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.

I’m not sure how this factoid slipped past us but the Financial Crimes Enforcement Network (FinCEN) last month issued a report stating that Suspicious Activity Reports (SARs) filed through the first six months of 2007 related to Mortgage Loan Fraud increased 35% from the corresponding six-month period in 2006. FinCEN, which is housed in the U.S. Department of the Treasury, is preparing a more comprehensive analysis of real estate and mortgage fraud to be released in the near future.

Structuring/Money Laundering continues to be the predominant characterization of SARs filed by depository institutions, at 48%. However, Check Fraud (10.5%), Counterfeit Check (4.9%), Credit Card Fraud (4.8%), Mortgage Loan Fraud (3.9%), Check Kiting (3.3%), Identity Theft (2.4%) and other types of fraud are consistently represented.

Since the inception of SAR filing requirements for money services businesses in 2002, along with the addition of requirements for other covered industries, SAR filings by non-depository institutions have grown to represent approximately 42% of all SARs filed.

In addition to use by FinCEN analysts, SARs are made available to federal, state and local law enforcement agencies and regulators. Law enforcement uses SARs both reactively to support existing investigations of fraud and money laundering, and proactively to initiate new investigations. There are over 80 SAR review teams located across the United States which consist of experts trained to conduct complex criminal financial investigations.

• Officials Falling Behind on Mortgage Fraud Cases (The New York Times): The number of mortgage fraud cases has grown so fast that government agencies that investigate and prosecute them cannot keep up, lenders and law enforcement officials have said. Reports of suspected mortgage fraud have doubled since 2005 and increased eightfold since 2002. Banks filed 47,717 reports this year, up from 21,994 two years ago, according to statistics from the Federal Bureau of Investigation and the Financial Crimes Enforcement Network of the Treasury Department. In 2002, banks filed 5,623 reports.
• Legislature must place legal curbs on ‘rescue’ practice: The bank was threatening to foreclose on Lonnie Davis’ El Cerrito home. One day, the 76-year-old retired school custodian got a postcard in the mail from someone offering 11th-hour help. But what seemed like a life preserver would drag Davis and his wife, Dorothy, to rock bottom faster than a pair of cement boots. Lonnie Davis not only lost the home where he had lived more than half of his life, the person he trusted to help him wound up being the new owner. The Davises were victims of a legal but deceptive mortgage lending practice euphemistically referred to as a “foreclosure rescue.” The “rescuer” takes advantage of a person’s desperation and financial naivete to convince him to sign over his deed. The “rescuer” offers to pay the distressed homeowner’s delinquent payments, which allow him to stay in his house, then gives him a new loan. A lot of people don’t realize that they will no longer own the property. Once the title has been transferred, the rescuer takes money out of the house by refinancing. Real estate fraud investigators call that “equity stripping.”
• When Receiving Cash Back at Closing is Legal: As real estate brokers, we are often told that “As long as the information is presented on the HUD statement, the transaction is legal.” What happens in almost all situations such as the scenario presented here, is that the professionals involved create two HUD statements-one for the closing and another that is sent to the bank or they camouflage the $80,000 junior lien or a recently created obligation of the seller. In other words, all is not being fully disclosed.
• Parent Company of Mercantile Bank takes Real Estate Fraud-related hit in Florida: The holding company of Mercantile Bank in Florida expects a $32 million provision for credit losses in the current fourth quarter, in part because of loan problems in Florida. That’s up substantially from the $10.5 million provision in the third quarter of 2007 and $8.8 million provision in the fourth quarter of 2006. The company also said it has revised downward its expected recovery of loans in a real estate fraud scheme in North Carolina.
• Minnesota man sentenced in mortgage-fraud scheme: The crime of mortgage fraud continues to be a priority with the United State’s Attorney’s Office as the first defendant in the LHS mortgage fraud case–involving a Prior Lake woman, a Credit River Township man and a Minneapolis man–was sentenced in federal court today in Minneapolis. Mario Augustin Lewis, 37, of Minneapolis was sentenced to serve four-and-a-half years in prison and ordered to pay $437,814.41 in restitution.
• Long Beach Mortgage Rep Faces Five Years in Prison: John Ngo, 27, of Dublin, California, pleaded guilty before United States District Judge William B. Shubb to lying under oath before a federal Grand Jury in connection with an on-going mortgage fraud investigation. The case is the product of an extensive investigation by the Federal Bureau of Investigation and Internal Revenue Service-Criminal Investigation. Several other individuals have been indicted in connection with this investigation and those charges remain pending.
• New Year, New Consumer Scams: It has been a tough year for consumers. With housing prices falling and the subprime-mortgage mess raging on, we won’t blame you if you’re looking forward to a fresh start in 2008. Better watch out: The financial woes and natural disasters of 2007 have armed scammers with plenty of new tricks — or resourceful spins on old ones — aimed at separating you from your cash. Here the five most treacherous scams to watch out for in 2008.

