6 October 2015

Mortgage fraud

As readers may have noticed, there has been a deafening silence at the heart of this blog on the Michelle Thomson affair. There are several reasons for my reticence about breenging into the fray. The first is consciousness of my own limitations. There are a number of areas of law which I understand pretty well: conveyancing and property transactions are not among them.

The second reason for circumspection is the active investigation into the case currently being undertaken by Police Scotland. Scottish political comment already has far too many folk reaching bold and decisive conclusions based on limited information and limited understandings of the processes which saw Christopher Hales, Michelle Thomson's solicitor, disbarred by the Scottish Solicitors' Discipline Tribunal in the summer of 2014. I'm disenclined to add to it. 

But the sheer weight of guff circulating in the public domain on this warrants a small, measured intervention. So here it is. Firstly, if you want to understand what the case is all about -- go straight to the source material. The Discipline Tribunal's decision is long and often technical, but read with a little care, it is clear. Some of you may be disinclined to credit it, but from everything I have been able to gather in the days since this story first broke, Ian Smart's summary of the issues lying behind the Hales decision was more or less bang on. It's worth remembering that although Ian has a partisan political perspective, and sometimes comports himself in a way which does him less credit than he warrants, he is no fool. He is also a solicitor of many years' experience, whose bread and butter work is selling houses. The rules Hales broke apply to his work, day in, day out. 

In Scots law, fraud is defined as a false pretense which secures some practical result. If you turn up at a restaurant, sit down, and set about the menu, you are cultivating the impression that you intend to pay for the food you eat and the wine you drink. If you beetle off without having settled up your final reckoning - you are a fraudster. If you convince me to lend you a sum of money with no intention of paying it back, you are a fraudster. But this week's topic is the esoteric question of mortgage fraud.

Why? Because in June 2014, the Scottish Solicitors' Discipline Tribunal stuck off Christopher William Hales, an Edinburgh lawyer, who had facilitated a range of transactions by a Mrs A and her husband. Why was Hales struck off? The tribunal's judgment sets out its reasoning at some length -- so much length, in fact, that some folk are stuggling to see the wood through the trees.  But first, some context. We have to understand something about the CML handbook. The handbook is produced by the Council of Mortgage Lenders, and imposes particular duties on solicitors who handle property transactions. In particular, the handbook sets out the following rules which lawyers are expected to follow in completing the sales of houses subject to standard securities (mortgages):

5.1.1 Please report to us [the mortgage provider] if the proprietor has owned the property for less than six months, or the person selling to the borrower is not the proprietor. 
5.1.2 If any matter comes to the attention of the fee earner dealing with the transaction which you should reasonably expect us to consider important in deciding whether or not to lend to the borrower (such as whether the borrower has given misleading information to us or the information which you might reasonably expect to have been given to us is no longer true) and you are unable to disclose the information to us because of a conflict of interest, you must cease to act and return our instructions stating that you consider a conflict of interest has arisen.

But why apply these rules? Why should solicitors be expected to advise mortgage providers of this information? The short answer is this: back-to-back property transactions and tricky mortgage arrangements are classic features of modern mortgage fraud. The nub of it is this: failing to disclose all the critical information to lenders in order to convince them to lend you more than the property you are purchasing is worth -- that is the potential fraud.

The Law Society of Scotland offers this advice to solicitors on identifying when their clients may be trying to dupe them - and their mortgage providers. Its guidance is pretty clear and simple. There are a number of warning signs which lawyers need to keep an eye out for. These include:

  1. Has the property been owned by the current owner for less than six months? 
  2. Has the value of the property significantly increased in a short period of time? 
  3. Is the mortgage for the full value of the property? 
  4. Is the deposit being paid by someone other than the purchaser? 
  5. If there is money left over from the mortgage after the purchase price has been paid, are you being asked to pay this money to the account of someone you don't know, or to the introducer, or to someone else on the client's instructions? 
  6. Have you been asked to enter a price on the title that is greater than you know was paid for the property?

