The FBI just released a comprehensive new report on real estate and mortgage fraud, and, as you might expect given everything we talk about here on Flipping Frenzy, it isn’t a pretty picture. The information contained in the report can get quite technical, with plenty of charts, graphs, and hard numbers. Regardless, it’s worth the read–see “The 2007 Mortgage Fraud Report.” Among the Report’s key findings:

1. Real Estate and Mortgage Fraud is clearly on the rise. Although there is no central way to track the total extent of the problem, the FBI received 46,717 Suspicious Activity Reports related to real estate and mortgage fraud last year—compared to 35,617 in 2006 and just 6,936 in 2003. Only 7% of these reports documented an exact dollar amount in terms of losses, but even so, the total loss from this 7% was $813 million. The FBI’s caseload has also escalated. By the end of fiscal year 2007, the Bureau was handling just over 1,200 real estate and mortgage fraud investigations—a 47% increase from 2006 and a whopping 176% increase from 2003.
2. The downward trend in the housing market will continue (see forecasts provided by the Mortgage Bankers Association in the report), providing further incentive for shady real estate industry insiders to look for dishonest ways to turn a profit and growing opportunities for scam artists to prey on vulnerable homeowners.
3. The subprime lending crisis is a contributing factor to real estate mortgage fraud, both directly and indirectly. Subprime loans, designed for people with poor or limited credit histories, now represent more than 13% of all outstanding loans–double the percentage of five years ago. These high-interest, high-risk loans contributed to the 2.2 million foreclosures filed during 2007, up 75% from 2006. The trouble actually began when home prices were rising a few years ago, leading to relaxed lending practices throughout the industry and the exaggeration of assets by industry insiders and borrowers under their charge anxious to qualify for loans, both of which contributed to fraud.
4. The top 10 hotspots nationwide for mortgage fraud in 2007, carefully mapped from multiple public and private sources, were:
   
   1. Florida
   2. Georgia
   3. Michigan
   4. California
   5. Illinois
   6. Ohio
   7. Texas
   8. New York
   9. Colorado
   10. Minnesota

   Other states significantly affected include: Arizona, Maryland, Utah, Nevada, Missouri, Indiana, Tennessee, Virginia, New Jersey, and Connecticut. The north-central region of the United States had the largest share of fraud, followed by the west and southeast regions.



5. The latest mortgage scams run the gamut: from builder-bailout schemes where developers unload excess inventory through financial trickery, to foreclosure rescue schemes that trick homeowners into signing over the deed to their house; from seller-assistance scams that use false appraisals to sell homes, to identity theft that leads to home equity credit lines being opened and drained.

The FBI’s report also briefly recounts the agency’s own response to the problem, including the Bureau’s participation in the Department of Justice’s Mortgage Fraud Working Group, through which the agency says it is helping to identify large-scale real estate industry insiders and criminal enterprises conducting systemic real estate fraud

The purpose of the The 2007 Mortgage Fraud Report is to provide insight into the breadth and depth of real estate and mortgage fraud crimes in the United States. The report updates the 2006 Mortgage Fraud Report and addresses current fraud projections, issues, and hot spots (as noted above). The objective of the report, according to the FBI, is to provide FBI program managers with relative data to justify real estate and mortgage fraud investigative and preventive resources and for investigators to identify real estate and mortgage fraud activity.

A lot of Flipping Frenzy readers take the time to contact my office with their own suspicions surrounding real estate and mortgage fraud. One such reader, Lisa D. from Michigan, recently gave us permission to share her experience with the rest of our readers.

See if you can spot the fraud:

My husband Peter and I got married in 2002 when we were both 23-years old. Peter had a Bachelor’s degree in Fine Arts and was student teaching. We lived with my parents for a while and then moved into an apartment of our own. I previously worked waitressing a couple nights a week to help make ends meet. Peter eventually secured a job as a teacher at the local county jail. His pay was solid and steady, and he also went back to school to get his teaching license.

