21st October 2021
Walker Morris Partner and Banking Litigation specialist Richard Sandford highlights Victus Estates v Munroe and Benjamin v Victus Estates , which demonstrates the courts’ up-to-date approach to mortgage fraud cases and the illegality defence, and offers practical advice for fraud prevention and cure.
Back in January of this year, we explained that, for a variety of reasons, 2021 was likely to see an increase in the commission of mortgage frauds. Recent bank account fraud research from Experian confirms that loan fraud rates rose by 40% in Q2 2021, its highest reported level in the last three years and up 63% on the same period in 2020; and that identity fraud related to loans (where an individual gives false information or misrepresents their identity to access a product on more favourable terms) also rose by 18%.
One very common area of mortgage fraud risk, which often involves identify fraud and/or forgery, is co-ownership. It can give rise to one co-owner borrowing against a property without the knowledge and consent of the other and it can facilitate schemes designed to defraud co-owners of their interest and banks of their security. The Victus Estates case involved one such scheme, perpetrated across two co-owned properties. (Details of the case are set out below.)
The case is of particular interest and use for mortgage lenders and their advisers, as well as all asset recovery professionals, because it confirms that, in many cases, a fraudster who has given false information or forged documents, will not then be able to rely on the illegality defence so as to void a transaction and leave co-owner victims and/or mortgage lenders with no legal recourse.
The fraud in Victus Estates was perpetrated by one co-owner (the seller) in cahoots with the buyer, without the knowledge of the other co-owners of the properties.
The best fraud risk management strategies help to avoid that scenario via a combination of both proactive steps (for example, putting into place systems, processes, identity and document checks etc when customer data is collected and stored – often as part of the on-boarding/account-opening process); and reactive mitigation and recovery action (where fraud is suspected and/or detected).
In particular, to mitigate against the risk of mortgage fraud involving co-owners, the following practical pointers may assist:
The best advice is for lenders and their professional advisers to combine a stringent human-led KYC approach with suitable digital safeguards.
The fraud in Victus Estates was perpetrated by one co-owner (the seller) in cahoots with the buyer, without the knowledge of the other co-owners of the properties. The fraudulent scheme was designed to take the co-owners’ equity away from them and to leave the banks with no security.
In relation to the fraud against the co-owners, the judge in the County Court had held (and the matter was not in issue in the High Court appeal) that the fraud did not succeed by virtue of the fact that the seller had forged the co-owners’ signatures on the relevant transfer documents. The innocent co-owners therefore retained their half shares in the respective properties.
The High Court appeal was concerned with the questions:
(1) were the fraudulent transactions a sham and of no effect, or were they nevertheless effective to transfer the fraudster-owner’s beneficial interests in the property to the buyer? and
(2) in the latter scenario, in circumstances where the buyer then charges the properties to a lender, should the court hold that equitable interest remains with the seller so that the buyer does not acquire any interest and is incapable of charging any interest in favour of the lender?
In accordance with the Supreme Court’s decision in Patel v Mirza , the High Court exercised its discretion to ensure that the defendants could not rely on the illegality defence to render the fraudulent transactions void for all purposes.
The court found that, in accordance with the case of Grondona v Stoffel & Co , fraudulent transactions will not always amount to a sham and property rights (including equitable rights) can pass under an illegal contract. Here, the transfers (TR1 forms) were in a form which satisfied the statutory definition of a conveyance  and so, despite the fraud, section 63 of the Law of Property Act 1925 applied with the effect that the fraudster-owner’s beneficial interests in the properties passed to the buyer. It followed that the banks therefore had an equitable charge over those interests.
Walker Morris’ cross-disciplinary Financial Services specialists are experienced and expert in dealing with all aspects of mortgage fraud prevention and cure, ranging from the provision of staff training and the preparation of policies and procedures to prevent, mitigate and respond to fraud; to litigation, tracing, recovery and enforcement action when the worst does happen.
If you would like to discuss any of the issues covered in this article, if you are interested in Walker Morris fraud prevention training, or if you would like any further advice or assistance in connection with mortgage or bank account fraud, please do not hesitate to contact Richard Sandford.
  EWHC 2411 (Ch)
  UKSC 42
  UKSC 42
 Law of Property Act 1925 s. 205