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Financial Crimes Enforcement Network
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Financial Crimes Enforcement Network,Commercial Real Estate. Financing Fraud, Suspicious Activity Reports by Depository Institutions. January 1 2007 December 31 2010,March 2011,Commercial Real Estate Financing Fraud i. Financial Crimes Enforcement Network,Table of Contents. Executive Summary 1,Background 4,Methodology 6,Research and Analysis 7.
Suspicious Activity Examples 14,Next Steps 25,Appendix 26. Commercial Real Estate Financing Fraud ii,Financial Crimes Enforcement Network. Executive Summary, The number of depository institution Suspicious Activity Report SAR filings reporting. commercial real estate financing fraud hereinafter CRE fraud almost tripled. between 2007 and 2010 reflecting the challenges facing the commercial real estate. hereinafter CRE sector and the ever present opportunity for fraud In contrast to. mortgage loan fraud SARs predominantly submitted by large financial institutions. filings reporting potential CRE fraud came from institutions of varying sizes and. locations indicating that CRE fraud may affect a broad range of reporting institutions. CRE loans totaling an estimated 1 4 trillion will reach the end of their terms between. 2010 and 2014 1 and some analysts anticipate a delinquency rate of 10 percent on these. loans 2 Given the size and potential future volatility of the CRE market SARs may. play an important role in providing law enforcement and regulators with intelligence. on techniques trends and patterns of suspected illicit activity within this market. Of the filers who reported dollar amounts involved the greatest concentration 45. percent reported suspected fraud in transactions valued under 1 million 3 Nine. percent of transactions were valued at 10 million or more Approximately half of. CRE SARs named subjects located in five states Georgia Illinois Florida New York. and California, Filers noted several different kinds of suspicious activity related to CRE fraud The. top four reported categories in order were False Documents Misappropriation of. Funds Collusion Bank Insider and False Statements, Reference in this report to any specific commercial product service process or enterprise or the.
use of any commercial product or enterprise trade firm or corporation name is for the information. and convenience of the public and does not constitute endorsement or recommendation by the. Financial Crimes Enforcement Network With respect to materials generated by entities outside of. the Financial Crimes Enforcement Network permission to use these materials if necessary must. be obtained from the original source The Financial Crimes Enforcement Network assumes no. responsibility for the content or operation of other Web sites. 1 Congressional Oversight Panel February Oversight Report Commercial Real Estate Losses and the Risk to. Financial Stability Page 2 10 February 2010 at http cop senate gov documents cop 021110 report pdf. 2 Business Wire Fitch U S CMBS Newsletter New Issuance Leads to Lower Delinquency Forecast. of 10 7 January 2011 at http www businesswire com news home 20110107005551 en Fitch U S. CMBS Newsletter Issuance Leads Delinquency, 3 Statistics in this paragraph derive from the total average of SAR fillings from 2007 through 2010. Commercial Real Estate Financing Fraud 1,Financial Crimes Enforcement Network. False documents included fraudulent rent rolls related to multi family residential. and commercial property tax documentation identification documents appraisals. and forged signatures 4 Filers reported subjects misappropriating funds in several. ways including diverting the proceeds of commercial loans to fund personal expenses. or to support businesses facing insolvency, Examples of fraud or illicit activity reported in SARs and described in this report. include a case where a bank insider s suspicious client base allegedly moved with. him from employer to employer 5 Also described are examples where customers. reportedly sold CRE collateral without disclosure to the lender pledged the same. collateral for multiple purposes and hid or conveyed collateral to associates. FinCEN will use this study and other studies like it to inform future rulemaking and. to provide information that may be of value to financial institutions Additionally. studies like this one further our ongoing efforts to support law enforcement in. allocating resources and the investigation and prosecution of individual criminal. cases Making public this type of study helps banks and other financial institutions. spot and report illicit activity to FinCEN that is useful to state local and federal law. enforcement and regulators, 4 Rent rolls are documents that state how much rent the property owners receive per unit Filers. reported numerous instances in which borrowers submitted inflated rent rolls to enhance their loan. application, 5 For this study the term bank insider refers to persons employed by the lending institution In most.
