Loan Fraud and Money Laundering
by David J. Willis J.D., LL.M.
Topics Covered
Part One: Mortgage Loan Fraud
Part Two: Money Laundering in U.S. Real Estate
PART ONE: MORTAGE LOAN FRAUD
Mortgage loan fraud (including wire fraud), on the decline after the Great Recession due to elevated monitoring by lenders and regulators, is again on the rise. Scammers seem to be everywhere in our electronic lives, proving that wherever money flows there will always be those who seek to divert some of that flow to them. Great American Title specifically warns its customers against transmitting confidential financial information by email:
EMAILS ATTEMPTING TO INDUCE FRAUDULENT WIRE TRANSFERS ARE COMMON AND MAY APPEAR TO COME FROM A TRUSTED SOURCE. YOU SHOULD NEVER TRANSMIT NONPUBLIC PERSONAL INFORMATION, SUCH AS CREDIT OR DEBIT CARD NUMBERS OR BANK ACCOUNT OR ROUTING NUMBERS, SOCIAL SECURITY NUMBERS, DRIVER’S LICENSE NUMBERS BY EMAIL OR OTHER UNSECURED ELECTRONIC COMMUNICATION.
Title companies are very cautious now about accepting any change to a seller’s wiring instructions, requiring at least an express verbal phone call with the principal or, in some cases, an in-person meeting in order to effect any such change.
Federal Investigation of Loan Fraud
At the federal level, the FBI investigates and prosecutes criminal loan fraud, particularly where mortgage industry professionals and insiders are involved. The FBI uses two categories: fraud for housing, which occurs when a single borrower misrepresents assets or liabilities in order to purchase a home, and fraud for profit, which occurs when mortgage professionals defraud a lender in order to collect fees.
For the most part, the FBI works on the basis of suspicious activity reports (SARs), of which thousands are filed each year, mostly by banks. Banks are not allowed to reveal or even discuss the SARs they file; they do, however, make occasional general statements about them such as this one by issued by lender HSBC to the press in 2020:
The goal of any financial crime compliance programme is to detect and prevent financial crime. One way we do that is through transaction monitoring and sanctions screening. Each month, we screen over 689 million transactions across 236 million accounts for signs of money laundering and financial crime. In addition, we screen approximately 131 million customer records and 40 million transactions monthly for sanctions exposures. During 2019, we filed almost 50,000 suspicious activity reports to law enforcement and regulatory authorities where we identified potential financial crime. . . . In August 2019, we became the first bank to introduce a system that will automatically screen all our trade finance transactions for potential signs of financial crime.
AI now screens all bank transactions, large and small, for indicators of suspicious activity. When these are detected, SARs are automatically generated and sent to the federal government.
EXAMPLES OF LOAN FRAUD
Mortgage Occupancy Fraud
Politicians and their allies are under special scrutiny. Trump’s civil prosecution by the attorney general of New York is an obvious example, even though Deutsche Bank suffered no loss and declared they would gladly do business with Trump again. Now the same attorney general is under investigation for a loan fraud offense. Other potential defendants include Senator Adam Schiff and federal reserve governor Lisa Cook. The alleged offense in these cases is mortgage occupancy fraud which involves deceiving the lender as to one’s intention to occupy a property as one’s principal residence or listing more than one principal residence. The potential benefits to the borrower are four: a lower interest rate, a lower down payment, lower property taxes, and lower insurance premiums on an owner-occupied property.
Instead of being led by the FBI, high-profile mortgage occupancy fraud cases under the Trump administration are being investigated by the Federal Housing Finance Agency (FHFA), a small department that oversees and regulates Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System.
Money Laundering
The 2019 mortgage fraud conviction of Paul Manafort is an interesting case. Manafort formed a shell company to buy an expensive Manhattan condominium for the purpose of evading taxes on foreign-sourced money—money laundering, in other words. The purchase was successful. However, Manafort later applied for a cash-out refinance and stated on his loan application that his daughter lived in the condo. This was provably false since Manafort was publicly renting the property on Airbnb. Manafort’s classic error? Greed. Not satisfied with successfully laundering untaxed income into apparently legitimate loan proceeds, Manafort also wanted to gain future income from the property. This runs afoul of the adage You can make money being a bull, and you can make money being a bear, but you can’t make money being a pig.