With our little family growing, we started looking around for a house we could afford (apartment living was fine but we needed more room). We finally came across the perfect house: A quaint little home in the town where Peter grew up. Since the home was in a state of foreclosure, we thought we might have a good chance to get the house at a discount. We tried to get approved through a traditional loan but were unable to. So we went through a private company and secured a land contract instead, and by Christmas of 2003 we were settling into our first new home.

We lived in the house for a year when Peter started hearing commercials on the radio for Rock Financial–a Quicken Loans Company. The company’s spokesperson promised to qualify people for a mortgage they could afford. We called Rock Financial, made an appointment, and got a really good feeling from our sales representative. He was a very nice man who seemed eager to help us get into a loan with a lowered interest rate. He was charismatic and told us not to worry about a thing.

At the time, after paying on our mortgage for a year and Peter having been at his job longer, Peter’s credit score was improving (it was in the 680’s). That was an important thing for us because my credit was blemished from uninformed college spending. We knew it would be important to keep Peter’s credit healthy so we could at least rely on it while we worked to correct mine.

The sales representative at Rock Financial was able to get us approved for a loan rather quickly. He arranged for an appraiser to come out and do an appraisal on our house and property, which they appraised at $135,000. Our sales representative wasn’t sure that he could get us straight into a 30-year fixed loan, so we started out with an adjustable and had to take out a second mortgage for $12,000 to help pay off some bills.

When we arrived at the closing, we learned that our Rock Financial sales representative was not able to be there. Two ladies that worked for Rock Financial were there instead to go over the closing materials. To say they rushed us through the closing process would be an understatement. We pretty much just signed paper after paper were they told us to do so. When we left, I told Peter I didn’t feel good about what had just happened; I felt rushed and uniformed, and Peter agreed. Together, we called our sales rep at Rock Financial and told him what had happened and how we felt. He apologized profusely and offered to come to our house and go over anything and explain everything we did not understand. We said that we didn’t want him to have to do that; talking to him put us at ease. A few days later we received a package from the sales rep that included a nice popcorn bowl from Crate & Barrel and a $5 Blockbuster Video gift card. That confirmed in our minds what a great guy the Rock Financial sales representative really was.

Our mortgage payment at this time was $720.94 (4.124%) with an adjustable rate mortgage and our payment on our second mortgage was $254 (5.75%), interest only. We felt that this was a good deal. Originally, we had paid $904.00 on our land contract. Even though our payment was a little higher we were able to pay some bills off and also build a garage. Peter and some of his friends built the garage, and we felt blessed to still be in this perfect little home of ours but at a manageable cost.

A year later we started hearing the commercials on the radio again from Rock Financial saying that interest rates were on a rise and homeowners with adjustable rate mortgages should consider a fixed loan. Peter called the sales rep to see what he could do about getting us a fixed loan. We had bought a used truck in 2004 and our payments were $359 a month, and since we were falling behind in the payments, our Rock Financial sales rep said we could take our more money on our second mortgage and that he could get us a fixed rate on both. All he needed, he said, was to get an appraisal on our home for $158,000. Accordingly, the Rock Financial sales rep sent out an appraiser who saw the new garage and the few minor updates that we had done in the past year, and lo and behold, the home appraised for $158,000. This was especially great news seeing that we bought the house for $114,000. We took out more money on our second mortgage to bring the loan to $34,000, and used the money to pay off bills and pay down other debts. Our Rock Financial sales rep got us into a fixed rate of 6.25% on our first mortgage and 5.25% on our second mortgage. Our payments went up to $771.19 on our first mortgage and $148.75 interest only on our second mortgage.

Shortly afterwards, we started having a difficult time coming up with our payments. Not having enough money and having to use credit cards that we had paid off with our second mortgage money back was getting us nowhere.

We called our Rock Financial sales rep who indicated that he wasn’t sure what he could do but that he would look into it and get back with us.