instances bank insiders were commercial lending officers. Commercial Real Estate Financing Fraud 2,Financial Crimes Enforcement Network. This report provides an overview of suspected fraud involving CRE financing as. reported in a sample of Bank Secrecy Act BSA SAR filings 6 It is the latest in a series. of publications issued by FinCEN regarding fraud and other illicit activities in the. residential and CRE markets 7, The primary purpose of this report is to describe CRE fraud trends and patterns and. to provide examples of suspicious activities within the context of the CRE market. FinCEN is publishing this report to aid in the detection and prevention of fraud and. to help financial institutions identify the kinds of activities that may warrant SAR. filings related to CRE fraud, 6 For purposes of this report SAR refers only to the Suspicious Activity Report filed by depository. institutions TD F 90 22 47 Most CRE related fraud occurs in the context of commercial loan. transactions and related activities conducted by banks and other insured depository institutions As. such this report does not address other types of SARs e g those filed by casinos money services. businesses and the securities and futures industry. 7 FinCEN reports on mortgage fraud may be viewed on the FinCEN website at. http www fincen gov mortgagefraud html,Commercial Real Estate Financing Fraud 3. Financial Crimes Enforcement Network,Background, The scope of the CRE market and the financing structure that underpins it are.
extensive The CRE market includes brokerage and lending services for the industrial. retail office hotel and multi family housing sectors SARs related to the CRE. market involve a variety of transactions and activities related to the purchase and. development of raw land as well as the acquisition development construction and. improvement of commercial buildings Developers and other CRE related businesses. use commercial mortgages construction loans multi family mortgages and land. loans to facilitate CRE activities Borrowers also use CRE holdings as collateral for. other types of commercial loans, As commercial rents and occupancy rates have fallen and commercial loan defaults. have risen over the last several years concern has grown about the CRE market and. its potential effects on the nation s economy 8 In 2006 the FDIC published two reports. foreshadowing problems within the CRE market 9 One report indicated that insured. institutions with CRE holdings in excess of 300 percent of total capital were beyond. levels seen before the CRE crisis of the late 1980s 10 The reports also signaled concerns. over lax underwriting and the potential that unforeseen events could lower rents. reduce property values and limit refinancing options 11. 8 Lingling Wei CMBS Savior Developers Diversified Deal Is Nearer Wall Street Journal 4 November. 2009 Page C14 Michael Murray More than 1000 Banks Face CRE Loan Exposure MBA NewsLink. at http www mortgagebankers org tools FullStory aspx ArticleId 11356. 9 FDIC Economic Conditions and Emerging Risks in Banking 9 May 2006 at. http www fdic gov deposit insurance risk 2006 02 Economic 2006 02 html FDIC the Office of. the Comptroller of the Currency and the Board of Governors of the Federal Reserve System Joint. Guidance Concentration in CRE Lending Sound Risk Management Practices December 2006 at. http www fdic gov regulations laws federal 2006 06notice1212 html. 10 FDIC Economic Conditions and Emerging Risks in Banking 9 May 2006 at. http www fdic gov deposit insurance risk 2006 02 Economic 2006 02 html. 11 See footnote 9,Commercial Real Estate Financing Fraud 4. Financial Crimes Enforcement Network, Of key concern is the estimated 1 4 trillion in CRE loans that will reach the end of. their terms between 2010 and 2014 12 As the loans become due analysts anticipate a. delinquency rate of 10 percent because some borrowers will be unable to refinance. their loans due either to stricter underwriting standards or because the loan amounts. outstanding exceed property values 13 The valuation of the overall CRE market. has fallen approximately 42 percent since it peaked in October 2007 with future. fluctuation in CRE prices expected 14, 12 Congressional Oversight Panel February Oversight Report Commercial Real Estate Losses and the Risk to. Financial Stability Page 2 10 February 2010 at http cop senate gov documents cop 021110 report pdf. 13 Business Wire Fitch U S CMBS Newsletter New Issuance Leads to Lower Delinquency Forecast. of 10 7 January 2011 at http www businesswire com news home 20110107005551 en Fitch U S. CMBS Newsletter Issuance Leads Delinquency, 14 Moody s Investors Service Moody s REAL Commercial Property Price Indices December 2010 at.