Plethora of Schemes
In addition to the above, there are a variety of ways to illegally game the system. These include flipping based on falsified loan applications and inflated appraisals; concealing other indebtedness of the borrower; nominee loans using the name and credit of straw buyers; equity skimming in “subject to” transactions; phony second liens to contractors who never perform any work; “silent seconds” that involve concealing the loan of a down payment to a borrower when the down payment was supposed to come from the borrower’s own funds; use of fictitious or stolen identities; and “stop foreclosure” schemes that mislead homeowners into paying fees and signing the property over to a crooked investor. Common to many of these schemes are inflated appraisals that create phantom equity, kickbacks that violate RESPA (payments not shown on the closing statement as they should be), and falsified loan applications.
One can be reasonably sure that loan fraud has occurred when it is clear that a lender would not have made a particular loan if it had known all the facts, and the lender was prevented from knowing the facts by means of misrepresentation and concealment. Inducing a lender to make a loan based on false pretenses is mortgage loan fraud.
Many loan and real estate transactions, while not plainly illegal, fall into a gray area. The popularity of real estate investment seminars has added complex schemes and huge numbers of ambitious people to the field. The FBI attitude toward these schemes (and to real estate investors generally) is disdain. One official was heard mocking real estate entrepreneurs as entremanures. So if the FBI comes calling, even legitimate real estate investors should assume hostile intent and immediately contact a white-collar criminal defense attorney.
One can be sympathetic toward the FBI’s attitude since lenders are not the only victims of loan fraud. It is easy to feel antipathy toward banks, but the damage goes well behind the lender. Most home loans are either securitized or sold, meaning that others in the chain of ownership (including pension funds and the like) may be subject to loss due to fraud. Also, many loans are sold to Fannie Mae, Freddie Mac, and Ginnie Mae which are quasi-public entities. If there is a loss connected with these loans, it is the taxpayer who ultimately gets the bill. Finally, if loan fraud results in a foreclosure, property values may fall so everyone in the neighborhood suffers. Mortgage loan fraud is not a victimless crime.
Real Estate Investors
A visit to the courthouse on foreclosure day is akin to watching sharks being fed at the aquarium. Notwithstanding the popularity of investor seminars, it is impossible for all these fledgling investors to become wealthy overnight. Intense competition in the real estate investment business can lead impatient investors to look for profits in ways that cross the line.
Real estate investors should avoid schemes that sound too good to be true, either to the investor or to the homeowner. If a deal is just too complicated to understand, it may well involve fraud. If a transaction involves several people signing interests back and forth to one another and not recording anything, it is probably fraud. Payments made off the closing statement are almost certainly fraud.
Transactions involving incomprehensible documents with weird names may involve fraud. Giving legal documents creative and novel names in order to conceal their true effect does not help. Why? Because courts typically look to substance over form. Judges and juries may not understand the technicalities of mortgage finance but they intuitively understand fraud. They know a hustler when they see one. Here are some other indications that one may be dealing with a con artist:
“This is a great investment! You’ll make great money with no effort.”
“There’s no need to talk to a lawyer. These are all standard forms.”
“Just sign this blank loan application here. We’ll fill in all the paperwork.”
“We put the property in your name. You’re totally secure.”
“We pay all the costs and you get half the profit! Easy money!”
“We’ll pay you a bonus at closing. You’ll have cash in your pocket and instant equity.”
“We’re going to manage and sell the property and then split all the profits with you.”
“God has sent us to give you abundant wealth.”
The Straw Buyer Scheme
The straw buyer scenario, common before the 2008 recession, is reappearing. It works this way:
1. A crooked investor generally looks for two categories of homes, those owned by distressed sellers who are behind on payments as well as new-home builders who have unsold inventory that is draining them because of the interest carry.
