October 28, 2013
 
FALSE BIDDERS TARGET HOTEL OWNER
 
The U.S. Federal Bureau of Investigation (FBI) has arrested a Virginia-based hotel real estate broker on charges of defrauding the owner of Pittsburgh’s Wyndham Grand Hotel out of US $2.5 million, the Pittsburgh Post-Gazette reports. According to an FBI affidavit, Robert Timothy Koger, using the name Rick Thompson, initially contacted hotel owner Kiran Patel, claiming to have an agreement to acquire the hotel’s promissory note with intention of acquiring the hotel. The affidavit alleges that Patel agreed to pay “Thompson” US $2.5 million to agree to withdraw his bid on the note and to buy the hotel from Patel for US $87.5 million. The FBI alleges that Koger then posed as John Stern, a rival bidder for the hotel. After monitoring phone conversations and transactions between Patel and both bidders, the FBI determined that Koger was behind both bids. Most of Patel’s US $2.5 million payment was transferred to an offshore account and hasn’t been recovered.
 
Lessons Learned
This story culminates with a fraudster being charged with mail fraud and highlights the effective cooperation between his intended victim and the FBI. But it also is an opportunity for auditors to consider the broader context of real estate fraud and how it can be detected early, if not prevented outright.
  • What is real estate fraud? There are many different types of real estate fraud, but the two types that auditors should be most aware of are mortgage fraud and title fraud. Very often, the term mortgage fraud is used when title fraud is meant, but the two are very different.
  • Mortgage fraud occurs when someone intentionally provides inaccurate, fraudulent, or incomplete information to a lender in order to get a mortgage that he or she might not otherwise be granted. This could include anything from claiming to have a higher income than the individual actually has to providing falsified proof of identification or a falsified appraisal of the property. Identity theft also may be involved, whereby a criminal also obtains a fraudulent mortgage in a property owner’s name without that person’s knowledge.
  • Title fraud, directly relevant to this case, occurs when a criminal steals the identity of an individual property owner and then uses it to steal the title of the property through false documentation, including that which is filed at the land registry office. The fraudster then could sell the property or obtain a mortgage in the owner’s name. While properties that are mortgage-free and unencumbered tend to be more vulnerable to this type of fraud, in the variation shown in this case, the alleged fraudster used false identities to attempt to extort money from a legitimate property owner who was distracted by his primary goal of a financial rescue and recovery of a hotel that was in some difficult circumstances. If the alleged fraudster had been successful, he would have secured several million dollars under false pretenses, taken the cash, and left the owner on the hook for all future obligations and payments.
  • Title insurance (there are equivalent mechanisms in place in various European and North American jurisdictions) is an effective protection against this type of fraud. As well as protecting against title fraud, it also guards a new owner from existing liens against a property’s title (e.g., unpaid debts from utilities and mortgages, and unpaid property taxes), encroachment issues (e.g., a structure on a property needs to be removed because it is on a neighbor’s property), and errors in surveys and public records.
  • Protection of personal data and guarding against identity theft are other keys to preventing real estate fraud. Property owners always should be prepared to ask questions and verify information from third parties, whenever possible. As well as protecting their own information, investors and property owners should consider the use of trusted parties, such as real estate brokerages, but also ensure that these parties are taking appropriate security measures on their behalf. Measures to look for/ask about include: ensuring that files containing personal information are not left unsecured within accessible offices; using shredders capable of securely destroying documents; not allowing sensitive information such as credit reports to be released prior to consent from a client; and enabling clients to opt out of secondary uses of their personal information, such as for marketing.
  • Real estate fraud is not restricted to strangers. This kind of fraud also is perpetrated by spouses and business partners. A spouse may mortgage a property for his or her own benefit by using an accomplice to impersonate the other spouse. Fraud also can occur through breach of an undertaking, where the lawyer or notary fails to pay off and obtain a discharge of a mortgage, instead absconding with the funds that had been intended to be used to pay an existing mortgage.
 

 


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