http www realindices com pdf CPPI 1210 pdf,Commercial Real Estate Financing Fraud 5. Financial Crimes Enforcement Network,Methodology, This assessment describes suspicious activities relating to the financing of commercial. property as reported in depository institution SARs filed from January 1 2007. through December 31 2010 15, FinCEN analysts identified 1 596 depository institution SARs filed from 2007 through. 2009 involving potential CRE fraud As the SAR form does not include a checkbox for. CRE fraud analysts identified these potentially relevant reports by searching narratives. of SARs with the Mortgage Loan Fraud or Commercial Loan Fraud characterizations. of suspicious activity for terms related to CRE properties financing or uses 16 Analysts. then randomly sampled 310 of the 1 596 SARs for review 17 Of the sampled SARs 231 75. percent clearly involved CRE fraud 18 Those 231 CRE fraud SARs were the basis for the. 2007 2009 findings The review showed that filers most commonly reported suspected. CRE fraud using variations of the terms commercial real estate commercial. property commercial mortgage and construction loan in SAR narratives 19. To provide the most recent data available FinCEN duplicated this process by analyzing. CRE fraud SAR filings from January 1 2010 through December 31 2010 Using this. methodology analysts identified 531 potential CRE fraud SARs filed in 2010 Analysts. then generated a random sample of 244 SAR filings of which 186 76 percent were. CRE related The 186 relevant CRE fraud SARs were the basis for the 2010 findings. Analysts then identified trends patterns and examples of activities described in the. relevant sample SARs FinCEN also researched government reports and information. reported in the media about the CRE industry and legal proceedings related to. subjects of the relevant sample SARs, 15 Analysts used the SAR filing date rather than the suspicious activity dates to compile the pool of SAR. data for this report Therefore some activities described herein predate the January 1 2007 filing date. 16 Initial analysis of BSA data containing CRE related terms indicated that SARs with other. characterizations of suspicious activity were generally not related to the financing of CRE. 17 The sample size of 310 SARs represents a 95 percent confidence level with 5 percent variance. 18 Another 78 SARs 25 percent were either inapplicable or of indeterminable relevance. 19 Filers used a variety of terms to describe CRE fraud related activities which posed a challenge. for analysts trying to identify this type of activity within the BSA database Analysts looked for. numerous descriptive terms to identify potential CRE fraud including commercial property. commercial real estate and commercial mortgage in conjunction with construction develop. land industrial multi family retail and office,Commercial Real Estate Financing Fraud 6.
Financial Crimes Enforcement Network,Research and Analysis. Research and Analysis,The following,followingsection. sectionprovides an overview,provides of CRE,an overview of fraud. CRE SARsfraud during,SARs calendar years 2007years. during calendar, through 2010 It covers annual filing totals reported activities and transaction amounts.
2007 through 2010 It covers annual filing totals reported activities and transaction. locations of subjects and regulators of filing institutions 20. amounts locations of subjects and regulators of filing institutions 20. SAR Filings,SAR Filings, CRE fraud SAR filings generally increased from 2007 through 2009 before peaking in the first. quarter SARAlthough,of 2010 filings generally increased. filings decreased from 2007,throughout through,2010 2009 before. they remained peaking,at levels higher in,than priorquarter. years of 2010 Although filings decreased throughout 2010 they remained. at levels higher than prior years,Commercial Real Estate Fraud.
SAR Filings by Quarter,January 2007 December 2010, Increases in SAR filings are not necessarily indicative of an overall increase in CRE fraud. activities over the same period because financial institutions may not detect and report suspected. CRE fraud until a later date 21 The volume of SAR filings in any given period does not directly. correlate to the number,20 The statistics or timing. were based of suspected,upon data fraudulent,from samples incidents. generated for yearsin2007 2009,that period,and 2010 The 2007. 2009 statistics are based upon 231 CRE related sample SARs and the 2010 statistics are based on 186. TheCRE related sample,statistics were based SARs,upon data See Methodology.