If you dig into the tribunal's Hales decision, you will find that a large number of the thirteen transactions faciliated by Mr Hales bear features characteristic of this kind of mortgage fraud. These features aren't decisive. They can have perfectly innocent explanations. But they trip warning lights. Here's a useful summary of what is known as "flipping fraud" and back-to-back selling:

The scheme known as 'flipping fraud' involves purchasing property and re-selling at an inflated price within a short space of time to a buyer with a high LTV mortgage greater than the value of the property. The true nature of the transaction is concealed from the lender and may also involve dishonest or negligent professionals. A typical example is: 
A sells property to B for £75,000. B quickly sells the same property to C for £125,000. The true value is £75,000. C obtains a 95% mortgage with ABank who is unaware of the sale from A to B. If B and C are fraudsters in league, C will obtain a mortgage of £118,750 against a purchase price of £125,000. B and C use the £75,000 mortgage advance to pay A, then disappear with the remaining £43,750. Such cases will almost always involve a valuer who overstates the market value of the property and a solicitor who fails to notify the lender of the transaction between A and B.

And this is the critical section of the judgment which ended Hales' legal career:

The Tribunal had no hesitation in making a finding of professional misconduct. There were numerous breaches of the CML Handbook in respect of 13 different transactions involving an ongoing course of conduct which continued for a period of over one year. The Tribunal has made it clear on numerous occasions that institutional lenders are clients of Respondents in the same way as any other clients and are owed the same duties of care. The CML Handbook has been instituted to help prevent mortgage fraud and emphasise the reporting duties on the part of solicitors. 
In this case the Respondent had a clear duty to report the back to back transactions, cash backs, increases in prices and deposits being provided by a third party to the lender. These matters would have been very likely to have had a material effect on the lender’s decision to lend. The Tribunal consider that the features of these transactions were such that the Respondent must have been aware that there was a possibility that he was facilitating mortgage fraud, whether or not this actually occurred. He generated fees on the basis of allowing this to occur. It must have been glaringly obvious to the Respondent that something was amiss when cash backs of £27,000 or £28,000 from the seller to the purchaser were involved.

Even if you read this paragraph - and only this paragraph - from the decision - it scotches the idea that this is an empty and partisan scandal whipped up by a hostile media. There may be a good explanation for these transactions. There may be no wrongdoing here whatever. But Hales was kicked out of the legal profession because his failure to observe the rules may well have covered up behaviour characteristic of mortgage fraud. Of course there had to be a police investigation. Lawyers are facilitators and professional functionaries. We don't know why Mr Hales failed to keep the mortgage providers properly informed. Only by being investigated thoroughly will the answers to these questions become clear.

But as ever, politics and calculations of political advantage intervene and distort the reporting. Labour are going great guns on this story, demanding that the Lord Advocate should appear to answer questions in the chamber. Frank Mulholland QC appeared in Holyrood this afternoon. His answers - unsurprisingly - focused on when prosecutors received all of the information on the Hales decision from the Law Society of Scotland. There are real public interest questions for the Society to answer about how this case was handled, and how other cases of this kind are handled.

The Society has a vital regulatory and public function. You might expect the phrase "mortgage fraud" in a decision to ring alarm bells. So why did it take them so many months to communicate the outcome of the Hales case to the criminal authorities? Law's delays? "Pressures of work", as Law Society chief executive Lorna Jack said at a recent conference? We do not know. Or at least, not in detail. Hales was prosecuted before the tribunal and struck off to protect the public. But public protection surely cannot cease when a disciplinary tribunal has reached its conclusion. The Law Society has a wider duty - not just to lawyers - but to society at large. We can expect today's appearance by the Lord Advocate to turn up the heat.

But after the Lord Advocate had spoken, blundering Jackie Baillie decided to go too far. Not content with the facts as we understand them - not content with the allegations currently being investigated - today she uttered this gem in the Holyrood chamber. She said:
"The Lord Advocate is right not to rule out action under the Proceeds of Crime Act. Vulnerable families have lost out because of the alleged actions of people trying to make a quick buck. In the interests of justice it's only right that those who allegedly profiteered from vulnerable families don't get to enjoy the benefits of their immoral actions."

