Mortgages account for 18% of all fraud

Mortgage fraud accounted for 18% of all reported fraud last year, according to research from accountants and business advisers BDO.

In its Fraudtrack survey, BDO says the amount lost by businesses and the public sector to larger frauds increased by 76% during the recession last year to more than £2bn, with both the number and size of frauds increasing dramatically.

The firm said the frauds typically work through a large loan being taken out on an overvalued property, with a buyer in collusion with a valuer and a lawyer.

BDO has predicted the 76% rise is a precursor of things to come. It warned annual reported corporate fraud could be as high as £5bn in a couple of years as more fraud is discovered both through management being focused by the recession on questioning costs, and because tighter cashflow and credit makes fraud harder to hide.

Simon P. Bevan, head of fraud at BDO, says 2009 saw the steepest increase since the report began seven years ago, with the average value of each fraud now over £5m compared to £1.8m in 2003.

He says: "Based on my experience of the two previous recessions, I expect that reported fraud will treble over the next two years. There has always been a lag effect, with reported fraud continuing to rise for at least a couple of years after businesses start to come out of the recession.

"A large part of this will be a tidal wave of fraudulent borrowing that has only just started to appear, particularly through use of over-valued properties as security for loans, while the property market was booming."

Many of these frauds are yet to be recognised by the banks, which still have them classified as non-performing loans, Bevan adds.

"It is only when specialist recovery departments start thorough investigations and eventually litigating against alleged dishonest borrowers and their complicit advisers that the true nature of these potentially horrendous fraud losses will come to light.

"It will take many years for the excesses of the past years to work through the system," he explains.