from samples Section, generated for years 2007 2009 and 2010 The 2007 2009 statistics are based upon 231 CRE. related sample SARs and the 2010 statistics are based on 186 CRE related sample SARs See Methodology Section. For an example of suspicious activity similar to CRE fraud explaining the lag between suspicious activity dates and filing dates see FinCEN s. March 2009 report Mortgage Loan Fraud Connections with Other Financial Crime An Evaluation of Suspicious Activity Reports Filed by. Commercial Real Estate Financing Fraud 7,Commercial Real Estate Fraud Page 8 of 36. Financial Crimes Enforcement Network, Increases in SAR filings are not necessarily indicative of an overall increase in CRE. fraud activities over the same period because financial institutions may not detect. and report suspected CRE fraud until a later date 21 The volume of SAR filings in. any given period does not directly correlate to the number or timing of suspected. fraudulent incidents in that period, Research revealed 73 percent of the 2010 SARs originated from different financial. institutions indicating that CRE fraud affects a wide range of institutions from. varying sizes and locations Likewise between 2007 and 2009 71 percent of SARs. originated from different financial institutions For all these years the top filer. submitted 6 percent of SARs This filing pattern differs from the results learned in. recent mortgage loan fraud studies showing that a relatively small number of filers. submitted the majority of SARs 22, 21 For an example of suspicious activity similar to CRE fraud explaining the lag between suspicious.
activity dates and filing dates see FinCEN s March 2009 report Mortgage Loan Fraud Connections with. Other Financial Crime An Evaluation of Suspicious Activity Reports Filed by Money Services Businesses. Securities and Futures Firms Insurance Companies and Casinos at. http www fincen gov news room rp files mortgage fraud pdf. 22 FinCEN Filing Trends in Mortgage Loan Fraud February 2009 at. http www fincen gov news room nr pdf 20090225a pdf. Commercial Real Estate Financing Fraud 8,Financial Crimes Enforcement Network. Time Range of Filings, The following table represents the length of time between when the suspicious. activity ended and when the filer submitted the SAR 23 Filers submitted over 40. percent of SARs within 30 days of the suspicious activity end date. Commercial Real Estate Fraud SARs,Time Elapsed Suspicious Activity End Date. to Reporting Date24,January 2007 December 2010,Time Elapsed 2007 2009 SARs25 2010 SARs. No End Date Reported 6 5,30 days 46 44,30 60 days 13 13.
60 90 days 8 7,90 180 days 6 11,180 365 days 9 7,1 2 years 8 5. 2 years 5 8,Characterizations of Suspicious Activity. The SAR form does not have a separate checkbox for CRE fraud Filers differentiated. CRE fraud from residential mortgage loan fraud by selecting the Commercial Loan. Fraud characterization checkbox of suspicious activity categories in almost all CRE. fraud SARs As noted in the Methodology section all data derived from term searches. of SARs characterized as Commercial Loan Fraud and Mortgage Loan Fraud These. are 2 of the 21 checkboxes in Field 35 on the SAR form 26 Filers also used a variety. of narrative terms to describe suspected CRE fraud Some of these terms and the. activities they describe are the same as those used to describe residential mortgage. 23 The suspicious activity end date reported in Part III Field 33 of the SAR form TD F 90 22 47 might. not always be the detection date of the suspicious activity See When Does the 30 Day Time Period. in which to File a Suspicious Activity Report Begin The SAR Activity Review Trends Tips Issues. Issue 10 May 2006 at http www fincen gov news room rp files sar tti 10 pdf. 24 Data derived from Part IV Field 50 TD F 90 22 47. 25 Due to rounding percentages do not total 100 percent. 26 See FinCEN Suspicious Activity Report at http www fincen gov forms files f9022 47 sar di pdf. Commercial Real Estate Financing Fraud 9,Financial Crimes Enforcement Network. fraud However other terms identified in the SARs such as commercial real estate. commercial property commercial mortgage and construction loan are more. specific to the commercial real estate market, Filers may check more than one box for characterization of suspicious activity in a single. SAR In addition to Commercial Loan Fraud or Mortgage Loan Fraud filers checked. False Statement as an additional activity in 30 percent of 2010 SARs Similarly FinCEN. mortgage loan fraud reports indicate that filers consistently select False Statement in. approximately one quarter of SARs involving suspected Mortgage Loan Fraud 27. In 2010 the selection of Other almost doubled in percentage points from the 2007. 2009 data Filers commonly used Other to provide additional description about. activities including misappropriation of funds appraisal fraud forgery and. conveyance of collateral,SAR Narratives, Analysis of the 2010 SAR narratives revealed similar activity types reported in.