When the sales representative called back, he said that he could help us but only if the house appraised in the $170’s. Knowing our neighborhood as we do, we were apprehensive. A comparable house next door to our own–a two-bedroom with an asking price of $150,000–was on the market for nearly two years. When it finally sold, it fetched only $120,000 or thereabouts. But to our excitement, our appraisal came back at $178,000. The Rock Financial sales rep said we could get some money back on our second mortgage raising the loan amount to $45,000 and our interest rate to 12.8%.

While we were nervous about the interest rate and our payment, our Rock Financial sales representative assured us that using the money we’d get back to pay down our credit cards and giving it three to six months, he would be ale to lower the interest rate on the second mortgage considerably. So we went on to do that and felt an immediate sense of relief.

Several months had past and the new payment of $501.00 on our second mortgage and $1,049.90 on our first mortgage, got us into the same predicament of using credit cards for daily expenses. Peter called Rock Financial to see if enough time had passed to get our interest rate lowered on the second mortgage. Unfortunately the sales rep we’d been dealing with since day one no longer worked there and the person Peter spoke with said there was nothing he could do for us because our credit was so damaged and our debt too high. We were devastated. I had always worked through all these years at night so I could stay home with the kids during the day. I had to start picking up more shifts. I began working five to six nights a week, leaving little time for Peter and I to even see one another. Peter would come home from work and I would leave to go to work as soon as he did.

Long story short, we stopped paying on our credit cards with the thinking being that the most important bill was our house. All of our credit cads are now in collections with one of the credit card companies placing a lien on our house. We have creditors calling daily, but there is nothing to give them. We are not sure how much longer we will be able to keep our heads above water let alone save for our children’s future.

Our worst fear is having to walk away from a house we love so much and put so much time and energy into, but we also feel there may be no other answer. Our dream home has now become a nightmare that we may just have to walk away from, but with such bad credit I’m not sure we’d even be approved for a local apartment.

~ Lisa D.

From what you read, were you able to spot the fraud? If not, read on.

The first thing that should raise the hair in the back of your neck is that the loan officer at Rock Financial placed Peter and Lisa into multiple loans with the promise he would refinance and consolidate them into one fixed rate loan. The problem here of course is that situations change and no one can ever guarantee that you can refinance at a later date in time. This tactic is known as “churning,” like stock and brokerage accounts. Sadly, some mortgage loan officers insure repeat business by placing people into loans that require refinancing or have larger or rising interest rates. When the time comes and the borrower doesn’t qualify, it’s not the loan officer left holding a note they cannot afford to make payments on. In Lisa and Peter’s case, the loan officer did refinance the loans. He did so three to four times in 24 months and made about $17,000 in refi commissions.

Next, in order to get loans approved, some loan officers jack up the borrowers assets to give the false impression that the borrower is more solvent than actually is the case. Other times, a good loan officer gone bad may increase the homeowner’s income to get them qualified. Most often though—and this was the case with Peter and Lisa—the loan officer uses a known appraiser and simply tells said appraiser what s/he needs the value to come in at in order to get the borrower qualified.

Notice too that Peter and Lisa were not required to present any cash at closing. While this is not a problem, per se, when homeowners don’t have to pay the refi costs out of pocket, it is much easier to churn the loans. Instead of coming out of pocket with the dollars, the loan officer uses the house’s equity to pay himself, and the homeowner simply sees it as another number on a settlement statement.

You may think trusting your loan officer is a good idea—as did Peter and Lisa—but at a core level, your loan officer is not your friend. Sure, legally, a loan officer has an obligation to uphold the law and operate within certain guidelines and commonly accepted practices, but not all loan officers—or anyone else who is party to a real estate transaction—operates with integrity. When a loan officer works in coordination with an appraiser—as was the case at Quicken’s Rock Financial—any benefit to you is temporary at best.

