Coin Dealer Hung Out On A Shingle For Home Loan Fraud?
Recently one of our consultants was asked to opine on the subject of Customer Due Diligence concerning a financial transaction that was, well, ultimately fraudulent.
As experienced investigators and advisors on financial crimes and Due Diligence matters, this was certainly well within our wheelhouse. The issue was to render an expert opinion on Due Diligence in a civil case between a party who invested in real estate as the private financier of mortgages and a firm that sells precious metals, coins and bullion.
The backdrop information on this case is as follows: A group of individuals (who we will call the Fraudster Gang) would identify target properties and set up sham purchase and sale transactions, masquerading as buyer and the seller. In the course of these sham transactions, the individuals would enlist the services of real estate professionals, including realtors, loan brokers, escrow companies and/or appraisers. This fakery was rooted in use of forged documents to support the real property “ownership” and thereby enable sale of properties that the Fraudster Gang did not actually own.
The idea is for the fraudsters to induce non-bank lenders to finance bogus purchases of these properties and convert the loan proceeds. In addition to using false documents to support the transactions, the members of the fraudster gang also served in the roles to fraudulently notarize documents to provide an air of authenticity to the documents. (We are of course shocked to learn that real estate fraud such as these continue to this very day)
In any event the Fraudster Gang, garnered their proceeds from the sale of these properties and/or the conversion of loan proceeds and promptly had the funds wired to accounts that they held in several major US banking institutions. The funds were then promptly wired out to purchase gold coins, bullion and precious stones incredibly before this was found out.
Investors who backed the mortgages are now attempting to make the seller of gold coins, bullion and precious stones liable for their loss on these transactions.
In cursory review of the facts as we know them, there are a couple of glaring issues that stand out. First and foremost, the lenders, which we can only assume are professional private investors as defined by FINRA and/or the SEC, apparently did not perform sufficient due diligence on the parties to the transactions prior to lending of funds and closing of the real estate transactions. They did not do their homework prior to placing their funds at risk to determine true ownership of the properties prior to the sale. And now the wounded lenders are seeking relief from the coin dealer who sold coins purchased with what ultimately are tainted funds.
Their argument seems to be designed around a premise that the dealer of gold coins, bullion and precious stones is somehow culpable in their loss, and therefore has some liability here. Unfortunately, we are at a lost to see how the issues related to the fraudsters conversion of ill-gotten monies from the fraudulent real estate transaction(s) and conversion to an alternate product of value justifies the plaintiff’s claim of relief for their loss on the real estate loan.
It is important to note that even though the dealers in precious metals and stones may have AML Program requirements, based on the size, type of firm and amount of revenues derived from sale of gold coins, bullion and precious stones. If so, the core elements of such an AML Program would include requirements to:
- Develop and implement policies, procedures, and internal controls, based on the dealer’s assessment of the money laundering and terrorist financing risk associated with its business, that are reasonably designed to enable the dealer to comply with the applicable requirements of the Bank Secrecy Act and to prevent the dealer from being used for money laundering or terrorist financing.
- Designate a compliance officer who is responsible for ensuring that the program is implemented effectively (this means one or more persons A compliance officer who is responsible for ensuring that the program is implemented effectively).
- Provide ongoing training of appropriate persons concerning their responsibilities under the program.
- Provide Independent Testing to Monitor and Maintain an Adequate AML Compliance Program.
Additionally, this would include the proper reporting of larger cash-based transactions on Form 8300, reporting of Suspicious Activity Reports and implementation of proper “Know Your Customer” to allow these dealers to know their customers through their Customer Identification Program or CIP processes.
However, we contend that to expect the dealer of gold coins, bullion and precious stones to be able to identify the proceeds used to fund the purchase their products as being tainted or somehow questionable at the time of the transactions is highly unlikely if not virtually impossible, at the time of the transaction, based on what commonly passes for KYC/CIP related to these purchases.
Conversely, our view here should also not be construed as a blanket statement that dealers of coins, bullion and precious stones have no need to do a better job of Knowing Their Customers. Due Diligence and Risk Management processes must remain fluid in the sense that enough effort must to be marshaled to sufficiently mitigate the risks of bad guys gaming their business.
There are some valuable take-aways here for all parties. Due Diligence is more than simply verifying that someone is who they claim to be based on a cursory glance of their ID and/or provided documents. There must be more to this than blindly following the compliance checklist that someone told us to use. The private lenders in this example have a responsibility to protect their investment monies and validate that the parties of the transaction are who they claim to be. A painful economic loss on their part should punctuate this for all of us involved in real estate transactions.
Real estate is often but falsely considered as “low-risk” for money laundering exposure. The truth is that real estate transactions are readily gamed by fraudsters and can be used both as instruments of the fraud or can also be used as vehicles to convert bad money into “good”. The industry has to do a better job of understanding the risks associated with financial crime, and they cannot assume that all is well because the “documents looked OK”. Certainly in this example no bank (or coin and precious metals dealer) would have been able to identify whether the funds used to purchase gold coins were tainted as proceeds of the preceding real estate fraud at the time of the transaction to purchase coins, bullion or precious gemstones.
If you would like assistance in implementing better business practices to really Know Your Customers, Vendors, Suppliers or Third Parties, or to get a bit more comfort about the source of funds associated with a customer higher value transaction, maybe Financial Examinations & Evaluations, Inc. can help.