A couple of days ago I mentioned that the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) reported that mortgage loan fraud in the United States rose 35 percent in the past year. For anyone interested, here are some additional items of note from the FinCEN’s November 2006 report:

• Between 1997 and 2005, Suspicious Activity Reports (SARs) pertaining to mortgage loan fraud increased by 1,411 percent between. This report-filing trend continues apace in 2006, with 7,093 reports filed on suspected mortgage loan fraud during the first quarter, an increase of 35 percent over the SAR filings in the first quarter of 2005. One explanation for the increase in SARs reporting mortgage loan fraud is increased awareness of the potential for fraud in a dynamic real estate market. Many areas in the United States saw double-digit growth in real estate values during 2003 and 2004. At the same time, mortgage loan interest rates were at a historic low. Although growth in the housing industry appears to be slowing in the first quarter of 2006, opportunities for fraud are still present.
• Reports of mortgage loan fraud rose significantly in 2003. The Federal Financial Institutions Examination Council reported an increase in the number of mortgage loans beginning in 2003: “The 2003 data include a total of 42 million reported loans and applications, which is an increase of about 33 percent from 2002, primarily due to a significant increase in refinancing activity (approximately 41 percent).” SARs on mortgage loan fraud increased over 92 percent between 2003 and 2004. The increase in filings may be attributed to an increase in overall mortgage lending concurrent with the decline in interest rates in the 2002 – 2005 timeframe and a broader awareness of this fraudulent activity.
• Mortgage loan fraud represents a growing percentage of total depository institution SARs. In 1997, reports of mortgage loan fraud comprised 2.12 percent of total depository institution SAR filings. In 2005, reports of mortgage loan fraud had increased to 4.94 percent of total depository institution filings.
• Identity theft was frequently reported in conjunction with the commission of suspected mortgage loan fraud. Reports of identity theft increased nearly 102 percent between 2004 and 2005.
• The National Association of Mortgage Brokers reports that as many as two-thirds of mortgage loans are now originated by mortgage brokers. Currently there are no national standards for licensing and oversight of mortgage brokers. Some states license mortgage brokerage offices, but not individuals; 24 states have no specific educational or experience requirements for mortgage brokers; and only a few states require criminal background checks on mortgage brokers making it possible for unethical individuals to move from one mortgage brokerage firm to another.
• The top 10 geographical areas for fraud are California, Florida, Illinois, Texas, Georgia, Michigan, New York, Ohio, Washington, and North Carolina.
• High home prices coupled with rising mortgage rates result in a reduction in housing affordability. In response to this trend, the housing industry is expecting a slow down in mortgage loan originations, a decrease in housing sales, and a slowing in housing price gains. The slow down in the growth of housing prices could result in the housing industry becoming less attractive to investors, which in turn could result in a reduction in the reports of fraud for profit. The current housing trend could also lead to an increase in fraud for housing as the increased costs of housing decreases the number of persons who qualify for mortgage loans. The current trend of rising interest rates and slowing housing equity growth could result in an increase in debt elimination fraud schemes, especially for homeowners with adjustable rate mortgages and interest only loans.

On the same day that the Financial Crimes Enforcement Network (FinCEN) reported that suspected mortgage loan fraud in the United States has risen 35 percent in the past year, the state of Illinois announced that six residential mortgage firms in the Chicago and East St. Louis regions used unlicensed loan originators to process more than 700 home loans. Both developments, which were announced last Friday, spotlight the need for continued education and enforcement in the fight against real estate and mortgage fraud.

FinCEN conducted its assessment, which is based on an analysis of Suspicious Activity Reports (SARs) regarding suspected mortgage loan fraud, to identify trends and patterns that may be useful to law enforcement, regulatory authorities, and financial institutions.

In Illinois, a state Mortgage Fraud Task Force (MFTF) found major problems after inspections at the following companies:

• Envision Mortgage Solutions: Twenty-eight (28) loan originators were found to have produced over 500 loans without possessing the proper registration as required in the State of Illinois.
• AM Mortgage: Eight loan originators produced around 100 loans without possessing the proper registration.
• Express Funding, Inc: Approximately 50 loans were originated by five loan originators not possessing the proper registration as required in the State of Illinois.
• Fidelity Mortgage Group: This firm originated 35 loans without employing a registered loan originator.
• Mainline Mortgage Group: A MFTF visit to this company revealed over 25 loans originated without a registered loan originator with the State of Illinois.
• Global Mortgage Company: The MFTF found that this firm had no actively registered loan originators but originated over 25 loans.

Consumers everywhere have the right to know that when they do business with companies licensed by a state, that they will receive the best possible service by ethical and appropriately trained professionals. Hats off to the state of Illinois for using all the tools available to discipline companies that violate the laws and regulations designed to protect homebuyers.

On the same day that the Mortgage Bankers Association kicked off it’s inaugural National Fraud Issues Conference in Chicago, the regulator for Fannie Mae and Freddie Mac announced that it is now sharing mortgage fraud information with the Treasury Department’s Financial Crimes Enforcement Network. According to a memorandum of understanding executed last Friday, the Office of Federal Housing Enterprise Oversight (OFHEO) and the Financial Crimes Enforcement Network (FinCEN) have reached an agreement to facilitate the sharing of information by OFHEO of its examination findings on actual or suspected mortgage fraud with the Financial Crimes Enforcement Network. FinCEN for its part will include OFHEO’s information in its database of Bank Secrecy Act (BSA) information, which can then be queried by law enforcement officials.

For those of you who did not know, the Financial Crimes Enforcement Network is a bureau within the U.S. Department of Treasury. It is tasked with administering the Bank Secrecy Act and maintaining a database that includes Currency Transaction Reports (CTRs), Suspicious Activity Reports (SARs), and other reports that financial institutions are required to file. FinCEN supports law enforcement and regulatory agencies through sharing and analysis of the BSA data. The inclusion of OFHEO’s findings will be of significant value in the ongoing effort to combat the use of mortgage transactions as a vehicle for fraud.