A federal jury in Greenbelt, Maryland, has convicted a husband/wife team of real estate fraud. Patricia Omondi, age 39, and her husband Boureima Sanfo, age 47, both of Woodbridge, Virginia, were convicted in late-April on eight (8) counts of interstate transportation of property obtained by fraud, three counts of money laundering, and one count of obstruction of justice in connection with a scheme to defraud residential lot buyers.

According to testimony presented during April trial, Omondi was the president of Raycha Homes, also known as Construction Consulting and Management (CCM), a home builder located in Woodbridge, Virginia. Sanfo was a loan officer for CCM. From November 2004 to December 2005, Omondi and Sanfo met with consumers and promised to build homes for them on the lots of their choice. Omondi and Sanfo drove people to view several parcels of land in Prince George’s County to select the lot, provided copies of design drawings of homes, provided fictitious letters on the letterhead of a mortgage company falsely representing that the individuals had been pre-approved for mortgages and falsely stated that CCM had obtained permits to begin construction of their houses.

The evidence showed that Omondi and Sanfo caused individuals to enter into contracts with CCM for the construction and purchase of a house and to make regular payments towards the down payment. However, no homes were ever constructed, nor were any lots purchased. Under this scheme, Omondi and Sanfo obtained more than $200,000 from at least seven victims, which they deposited in their bank account in Virginia.

According to trial testimony, in October 2006, Omondi and Sanfo obstructed a grand jury investigation into whether the defendants were committing fraud in connection with their home building operations by providing the grand jury with studies that had purportedly been done in 2005 regarding the feasibility of constructing houses on lots selected by purchasers, when in fact the feasibility studies were completed in September 2006.

Omondi and Sanfo face a maximum sentence of 10 years in prison followed by three years of supervised release and a $250,000 fine for each of the 12 counts. U.S. District Judge Deborah K. Chasanow has scheduled sentencing for both Omondi and Sanfo on September 5, 2008.

To all the Mothers out there who make this day possible in the first place, we say…

Happy Mother’s Day!

P.S.: You won’t need a magic cape to spot, report, and stop real estate and mortgage fraud! Just do it!

Defying veto threats from the Bush administration, the U.S. House of Representatives yesterday passed a comprehensive measure in response to the mortgage crisis. The American Housing Rescue and Foreclosure Prevention Act (H.R. 3221) appears to respond directly to the current crisis facing middle class Americans while providing many of the tools necessary to prevent a repeat of these problems. President Bush has threatened to veto the roughly $300 billion package, arguing it would “reward speculators and lenders.”

The legislation combines a number of bipartisan bills including measures to modernize the FHA and reform the GSEs, which will provide crucial liquidity to our mortgage markets now, and also strengthen regulation and oversight for the future. In addition, the package could help families facing foreclosure keep their homes, help other families avoid foreclosures in the future, and help the recovery of communities harmed by empty homes caught in the foreclosure process.

Amendment 1: FHA Housing Stabilization and Homeownership Retention Act (H.R. 5830)

• Provides mortgage refinancing assistance to keep families from losing their homes, protect neighboring home values, and help stabilize the housing market.
• Expands the FHA program so many borrowers in danger of losing their home can refinance into lower-cost government -insured mortgages they can afford to repay. This legislation will help troubled borrowers avoid foreclosure while minimizing taxpayer exposure.
• Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.
• Protects taxpayers by requiring lenders and homeowners to take responsibility. This is not a bailout; in order to participate, lenders and mortgage investors must take significant losses by reducing the loan principal. In exchange for an FHA guarantee on the mortgage, borrowers must share any profit from the resale of a refinanced home with the government.
• Contains important protections for taxpayers’ dollars, including higher refinancing fees that establish a new FHA reserve to cover possible losses from defaults on these government-backed mortgages.
• Provides $230 million for financial counseling to help families stay in their homes.

