'Liar loans' leave property market open to criminal exploitation

'Coordinated mortgage fraud' uncovered as AUSTRAC puts banks on notice over 'liar loans' In short: The financial crimes agency AUSTRAC has uncovered mortgage fraud worth hundreds of millions of dollars at 10 major banks. In this article: Hundreds of millions of dollars of suspected fraudulent loans have been uncovered at 10 major banks during an operation involving Australia's top-tier financial regulation and criminal intelligence agencies. Operation Claw has exposed coordinated mortgage fraud and "systemic weaknesses" across the lending sector, with properties, mainly in Sydney, being bought in a way that does not comply with laws meant to ensure responsible lending and cut down on dirty cash. "The scale of this activity should be a wake-up call for every lender," AUSTRAC chief executive Brendan Thomas said. "The same warning signs were found across banks that together cover the vast majority of Australia's mortgage market. "While this project did not identify evidence of widespread money laundering, the weaknesses it exposed could be exploited by criminals seeking to abuse Australia's financial system." The banking industry said it welcomed the action by the financial crimes agency and would continue to work with law enforcement and regulators to stamp down on suspected fraud. "This work has included intelligence sharing between banks and AUSTRAC through the Fintel Alliance, which has already proven effective in uncovering fraudulent loan activity," Australian Banking Association chief executive Simon Birmingham said. Mr Birmingham said banks would continue to advocate for secure access to income data from the Australian Taxation Office (ATO) to help reduce the use of fraudulent loan documents. "Verified ATO data would give lenders a single, trusted source of truth for a customer’s income and be a new tool banks could deploy to prevent loan fraud into the future," he said. Years of 'liar loan' warnings The money has been lent out in what are called "liar loans". AUSTRAC described the suspected fraud as using the following to support loan applications: - inflated incomes - misrepresented employment - fabricated or unverifiable business activity There were also cases in which "offshore or third-party funds" were used to finalise settlements and make mortgage repayments. The agency said this demonstrated how false income streams and complex funding arrangements can wash money through the Australian property market. It is not a new issue. In recent years, investment bank UBS asked borrowers about their honesty when filling out applications. In 2021 its survey of about 900 people showed 41 per cent submitted loan applications that were not completely factually accurate. The most common areas of inaccuracy were under-representing living costs (34 per cent), under-representing financial commitments (28 per cent) and over-representing income (22 per cent). Borrowers who used mortgage brokers were far more likely to submit inaccurate applications (44 per cent) versus those who applied directly through a bank (29 per cent). Last year corporate regulator ASIC sued the Westpac-owned RAMS for systemic misconduct in arranging loans, including fake payslips being submitted for mortgage applications, and customers' debts and expenses being altered so they would meet loan serviceability requirements. In October, the Federal Court ordered RAMS to pay a $20 million penalty after admitting to "widespread compliance failures". This month RAMS's book of home loans was sold to Pepper Money for $15.4 billion. 'Operation Claw' goes wide People involved in submitting fake documents that support loan applications might be getting a knock on the door. Mr Thomas said Operation Claw had already made referrals to appropriate authorities. Operation Claw involved AUSTRAC working closely with banks, the ATO, NSW Police, the NSW Crime Commission, the Australian Criminal Intelligence Commission and financial regulators APRA and ASIC. "Every lender should be looking closely at these findings and asking whether the same vulnerabilities exist in their own business," Mr Thomas said. "The most effective way to stop mortgage fraud is before a loan is approved. "Once a loan is established and the funds have moved, recovering the money becomes significantly harder. "Lenders need to actively look for these warning signs, strengthen their controls and report suspicious activity to AUSTRAC. This is not something any institution can afford to ignore." Watch The Business, Mondays to Thursdays 8:44pm on ABC News Channel, after the Late News on ABC TV, and anytime on ABC iview