Valuing the Proceeds of Crime in Mortgage Fraud

Of every 10,000 applications for a mortgage, as many as twenty seven are fraudulent1. Such frauds are more likely to be discovered during a period of economic decline, such as now. And when they are, you can bet that the prosecution will seek a confiscation order. So, the problem of how to value benefit in a case of mortgage fraud is of obvious importance.

In order to explore the relevant principles, this article will suggest a number of ways to approach the problem intuitively, without reference to the legislation. Next, it will look at the relevant law and the correct approach as found in R v Waya [2010] EWCA Crim 4122. Finally, the article will suggest that R v Waya may cast doubt on the correctness of those cases concerned with the confiscation of wages earned from employment secured by a false representation (e.g. R v Carter and Others [2006] EWCA 416).

A Typical Mortgage Fraud

A typical mortgage fraud may be committed in the following way. The mortgage applicant ('the defendant') misrepresents his income on the application form. Acting on that misrepresentation the lender transfers mortgage monies of (say) £600,000 to the defendant's solicitor. The solicitor then arranges the purchase of a house costing £800,000. The purchase is financed using the tainted mortgage funds (in this case 75% of the purchase price) and an untainted deposit of £200,000 provided by the defendant (25% of the purchase price). Thereafter, the defendant keeps to his mortgage payments (which include capital payments using untainted funds). The value of the house increases. The fraud is discovered, and the defendant is convicted. At the time of the confiscation hearing, the value of the property has increased to £1.6 million (an increase of 100%). The defendant's equity in the property is now £1.2 million (reflecting the increase in the price of the house and capital payments made on the mortgage).

Valuing Benefit: Some Possibilities

Approaching the problem from first principles, given that the purpose of confiscation is to deprive criminals of their criminal benefit, what should be the value of the benefit? There are five possibilities:

The mortgage funds: £600,000. The rationale for this is that the offence was fraudulently obtaining £600,000. That is the defendant's benefit. What he did with the funds thereafter is irrelevant. The value of the house at the time of the purchase: £800,000. Although the defendant only obtained the mortgage funds, the reality is that the mortgage funds enabled the defendant to buy the house: 'but for' the mortgage funds he could not have bought the house. His benefit should therefore be the value of the house. The value of the house at the time of the confiscation hearing: £1.6 million. The defendant obtained the...