FHA Modernization (H.R. 1852)

• Expands affordable mortgage loan opportunities for families (many of whom would otherwise turn to subprime lenders) and for seniors through expanded access to reverse mortgages through Federal Housing Administration reform.
• This measure passed the House in September. (Expanding American Homeownership Act of 2007, H.R.1852)

GSE Reform (H.R. 1427)

• Strengthens regulation of Fannie Mae and Freddie Mac, and the Federal Home Loan Bank system.
• Raises the GSE loan limits for single family homes in high cost areas, so that these entities can purchase more loans in higher cost areas (thereby lowering interest rates for new homes and refinancings in those areas).
• Expands liquidity in the mortgage markets by buying loans already made, freeing up money for new mortgages and refinances.
• Creates a new Fund to boost the nation’s stock of affordable rental housing.

Encouraging Mortgage Modifications/Castle Bill (H.R. 5579)

• Mortgage servicers are concerned about the threat of investor lawsuits if they help families in danger of losing their homes with loan modifications that reduce monthly mortgage payments through lower interest rates, reduced principal amounts or other changes in loan terms.
• To speed loan modifications and keep more families in their homes, this package includes HR 5579 to provide mortgage servicers with clarity and certainty for their actions, and protection from such lawsuits for specified loan modifications.

Preserving the American Dream for Our Nation’s Veterans

• Increases VA Home Loan limit, as was done in the stimulus package, for high-cost housing areas so that veterans have more homeownership opportunities.

Amendment 2– Tax Provisions to Expand Refinancing Opportunities and Spur Home Buying (H.R. 5720): This amendment provides $11 billion in tax benefits, including tax credits to first-time homebuyers, a real property tax deduction for non-itemizers, an additional $10 billion in mortgage revenue bonds for states, and improves access to low-income housing.

• Gives first-time homebuyers a refundable tax credit that works like an interest-free loan of up to $7,500 (to be paid back over 15 years) to spur home buying and stabilize the market. The credit will begin to phase out for taxpayers with adjusted gross income in excess of $70,000 ($140,000 in the case of a joint return).
• Provides taxpayers that claim the standard deduction with up to an additional $350 ($700for a joint return) standard deduction for property taxes in 2008.
• Temporary increase in mortgage revenue bond authority to allow for the issuance of an additional $10 billion of tax-exempt bonds to refinance subprime loans, provide loans to first-time homebuyers and to finance the construction of low-income rental housing.
• Temporary increase in low-income housing tax credit and simplification of the credit to help put builders to work to create new options for families seeking affordable housing alternatives.
• Helps returning soldiers avoid foreclosure by lengthening the time a lender must wait before starting foreclosure, from three months to one year after a soldier returns from service.
• Would not add to the national debt. The cost of this bill is offset with a tax compliance provision included in the President’s Budget and by delaying the effective date of a tax benefit for multinational companies that has not yet taken effect.

Amendment 3–Miller/LaTourette

• This amendment protects the right of states and cities to regulate the foreclosure process and the treatment of foreclosed property — by clarifying that this act, the National Bank Act, and the Home Owner’s Loan Act do not preempt State foreclosure laws for national banks or federally chartered thrifts.
• Exempting national banks and thrifts from foreclosure law would deprive the states and cities of the right to require that foreclosures must follow certain procedures, including notice to the people foreclosed, and that foreclosed property be safely maintained.
• Many in the industry and in the Bush administration argue that national banks should be exempted from these rules. There is no reason that national banks and federal thrifts should be treated differently from all other mortgage holders when it comes to how to foreclose and how to maintain foreclosed property.

The U.S. Attorney for the District of Colorado–along with the FBI’s Denver Division and the IRS’ Criminal Investigation Field Office in Denver–late last week announced that 72-year-old Norman Schmidt of Denver, Colorado, was sentenced by a U.S. District Court Judge to serve 330 years in federal prison and ordered to forfeit more than $38 Million for his role in a fraudulent high yield investment scheme involving more than 1,000 victims.

While Schmidt’s case did not significantly involve real estate-related investments, his unusually long sentence–especially given his advanced age–may serve as a deterrence to the scumbags who violently interrupt the American Dream of Homeownership with their acts of real estate and mortgage fraud.