Reading this quotation, you might get the impression that the investigation prompted by the Hales decision turned on the fraduluent manipulation of people who sold their houses to Michelle Thomson or her business partners. You might get the impression that the "mortgage fraud" in the headlines concerned the initial purchases and the amount paid. But there is nothing like this in the Hales judgment whatever. This scenario has marched straight out of Jackie Baillie's head.

On the facts set out in the Hales decision, it is the mortgage providers who are the potential victims of  any alleged fraud -- not the sellers who completed their transactions with Mrs A and her associates. A number of the loans now being investigated were taken out with Birmingham Midshires - a trading name for the Bank of Scotland. I don't know about you, but I struggle to see the bank as a "vulnerable family", however cosy its declared corporate ethos.

You can understand folk wishing they'd been paid more for their houses. But with certain exceptions, the law doesn't prevent you from striking a hard bargain or getting a lower price than you hoped for your property. That isn't what this criminal investigation is about, and Jackie Baillie must know that this isn't what the investigation is about. Her innuendo cannot be defended as a political point about the ethics of landlordism either. Her invocation of the Proceeds of Crime Act was presumably premediated. But given the opportunity to stick to the facts, she declined.

Full of political mischief, blinded by partisanship, she decided to lob yet another ripe red herring into the heart of this difficult affair. You might well think that a wise person, a prudent person, condemning alleged falsehoods, would do well to ensure that their own comments are not misplaced and misleading. Not Jackie Baillie, it seems. Blockheaded, forked-tongued, her contribution actually serves to obscure the real, serious, challenging legal issues raised by this matter by over-egging them. All for the sake of a partisan barb without legal foundation. This kind of thing is the worst of politics.

Let the criminal investigation proceed. As the Lord Advocate says, let's "follow the evidence". Let's ignore the baseless, breathless political sidelines. The rights and wrongs of this matter will, surely, become clear in time.


  1. "The first is consciousness of my own limitations."

    All too rare in this day and age, and I deeply appreciate such an island in a sea of self-professed experts who refuse to acknowledge the possibility they don't know everything.

    1. Fuck off... you're a fuckin twat...try pulling yer heid oot yer arse....

  2. The question isn't just whether Thompson is technically guilty of technical fraud. It's also about the ethical and moral standards we expect of our MPs.

    Buying someone's house at a price and knowing you can manipulate the market to sell it on at a higher price and get a kickback may be technically legal but it is morally bankrupt.

    Especially if you have set out your business model to do precisely that and you do it repeatedly, regardless of other consequences for other people.

    It's like the Tory mantra that taking advantage of mugs is no sin.

    But she, and the SNP leadership, made much of her "social" "conscience" care concern blah blah blah, during her election campaign (leave aside her time at BFI when she pretended not to be SNP and I quote "not even a nationalist really"),

    The problem for the SNP is that, while they pretend to be holier than thou and more ethical than particularly Labour, Thompson's approach to ethics and the truth and decent behaviour is far from unique amongst SNP elected representatives,

    And the involvement of Nicola Sturgeon in endorsing Thompson so enthusiastically while her husband was secretly involved in sorting out her perceived incompetence in BFI just adds another eye watering level to the hypocrisy and moral degeneracy (though hard about it but kept it in) of the SNP and its approach to politics, society and decency in general.

    1. What a characteristic outpouring of hypocritical cant and pish from you, Councillor. Do keep it up, it's working a treat for your party so far.

    2. Alex the political capital u expect to reap from this case will,I think,prove to be yet another own goal from ur defunct party.The people of this country are not fools-imagine that-and are well capable of seeing this for what it is-carping cant from Slab.Episodes like this ensure continuing support for the SNP.Hurting much Alex?