2. The perpetrator recruits straw purchaser-borrowers who are willing to allow their names and credit to be used in exchange for an up-front, off-the-closing statement kickback ($10,000 or more) and then buys the property in their names. The note, deed of trust, and other loan documents (including an affidavit of intent to occupy) are all signed by the straw purchasers at a title company closing that appears legitimate.
3. A real estate broker accomplice may be involved to make this easier and eventually collect a commission from a “client” the broker never met and by whom he was never formally engaged.
4. A mortgage broker accomplice submits a fraudulent loan application and supporting documents that show the straw buyer as having significantly higher income than is actually the case.
5. An appraiser accomplice substantially inflates the value of the property.
6. The loan amount may exceed the true market value of the house.
7. A title company may be complicit in this process in order to facilitate a smooth closing with no questions.
8. All the various accomplices and co-conspirators get paid large fees at closing, either on the closing statement for vague and unspecified charges, or off the closing statement altogether.
9. The house is placed on the market but does not sell because its value is so inflated.
10. The lender forecloses, taking a loss (part of which is passed on to HUD or a mortgage insurer) and ruining the credit of the straw purchaser. By then, the con artists are long gone with profits in hand.
Looking closely, it is clear that the whole transaction was concocted in order to generate large up-front fees for the conspirators. In any real estate investment, big frontloaded fees for the promoters, facilitators, and others should always set off alarm bells.
Interestingly, straw buyers often allege that they were wronged. They even file lawsuits. It is difficult to feel sorry for them, however, since they willingly signed blank documents and gladly received an under-the-table payoff at closing. They cooperated in the fraud and benefited from it.
Before the recession, sub-prime lenders were complicit in this process. Eager to make loans and collect fees, many did not supervise the underwriting process as thoroughly as they should.
APPLICABLE LAW
Federal Law Applicable to Mortgage Crimes
There are so many types fraud and conspiracy statutes that prosecutors have little trouble finding one that can be used against someone considered to be suspicious. Numerous federal criminal statutes apply in this area, including but not limited to:
| Federal Crime | Law | Penalty |
|---|---|---|
| False statement on a HUD loan | 18 U.S.C. § 1012 | 1 year, fine, or both |
| False statement to obtain credit | 18 U.S.C. § 1014 | 2 years, $5,000, or both |
| Mail/wire fraud | 18 U.S.C. §§ 1341, 1343 | 5 years, $1,000, or both |
| Concealment | 18 U.S.C. § 1001 | 5 years, $10,000, or both |
| Conspiracy | 18 U.S.C. § 371 | 5 years, $10,000, or both |
| Racketeering | 18 U.S.C. §1961 | 20 years, $25,000, or both |
| Money laundering | 18 U.S.C. § 1956 | 20 years, $25,000, or both |
| Aggravated identity theft | 18 U.S.C. § 1028 | 20 years, $25,000, or both |
In addition to these crime-specific statutes, the government has many additional powers under the USA Patriot Act, the Trading with the Enemy Act, the International Emergency Economic Powers Act (authorizing the president to regulate international commerce after declaring a national emergency), and more. There is also the Office of Foreign Assets Control (OFAC, located in the treasury department) which administers and enforces economic and trade sanctions. There is no shortage of federal laws or enforcement bodies to address loan fraud and money laundering, whether domestic or international.
Federal Enforcement
What about all those SARs, reputedly filed at the rate of 10,000 per day? As a practical matter, banks make the required reports and then go ahead and do the transactions anyway. In the end, only a tiny fraction of SARs are investigated by the government.
Globally, in spite of regulatory enforcement, fraud and money laundering are on a trillion-dollar tear. The truth is that the international financial system sits so solidly on a pedestal of illicit money that it would likely collapse without it.
Texas Law and Enforcement
At the state level, numerous civil statutes can be brought to bear including statutory fraud and deceptive trade practices. However, the broadest enforcement tool is the Residential Mortgage Fraud Act which combines sections of the Finance Code, the Government Code, and the Penal Code. According to the Act, “A person commits an offense if he intentionally or knowingly makes a material false or misleading written statement to obtain property or credit, including a mortgage loan” (Penal Code Section 32.32(b)). If the value of the property or amount of the loan exceeds $200,000, which is certainly the case for the average home, then the offense is a first-degree felony punishable by 5 to 99 years in prison and a fine of $10,000.