Schmidt was found guilty on in late-May of 2007, following an eight week jury trial, of conspiracy to commit mail fraud, wire fraud and securities fraud, as well as substantive counts of mail fraud, wire fraud and securities fraud, and separately the crime of money laundering. Schmidt, his wife, and five others were indicted by a federal grand jury in Denver in March of 2004. The wife, Jannice Schmidt, was previously sentenced to serve nine (9) years in federal prison. Three other co-defendants in the case–George Alan Weed of Benton, Illinois; Charles Lewis of Littleton, Colorado; and Michael Smith of Colbert, Washington–are all awaiting sentencing. George BerosPeter A.W. Moss of London, England, remains a fugitive.

According to the evidence presented during the trial, Schmidt obtained tens of millions of dollars from hundreds of investors, and used the money for his and his co-conspirators own personal gain. From April 1999 through April 2003, Schmidt and the others engaged in a conspiracy to commit mail, wire and securities fraud by executing a scheme to defraud investors by implementing a high-yield investment program.

Schmidt, with assistance from others, falsely stated that they would invest victims’ money, promising rates of return from 2-400% per month. To perpetuate the scheme, the defendants sent investors fraudulent monthly statements which falsely reflected the growth of and earnings on their invested funds. The defendants would encourage victim investors to make additional investments, defer disbursements, and refer new investors to the program.

To lure and reassure investors, Schmidt and his friends made false representations that the investments were safe because invested funds could not be moved, and that the investments were insured from loss by various high profile insurance companies. They also misled investors by using false legal opinion letters concerning the status of insurance on investor funds. To further their scheme, they created corporate alter egos through which the investment program was offered. Entities involved in the scheme include the Reserve Foundation Trust, Smitty’s Investments, Capital Holdings, Monarch Capital Holdings, and Fast Track.

The defendants then used investor funds for purposes other than those represented to investors, including for loans or payments to the defendants, personal expenses, acquisition of unrelated businesses and assets, payments to other investors, and the payments of monthly commissions or overrides to members of a network of individuals, acquaintances, and insurance agents recruited by the defendants to obtain new investors in the fraudulent program. Some of the investors’ money was used to purchase the Redstone Castle, which was built around the turn of the 20th century by coal magnate John Osgood. The castle was sold by the IRS at auction in 2005 for $4 million to someone who reopened it for public tours last year.

Also seized during the course of the investigation, was money in approximately 60 bank accounts, and 8 NASCAR race cars, 1 race truck, as well as other race related vehicles and items. In all, federal agents seized assets, including cash and property, worth approximately $24,000,000, which have since been distributed to the victims of this fraudulent scheme through a separate court process. To date over $18,000,000 in forfeited funds have been returned to the victims of the crime.

Federal investigators last week identified the majority development partner in a troubled condominium project as the central figure in a mortgage fraud scheme involving about one-quarter of the units sold in a downtown Minneapolis, Minnesota, building. In an affidavit filed in U.S. District Court in St. Paul, MN, IRS agents say Brett ThielenJJT Development, owns 50% of Sexton Lofts, LLC, which developed the project.

The Sexton has 123 units, but fewer than 50 were ever sold, according to local property records.

The affidavit says Thielen laundered proceeds from the scheme by having his lawyer, Ben Houge, wire money to an attorney in Australia, who then wired the money back to Thielen and others taking part in the scheme. The Australian attorney also wired money on Thielen’s behalf to buy $700,000 worth of stock in two U.S. companies:

• Digital Town, Inc.: a Burnsville, MN-based company that is attempting to develop a nationwide network of online communities for high school alumni, boosters, students and local citizens.
• ESPRE Solutions: a Plano, TX-based videoconferencing company.

The IRS filed its affidavit to seek a warrant to seize the stock and other assets that it says were proceeds of the scheme. And while court documents do not specify a total amount of fraudulent proceeds, it is alleged that attorney Houge sent more than $2 million to his counterpart down under.