    3. ha ha ha ha sick him Rev, sick him. I didn't accept 4 offers on my property 6 weeks ago until I got a higher offer, seems these sellers accepted an offer and are now unhappy about it, bit too late to moan now. Thompson would be a total mug to offer way over the odds, no one ever does unless they're completely stupid or desperate ( not the buyers fault )

    4. Manipulate the market? How? Your house is only EVER worth what someone will pay at that time, even if it's valued higher. The lady shouting 'cheeky bitch' would have bitten at a higher offer if it had been available via the market.
      Why is this difficult for some to grasp in a property owning culture?

    5. :-- ) (-- : back to back LOLs to you all..... and thanks for making my evening.

    6. This comment has been removed by the author.

    7. @Valerie - The article explains how. The potential fraud is not against the sellers but the banks who can be duped into lending a mortgage at an inflated rate (way above the value of the property - which can most readily be gauged by the original sale price) by not disclosing all the relevant information.

      So the fiddle is not on the 'vulnerable souls' who originally owned the property but it's a fiddle nonetheless...

    8. I might give your ramblings some attention or thought, but for the fact, you cannot even spell Michelle Thomson's surname properly.

      If you can get this fairly obvious fact - her name has been all over the papers for the past week - we have to ask, what else can this idiot get wrong?

    9. your entire diatribe combined with Corbyns five lies in twenty seconds bizarre rant on the Andrew Marr programme along dug faces out of this world interpretation of the Education system in Scotland , just goes to show the Labour party can't change,are unable to comment without lying , the electorate told them to f/off don't you get it ?

    10. your entire diatribe combined with Corbyns five lies in twenty seconds bizarre rant on the Andrew Marr programme along dug faces out of this world interpretation of the Education system in Scotland , just goes to show the Labour party can't change,are unable to comment without lying , the electorate told them to f/off don't you get it ?

    11. A "Labour" cooncillor pontificates from the epic moral heights occupied by his house-flipping, former House of Commons peers {some now stoated up to HoL ermine).

      Gaun yourself, sirrah, as the electoral clock tick tocks on your guid self and sordid ilk.

    12. 2 Falkirk Labour Councillors bought half of the Council Houses with the right to buy. This is blatantly illegal yet nothing has been done or said. Since we've suddenly woken up pius I should rally the Falkirk folk, who know exactly who these subjects are, and dig into their property deals. They stole from the taxpayers and denied families homes.

    13. Dear ! Oh! Dear!, Mr Gallagher, what a display of absolute cant and gobbledegook. As the author made explicitly clear the former council rentees who were selling the property not only went into this deal with their eyes wide open but it was they who contacted those you are slandering. They lost nothing but in fact made a rather nice profit. We know not their motive for selling up but by their own words the wanted rid of it in a hurry. We won't even needs assume they had mortgage or debt problems.

      Simply they are not the innocent unwary victims of anything. To date not even the disbarred solicitor has been charged with any crime. He was disbarred for breaking Law Society rules not for breaking the law. As the author of this piece plainly states, the only possible victim of criminal fraud is the Mortgage provider.

      So just where is your faux rage and claims of morally wrong actions now? The only possible victim is an arm of a bank that was indeed found guilty and bailed out by the nation.

      No wonder the people of Scotland are deserting your party in droves and if you still imagine the Scottish electorate are stupid then you are even more stupid and dishonest than even I thought you.

    14. Caroline Magoha who are the 2 Falkirk Labour councillors? Everyone should know.

    15. I wonder. Do you know that you are being dishonest? Or is it that you have fallen for your own malicious propaganda. A liar? Or a fool?

  3. Thank you for this. It confirms what my non-legal mind thought was the situation. It now remains to be seen whether the actual transactions are criminal or not. Until then, many newspapers and others should keep their counsel (although I do not suppose for a moment that they will). I will choose to do so as well.

  4. Thanks for swimming through the details most of us (including the press and politicians) can't be bothered with.

  5. An excellent article and, barring what I've read on Wings and the SSDT website, the first actual facts I've read regarding this thoroughly distasteful witch hunt. It's been particularly galling to see journalists I've previously highly respected joining the baying pack. Is there some kind of irresistible professional pheromone that kicks in when they scent political blood?