Section 402.031 of the Texas Government Code (part of the Residential Mortgage Fraud Act) defines fraud as “any act that constitutes a violation of a penal law and is part of an attempt or scheme to defraud any person.” Moreover, this section imposes an affirmative duty to report fraudulent activity to “an authorized governmental agency” if “a person determines or reasonably suspects that fraudulent activity has been committed or is about to be committed.” Loan officers, escrow officers, realtors, and attorneys all have a duty to report loan fraud. Compliance results in immunity for the reporting individual. Failure to comply or failure to act could be a violation with civil and criminal consequences.
The Act also created a Residential Mortgage Fraud Task Force under the direction of the attorney general, which included a range of state officials—the consumer credit commissioner, the banking commissioner, the credit union commissioner, the commissioner of insurance, the savings and mortgage lending commissioner, the presiding officer of the Texas Real Estate Commission, and the presiding officer of the Texas Appraiser Licensing and Certification Board. Although the Task Force was eventually abolished, these agencies continue to informally share information and resources.
Texas Finance Code
Texas Finance Code Section 343.105 requires that lenders and mortgage brokers give the following notice in 14-point type to residential borrowers at closing:
WARNING: INTENTIONALLY OR KNOWINGLY MAKING A MATERIALLY FALSE OR MISLEADING WRITTEN STATEMENT TO OBTAIN PROPERTY OR CREDIT, INCLUDING A MORTGAGE LOAN, IS A VIOLATION OF SECTION 32.32, TEXAS PENAL CODE, AND DEPENDING ON THE AMOUNT OF THE LOAN OR VALUE OF THE PROPERTY, IS PUNISHABLE BY IMPRISONMENT FOR A TERM OF 2 YEARS TO 99 YEARS AND FINE NOT TO EXCEED $10,000.
I/WE, THE UNDERSIGNED HOME LOAN APPLICANT(S), REPRESENT THAT I/WE HAVE RECEIVED, READ, AND UNDERSTAND THIS NOTICE OF PENALTIES FOR MAKING A MATERIALLY FALSE OR MISLEADING WRITTEN STATEMENT TO OBTAIN A HOME LOAN.
I/WE REPRESENT THAT ALL STATEMENTS AND REPRESENTATIONS CONTAINED IN MY/OUR WRITTEN HOME LOAN APPLICATION, INCLUDING STATEMENTS OR REPRESENTATIONS REGARDING MY/OUR IDENTITY, EMPLOYMENT, ANNUAL INCOME, AND INTENT TO OCCUPY THE RESIDENTIAL REAL PROPERTY SECURED BY THE HOME LOAN, ARE TRUE AND CORRECT AS OF THE DATE OF LOAN CLOSING.
The borrower must sign this notice. However, “[f]ailure of a lender, mortgage banker, or licensed mortgage broker to provide [this notice] to each applicant for a home loan does not affect the validity of or enforceability of the home loan by any holder of the loan” (Fin. Code Sec. 343.105d). Thus the loan is valid without the notice even though fraud may be present.
Civil and Criminal Conspiracy
Mortgage loan fraud seldom occurs as the result of an isolated actor. More than one perpetrator is usually involved. As a result, conspiracy (fraud’s sister crime) is the catch-all allegation available in both civil and criminal cases. Even if it cannot be plausibly shown that a real estate investor directly engaged in unlawful or wrongful acts, he or she may nonetheless be forced to defend against conspiracy charges. In terms of the legal consequences, these can be just as serious.
The elements of civil conspiracy are: (1) two or more persons (2) who have an unlawful or wrongful objective they intend to accomplish, (3) who have a meeting of the minds on the objective or course of action to be pursued, (4) followed by the occurrence of one or more overt unlawful or wrongful acts, (5) which result in damages as a proximate result. The king of conspiracy statutes is RICO (Title 18 of the U.S. Code) which targets a pattern of wrongdoing. Even an email can connect you to an underlying conspiracy. RICO is available not just for criminal prosecutions but to civil plaintiffs as well.
