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.