    I've read the SSDT decision in Hales and the similar previous decision in Aikman. Will Aikman's clients be being investigated by the police for potential mortgage fraud? If not, why has the Lord Advocate not been called to parliament to explain why? Of course they won't, because there's no suggestion that they went on to become SNP politicians.

  6. Typo - hard - "striking a had bargain".

  7. My local Bank of Scotland offering £500 cash back on mortgages at the moment

    27k cash back is like hitting the Richter scale

    The right option is to wait for the criminal investigation findings

  8. Care to speculate on a legitimate reason for substantial cashbacks in a property transaction? A finders fee or similar would go from the purchaser to the middleman, rather than this way round.

    1. Surely it is obvious?

      You give me a bundle of cash right now for my house, today.

      I know it's not the market value but I'm getting the money today.

      I sign a bit of paper saying that when the house is sold any money over and above what you've given me is paid to you.

      It's not really rocket science. I wanted an immediate sale, didn't want to wait for months, I took a hit on what I would have got had I waited but that's the way it is.

    2. Yes Mr Ritchie I can. I don't know but could imagine the former owners could be in arrears with mortgage repayment and that being the possible reason they wished a quick sale. I could also see the new buyer offering to pay off those arrears by offering the seller a price that took into consideration the unpaid mortgage debt.

      Thus the offer meant the new buyer was taking over the risk of being left with a property in need of renovation the previous owners could not sell. If they did in fact sell it on the same day that is neither here nor there.

      The country has many, many such companies buying up such properties at risk of either loss on resale or tarting them up and either renting them out or selling them on at a profit. It is not against the law nor is it immoral.

      The former owners only other option is the mortgage lender repossess it and they lose everything. It is, after all, legally their property until the mortgage is settled.

  9. Phase two of better together and the Empires fight back is now in full swing ,they will do anything to avoid a wipeout next year , the recent orchestrated attack by ruthie & dugface combined with the intervention of a English Tory MP all to discredit the SNP leaving aside any facts that may come to light reguarding the ongoing investigation , what is the saying "a lie is halfway round the world before the truth has got its pants on " i believe that's how it goes , this theme will continue aided by a compliant media until next year's elections

  10. Phase two of better together and the Empires fight back is now in full swing ,they will do anything to avoid a wipeout next year , the recent orchestrated attack by ruthie & dugface combined with the intervention of a English Tory MP all to discredit the SNP leaving aside any facts that may come to light reguarding the ongoing investigation , what is the saying "a lie is halfway round the world before the truth has got its pants on " i believe that's how it goes , this theme will continue aided by a compliant media until next year's elections

  11. Hurrah! This is what I thought it was all about. Nice to have it confirmed.

    But ruling out a clever schemes of the sort whjere the intention is for the straw-man second purchaser to declare bankruptcy - because it never happened - where's the profit in this? It seems like a less-than-zero sum game, what with the arrangement & redemptiom fees and so on. Would the difference between mortgage rates & business loan rates make this worthwhile, if you needed the funding? Colour me puzzled.

  12. Nice graphic Andrew, but your arrows fail to indicate the usual suspect at the centre of a Simpsons scandal - Maggie. Though of course the purple hair trail leads to that canny player Patty Bouvier -


  13. Yes. It is however reasonable to consider how serious a fraud is. Swindling a widow out of her home and money is a very serious fraud. A student doing a bolt from a restaurant without paying is a bit less so.

    The extent of the fraud against the mortgage company is that the security they hold against non-payment is less valuable than they had understood. Therefore they may make an absolute loss in the event of default. But if there is no intention to default and the loan is serviced, they don't make any actual financial loss at all.

  14. Surely this is how the London market in houses has been based and still is?

  15. Not-really-related fraud news: http://www.bbc.co.uk/news/magazine-34445201

    A billion dollars stolen from Moldova has been traced to a flat in Pilton. But the SNP aren't involved, so I'm not expecting to read about it in many papers.

  16. As ever, Andrew provides a concise, accessible and massively helpful analysis of a complex matter. While thanking him for this effort, I would take issue with only one point. I seriously dispute that there is claim of this being an "empty and partisan scandal whipped up by a hostile media" which requires scotching.

