no place for rivalries – lender solidarity is critical if data-sharing is to operate effectively and ensure we win the fight against financial crime.
Security measures currently in place include National Hunter and National SIRA, which cross-check new application inconsistencies against prior applications. CIFAS also encourages members to data share more easily. Adding to this, the Financial Services Authority has recently launched a reporting system for lenders. It is designed to reduce the level of fraudulent loan applications handled through mortgage intermediaries.
This proves that our industry is awake and alert to financial crime. Yet we need to see more of this kind of activity if we are to stamp out fraudulent activity in our industry. It’s not just a question of doing the right thing – this is a business critical issue. Preserving the reputation of the mortgage industry is strategically essential if we are not to lose the trust of consumers. The problem is that private firms are springing up, offering fraud solutions tailored to the finance industry.
Fiercely competitive
Luckily the field of fraud prevention IT is fiercely competitive, therefore the technology is developing at a staggering pace. Some financial institutions are becoming worried that data sharing will fragment – that a technological fissure will open up between IT systems. This must not happen. It was bad enough when Betamax was slugging it out with VHS – imagine the chaos if fraud-prevention teams within the mortgage industry had to endure a technology battle on that scale. If there is a breakdown in communication between separate financial institutions, the gap which fraud will exploit could become wider.
Communication is the basis of modern society – we must not allow our communication on issues like fraud to break down and must push towards effective data sharing if we are to root out these mercenaries.
IT can help counter IT-related fraud
The mortgage industry recognises that continuous investment must be made in order to prevent fraud, and firms are providing the tools and associated processes to keep pace with the fraudsters’ quick evolution.
Therefore the development of fraud management tools and IT packages must continue in line with lenders’ service levels. If not, we will not be able to continue to offer time critical solutions – solutions that are vital in fraud investigations. In the mortgage sector, a strong framework is crucial if we are to identify fraud infiltrating business. This is even more significant given the current housing market. Identifying hidden addresses and inflated incomes and valuations can prevent damage to firms. While serious fraud poses an immediate risk, the long term could see such discreet misinformation severely undermining mortgage lenders.
Everyone’s responsibility
But it’s not just the IT that has to be up to scratch. Financial organisations must also invest in staff training and education. Fraud management is a responsibility for everyone, and everyone needs to take personal responsibility for recognising it. For those actually in the fraud team, consistent training on the latest fraud trends is vital. Ensuring people are fully equipped to tackle fraud at both application stage and on active accounts is key to minimising its impact on the industry.
Fraud must maintain its position as the only non-competitive area in this business. In a time where fraud is rife, working together across the industry is vital. With growing internet usage and firms relying more heavily on IT, companies need to make sure they equip themselves properly. It is the responsibility of all to continue to improve identification and recording rates of customer information, allowing for more effective cross-checking. It is the responsibility of everyone to keep channels of communication open. Data sharing continues to be the key to curtailing this global problem.
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Simon Biddle - Infinity
Fact - fraud is always a serious issue. However it has never been higher on the agenda that now. The growth of the web and the well publicised problems with credit card and ID fraud, just open any newspaper any given day and there will be a story about the victims of fraud.
Mortgage fraud seems in some ways seems quaintly old fashioned. There are complexities and paper trails that many web based fraudsters would snort at. However the potential picking in mortgage fraud can be huge. Both lenders and intermediaries need to be vigilant. This is especially more so considering the potential terrorist and organised crime threat that we now face and all the serious social implications that go with that.
A cornerstone of defeating fraud is knowing your client (KYC). The detailed money laundering rules with proof of identification are essential but as a starting point. Lenders are now assisting intermediaries in new ways to double check the identity of their clients. At Infinity we have just launched an online identification system, we are looking at rolling it out to intermediaries. All that is needed is the passport driving licence number and the system will verify the applicant on a pass or fail basis. The system will go as far as to add in the vital components of voters roll, utility bills and mortality data. It is sad fact that fraudsters have no respect for the living or dead often posing as a deceased individual with forged documents.
The nature of mortgage fraud is that it comes in different shapes and sizes. One angle is the alteration of documents in attempt to obtain a mortgage higher than would normally be acceptable. This can be the alteration of documents of the placing of false information on application forms. This is often viewed as low level but it is fraud and is illegal none the less. At the more extreme end is the fraud ring where various parties in the chain collude to benefit illegally from mortgage proceeds. In many cases lenders may not have legal charges on overvalued properties. Long prison sentences beckon for those organised fraudsters when caught.
It is worth remembering that fraud affects everybody, we all pay more as a result. Never think of fraud as soft white collar crime. The FSA have made it clear that they have a roll to play in combating fraud and lenders are expected to feedback details where fraud is proven. The police will prosecute where there is clear evidence of fraud. Plus lenders are also doing their part with snap audits and good vigilant underwriting.
This is now an important issue with the regulator and in the corridors of power. Lenders are doing more, just look at the example of assisting intermediaries with the checking of their clients’ identification. Everybody has their part to play and the stakes are very high, we need to remain vigilant at all times.
Spotting mortgage fraud
As fraudsters become more sophisticated, brokers need to keep pace and this article provides practical assistance on how to spot fraud without alienating prospective customers. The FSA looks at both proven and suspected fraud, but the steps needed to identify both are the same.
Brokers have a harder job than lenders, as their clients often fall outside of the traditional lending criteria e.g. clients with impaired credit, multiple properties, or frequent employment moves. They must balance due care without making a client feel like a criminal through over-zealous interrogation.
How to spot fake documents
Fraudulent documents (bank statements, utility bills, wage slips, P60s, passports, driving licences) should, theoretically, be easy to spot. However, while a fraudster looking to buy a property beyond their means may just have access to Tipp-Ex®, a sophisticated criminal can have national or international support.
Fake documents often have spelling errors, ink smudges or inconsistent font size, etc. Doctored post should be checked with authorities, passport numbers should match top and bottom - and check place of issue. For driving licences, look for the counterpart to the card. Utility bills normally have consistent numbering - British gas bills should all begin with a 100 and, as BT sends quarterly bills, Q0001 should be the first bill issued to the customer at that property. Most utility companies also use bar codes under the address section of the bill – without one, be wary. Check bank statements to ensure income was deposited by the same company and check salary for benefits as this usually means their income is less than suggested.
Fake employment records
These are hard to spot for many reasons: in 20 years the number of jobs per lifetime rose from 7 to 11; over 200,000 people migrate to the UK annually; and around 1 million businesses employ under five employees - many still paid cash.
Simple ways to check employment records include: company registration - via Google or Yell for free, or on-line with Companies House. Check 3 months payslips to calculate what the applicant should have been paying in tax, and also the tax code for that income. Judge whether self-cert income is reasonable; if it looks unrealistic, check with the accountant. And finally, NI numbers can be checked against a register.
Inconsistency
Inconsistent information can be a giveaway; for example, multiple applications to the same lender or lenders within a group. As most serious fraudsters use multiple intermediaries, much of the responsibility for spotting this lies with the lenders. Other tell-tale signs include links with other applicants where fraud is suspected, e.g. shared addresses, purchases on same development, identical loan amounts, and applications cancelled when further information/verification is requested.
Identity theft
This is most common in second charges or remortgage products. Usually one party is not aware of the loan and the other party forges the signature.
Although it is often difficult for the broker to detect serious fraud, by being diligent much of the opportunistic fraud is fairly easy to spot.