The U.S. Attorney in charge of the case declined to comment on whether Thielen, Houge or anyone else will be charged in connection with the scheme outlined in the court documents.

According to the affidavit, the fraudulent transactions began with Thielen providing cash to buyers, who would then hold purchase agreements for specific units. The titles would be transferred to Thielen, who then re-sold the units at inflated prices to new buyers on the same day or soon after the original sales. The higher resale prices were based on false appraisals and income information for the new buyers. Thielen would then get the fraudulent proceeds from the re-sales, splitting the money with others taking part in the scheme, the affidavit said.

One person already has been convicted of mail fraud and conspiracy for their role in the scheme outlined in the affidavit. As part of a guilty plea, Joseph Huebl, 28, agreed to cooperate with an investigation by the U.S. attorney’s office.

The charges of mortgage fraud are the latest of several financial and legal troubles to surface at the Sexton condo project, which went into foreclosure last fall. Condo owners have sued the developers for failing to complete the project, including building a parking ramp whose cost was included in the price of some units. An unpaid contractor has placed a $5 million lien against all the units in the building.

The Financial Crimes Enforcement Network (FinCEN)–which safeguards the U.S. financial system from the abuses of financial crime, including terrorist financing, money laundering, and other illicit activity–last week released “Suspected Money Laundering in the Residential Real Estate Industry: An Assessment Based Upon Suspicious Activity Report Filing Analysis,” a new report that identifies several transactional typologies and associated illicit activities that may be perpetrated by individuals or groups seeking to launder funds via residential property transactions.

The study appears to confirm an increase in the number of suspicious activity reports (SARs), indicating suspected money laundering in the real estate industry which tracks closely with the past expansion of the real estate market, especially in 2004 and 2005. Previous FinCEN studies concerning mortgage loan fraud and money laundering in the commercial real estate industry confirmed similar trends. However, in contrast to criminals seeking to profit by committing mortgage fraud, those who seek to launder money through residential real estate generally intend to make timely payments and seek to make their transactions appear as unremarkable as possible in order to disguise the source of their funds.

Laundering money through residential real estate involves turning the proceeds of crime into the use or ownership of real property assets. For example, a criminal may use illicit funds to outright purchase or to make monthly rental payments on real property. Internationally, these laundering techniques are well known. FinCEN’s report shows that U.S. financial institutions have been able to identify some possible instances of money laundering through residential real estate. The report is intended to help raise awareness of the vulnerability and assist financial institutions to better recognize risk and thus provide better information to law enforcement in order to combat criminal activity.

In some cases, according to the new report, laundering money through residential real estate was found to support tax evasion, fraud and identity theft.

Though SAR narratives reporting suspicious activity associated with the residential real estate industry are relatively common, only about 20% of such filings reportedly describe suspected structuring and/or money
laundering, and of those, only about 11% described any other suspected illicit activity including tax evasion, fraud, or identity theft. Specifically, illicit activity related to tax evasion included:

• cashing checks payable to businesses and the diversion of cash business receipts in a manner possibly designed to evade taxes.
• misusing the tax exempt status of organizations to conduct real estate-related businesses and disguise the profits as contributions.

Various types of fraud and identity theft were reported, including:

• check kiting on real estate investment accounts
• real estate investment accounts used to promote a potential pyramid scheme
• fraudulently acquired state and federal tax refunds laundered through mortgage trust accounts
• mortgage loans granted on the basis of fraudulent appraisals
• identity theft employed to drain the balances of home equity line of credit accounts and to layer illicit proceeds from money laundering activities

Over 75% of the entities suspected to be involved in residential real estate-related money laundering were identified as individuals unaffiliated with residential real estate-related businesses. For example, launderers may use multiple nominees or straw buyers to secure numerous mortgages on various residential properties, thereby creating a means for the conversion of illicit cash into real property while projecting the appearance of many unrelated mortgages paid on a regular and timely basis.