    As I see it, there are two aspects to the affair. There is what I shall refer to as the "legal" side of things, which we are all considerably better informed about thanks to this article. But there is also a "political" aspect, which the article also touches on.

    There has arisen a tendency to confuse and conflate these two things; not all of which has been without malicious intent. Those, like myself, who have accepted the "legal" process without demur but sought to deal with the "political" aspects have all to often been unjustly denounced for supposedly maintaining that this is entirely an "empty and partisan scandal whipped up by a hostile media". I, at least, have made no such assertion. And I am not aware of anybody who has. But this has not prevented some from dismissing my comments as the utterances of a mindless party loyalist defending an individual, whatever their conduct, on account of their association with the SNP.

    In fact, all I have been concerned with is the monstering of Michelle Thomson by the media and political operators such as the endlessly odious Jackie Baillie. I would question whether this wholesale demonisation would be justifiable even if the stories being told by the media were true. But I would, in any case, first have to be persuaded of their veracity. And I am not. I have no reason to be.

    There are, in my view, no circumstances in which it is not advisable to question pretty much everything that is fed to us by the mainstream media. Particular circumspection is required when there is a known political agenda. No sane, sober and sensible person would deny that the British establishment considers the SNP as its enemy. So it is reasonable to anticipate that this attitude will be reflected in the way the media cover any story with a connection to the SNP. It is reasonable to expect that any opportunity to damage the SNP will be seized. Media messages should be consumed with this in mind.

    I can only speak for myself, of course, but I have had nothing whatever to say about the "legal" aspects of the affair. Why should I? I know little or nothing of the relevant law and regulation; and no more than anyone else of the pertinent facts. All I know is that the matter is being dealt with by the proper authorities. I am content with that and will await the outcome with interest. I really have nothing more to say about it. Let others contrive, as they undoubtedly will, to represent the foregoing as a vehement defence of Michelle Thomson and a token of "blind allegiance" to the SNP. I have better things to do with my time than deal with such idiocy.

    But, while I've nothing at all to say about the "legal" side of things, I will not refrain from the most vigorous condemnation of the despicable behaviour of the media and people such as Jackie Baillie. With no hope at all that the point will get over to those whose minds are already closed, I repeat that this is NOT tantamount to a claim that this is ONLY an empty and partisan scandal whipped up by a hostile media. It is merely to pont out what really should be obvious to all. Namely that, totally aside from the matter of possible mortgage fraud, there is a hostile media; there are viciously unprincipled politicians; and there is a substantial element of this affair which is no more than an empty and partisan scandal.

  17. It's a bit of a coincidence that only a month ago, the same MP was "named and shamed" in the Ashely Madison affair, which apparently turned out to be some kind of malcious manipulation (as I understand it).

    Now we have this much more serious allegation - is there some connection between the two situations? Apparently some other diligent investigator has turned up a situation of another SNP's "luxury pad" being used for a photo opportunity. And there are apparently more similar instances lined up for publication.

    Claims to have proved one bad apple may well be being used to give credibility to any mischievous allegations - unfortunately, people think that way. So perhaps it's not a case of whipping up hostile media coverage, but something rather more serious.

    1. This sort of comment sums up the problem exactly. Even the Tory website which identified the Ashley Madison connection subsequently found it to be false and the pathetic comment about the luxury pad has also been exposed It is owned by a new MP who bought the place as a TV journalist decades ago and renovated it. He now occasionally rents it out for photo shoots
      Your comments exemplify what a little uneducated poison can achieve. Remember what happened when you accused your neighbor of witchcraft ??

  18. Mr Gallagher, perhaps you can remind us again how many Labour MP's were jailed for expenses fraud?

  19. The degree of the misrepresentation against the mortgage organization is that the security they hold against non-installment is less significant than they had caught on. In this way they may make a flat out misfortune in case of default. Be that as it may, if there is no goal to default and the advance is overhauled, they don't make any genuine monetary misfortune by any stretch of the imagination. mortgage rates winnipeg

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