- A look at how financial crime impacts New Zealand’s financial system and international reputation
- Stricter conditions put in place to protect against future mortgage fraud impact on those attempting to engage in legitimate lending
- Forensic accountants have the opportunity to protect New Zealand against the impacts of financial crime
Paul O'Neil, General Counsel for the Serious Fraud Office (SFO), will address the latest developments in mortgage fraud cases and SFO's practices in dealing with serious and complex financial crime as part of the upcoming 2019 Fraud & Forensic Conference in Auckland NZ.
High-profile cases investigated by the SFO
One of the most prominent cases of residential mortgage fraud Paul has investigated at the SFO occurred when developers sought to gain access to mainstream funding for residential property by deceiving banks into thinking their lending criteria had been met and exposing those banks to great risks.
Without access to mainstream funding, the developers had to engage with lower tier lenders and thus faced higher rates of interest. To avoid paying higher rates of interest, the developers created fictional identities to apply for mortgage lending from major banks at a much lower individual interest rate. "This gives them access to an interest rate they shouldn't have and funding they wouldn't otherwise get. The disparity might be only a few percentage points, but over the course of millions of dollars of lending and an extended period of time it significantly adds up," Paul says.
"Financial crime impacts upon New Zealand's financial system, banking system and international reputation as a safe place to do business the most."
In another commercial mortgage fraud case Paul investigated, the banks were only willing to lend $41 million dollars of funding to developers if pre-sales of the apartments in the developments had already been secured and deposits paid. As the developer couldn't meet these criteria, they instead registered the names and details of people as false purchasers without their knowledge and procured false undertakings from a solicitor about deposits being held on trust for the bank's security.
The true cost of mortgage fraud
The financial loss resulting from mortgage fraud varies case by case. In both of these cases, the direct losses were limited as the residential properties and apartments were ultimately able to be sold. However, this was pure good fortune due to a rising property market, and the banks were left exposed to massive risks that they hadn't contemplated when they lent the money.
In both cases, while little or no money was lost directly, hidden costs were present through the complex investigation that was required and a subsequent reassessment of lending practices. Furthermore, once fraudulent activity is detected, stricter lending conditions will typically follow to protect against future instances, which Paul says negatively impacts upon those attempting to engage in legitimate lending.
"It distorts the lending market because $50 million lent to a fraudulent entity is $50 million that isn't going somewhere legitimate. The people suffer the downstream effects of this type of fraud, because the banks will be less willing lend money and will do so on less favorable terms," explains Paul.
However, more than any individual, Paul argues New Zealand as a nation is the ultimate victim of mortgage fraud. It is a nation renowned for its political values of fairness and honesty. "Financial crime impacts upon New Zealand's financial system, banking system and international reputation as a safe place to do business," he says.
"New Zealand is typically [at the] top of the Transparency International Index for anti-corruption, and we trade a lot on that reputation for not being corrupt and being a good, safe, honest place to do business. When large fraud occurs on this scale it affects our international reputation which is incredibly valuable to New Zealand."
Combating financial crime
Paul highlights some potential warning signs that might indicate fraud. From within an organisation, danger signs can include staff being overly protective of working relationships, pushing through applications on fast-track time frames , and circumventing established processes. "It's not possible to engage in mortgage fraud of this scale without significant resources and intent. It's a series of false documents and sustained, elaborate deceptions and can involve inventing people, salaries, bank accounts and whole identities," says Paul.
He warns of the danger of compromising due diligence in the delegation and approval process, citing employees under the pressures of hitting lending targets within set periods as vulnerable to cutting corners and compromising on testing and evaluation.
The future of forensic accounting
While the individuals who commit these fraudulent acts ultimately put New Zealand's economy at risk, Paul says forensic accountants have the opportunity to actively protect it.
He adds that in addition to providing its forensic accounting staff with top-level training, the SFO also look to seek out natural communicators, capable of presenting their findings in simple terms.
"Forensic accountants are absolutely crucial and bring a huge level of expertise, allowing them to effectively unravel this complex level of fraud," he says.
"We look for clever, engaged and curious people. The ability to take complex concepts and express them is difficult to teach and the ultimate work product for our forensic accountants is presenting evidence in court, which requires a high degree of skill and expertise."