preceding years with minor shifts in reporting levels The number of SAR narratives. describing the use of false documentation increased nine percentage points over the. previous period The increase was especially apparent in the reporting of forged. signatures Narrative analysis also revealed a significant increase in non disclosure of. information to lenders which impacted banks lending decisions. Commercial Real Estate Fraud SARs,Top Five Activities Described in Narratives. January 2007 December 2010 28,Activity 2007 2009 SARs 2010 SARs. False Documents 42 51,Misappropriation of Funds 29 27. Bank Insider Collusion 19 13,False Statements 15 10. Non Disclosure to Lender 9 19, 27 The report included 15 697 mortgage loan fraud SARs of which 4 144 indicated the additional.
activity of False Statement 26 percent See FinCEN Mortgage Loan Fraud Update February 2010 at. http www fincen gov news room rp files MLF Update pdf. 28 Some filers reported multiple types of suspicious activities within one SAR narrative Therefore. percentages exceed 100 percent,Commercial Real Estate Financing Fraud 10. Financial Crimes Enforcement Network, Filers most commonly cited misrepresentations involving documentation false. statements misappropriation of funds and collusion involving bank insiders as. suspicious activities Filers reported the following suspicious activities. False Documents, Filers most commonly cited suspected misrepresentations involving. documentation Common misrepresentations included fraudulent rent rolls. tax documentation financial statements identification documents appraisals. and forged signatures Filers suspected that bank insiders sometimes colluded. by providing false documents to loan approval committees approving loan. disbursements after reviewing fraudulent invoices and submitting incomplete. paperwork Additional activities included false claims of property ownership. Misappropriation of Funds, Filers suspected misappropriation of funds in nearly 30 percent of CRE fraud. SARs for the entire review period indicating diversion of funds for personal. profit or support to businesses facing insolvency Filers discovered the. suspicious activity after learning that borrowers filed for bankruptcy or after. finding undisclosed liens on collateral fraudulent disbursement documentation. and or inspecting sites with little or no construction work performed Roughly. half the SARs describing misappropriation of funds were for transactions under. Bank Insider Collusion, Filers described possible collusion with borrowers and real estate insiders In.
these situations a bank insider s role in collusion was essential to facilitating. the loan approval process and funds disbursement In most suspected. instances of bank insider collusion filers referenced false documents and the. misappropriation of funds,Non Disclosure to Lender. Filers reported that borrowers did not disclose key information to lenders. thereby affecting lending decisions A common example was non disclosure of. debt such as a mortgage on financial statements Many filers stated they would. have denied the loan applications if they had known of the debts Additionally. borrowers did not inform lenders when they sold or transferred properties or. engaged in side agreements with property buyers,Commercial Real Estate Financing Fraud 11. Financial Crimes Enforcement Network,Suspicious Activity Amounts. Although some filers reported the entire transaction amount in the suspicious activity. amount field Part III Field 34 of the SAR others reported only the portion of the. amount they considered suspicious For instance in the case of participation loans. some filers reported the amount of the whole loan while other filers reported only. their portion of the participation amount 29, Analysis of all CRE fraud SARs showed that the largest class of suspicious. transactions roughly 45 percent were under one million dollars. Commercial Real Estate Fraud SARs,Transaction Amount Range.
January 2007 December 2010,SAR Amount in Millions 2007 2009 SARs30 2010 SARs. 29 FinCEN understands a participation loan to mean a collaboration among lenders to share interest. or ownership in a loan or a package of loans where one of the participants called the lead bank or. lead lender services the loan Participation loans make it possible for large borrowers to obtain bank. financing when the amount involved exceeds the lending limit of an individual bank. 30 Due to rounding percentages do not total 100 percent.

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