Using conspiracy charges, any person with actual knowledge (not just the primary wrongdoers) of the fraud can be indicted for a felony criminal offense, all the way down to the notary. The required culpable mental intent need not be proven directly but can be inferred from the circumstances, a relatively light burden for prosecutors.
LOOKING FORWARD
The Proposed Enablers Act
The Enablers Act was a bipartisan measure introduced in the U.S. House as a response to the 2021 release of the Pandora Papers. It did not pass this last time around, but supporters of radical transparency are likely to bring it up again in a future Congress. The proposed law would impose know your customer (KYC) obligations and other compliance requirements on gatekeepers including agents, brokers, investment advisors, attorneys, CPAs, art and antiquities dealers, and many others—all of whom would effectively be made unofficial agents of federal law enforcement. If passed, the Enablers Act would forever change the life of real estate investors and professionals.
Fraud Prevention for Real Estate Investors
The most prudent approach for real estate investors is to keep one’s distance (and plenty of it) from suspicious parties and transactions. Much of fraud prevention is common sense. If you suspect fraud in a transaction, trust your instincts. Immediately remove yourself from involvement and report the activity. Always read documents thoroughly before signing them. Do not sign blank documents. Most basic of all, check out the people you’re dealing with—this is part of due diligence. Be alert for irregularities. Follow instructions from title companies and closing attorneys. Ask questions about the fundamentals of the deal itself. If the answers are overly complex or outright ridiculous, consider walking away.
PART TWO: MONEY LAUNDERING IN U.S. REAL ESTATE
The Pandora Papers
Release of the Pandora Papers in 2021 (11.9 million documents published by the International Consortium of Investigative Journalists) exposed an international financial system awash in dirty money. Prime ministers, dictators, celebrities, arms dealers, oligarchs, and billionaires remain as determined as ever to move cash to places where the origin of funds is not questioned, taxes are low or non-existent, and one’s identity can be effectively concealed.
The Pandora Papers came five years after a previous and similar report, the Pulitzer-prize winning Panama Papers. These, however, exposed the files of just one law firm in Panama. The Pandora Papers were a much bigger story, encompassing 14 offshore providers, thousands of beneficial owners of shell companies and trusts, and spanning the period from 1996 through 2020. The finance ministers of Pakistan and Brazil were (and perhaps still are) siphoning money out of their countries and parking it offshore, often in the United States.
Acquiring American real estate, along with purchase of art and antiquities, are the preferred destinations for much of this international cash. Baker McKenzie, the largest law firm in the U.S., has been instrumental in creating vehicles (shell companies and trusts) to move this money. In 2016, the New York Times claimed that nearly half of the luxury real estate in the city was purchased by anonymous shell companies, many of which are used by money launderers, terrorists, and criminals to conceal profits by investing in U.S. real estate. That percentage is almost certainly higher today.
China and the Cartels
In August of 2025, the Wall Street Journal reported that according to the Treasury Department “Chinese money launderers appear to have moved some $312 billion in illicit transactions through U.S. banks and other financial institutions in recent years to aid Mexican drug cartels and other criminals. This growing marketplace connecting dirty cash from Mexico’s drug cartels to Chinese expats looking to get their savings out of China is drawing scrutiny from the Trump administration, which wants banks to help crack down. . . . Chinese money-laundering networks are no the dominant player in an illicit money-services industry that criminal groups like the Jalisco New Generation and Sinaloa cartels use to move profits from drug sales. . . .” The goal of these Chinese networks is to get cash out of China and into U.S. dollars in defiance of government export controls. The effort to convert yuan into dollars is likely a significant motivator for Chinese companies shipping fentanyl precursors into Mexico.
Crypto Currency
A discussion of money laundering would not be complete without mentioning the role of crypto currency. Chainalysis, a crypto consulting and compliance firm, estimates that nearly $9 billion dollars was laundered in 2024 using crypto. In the case of the Spartan Protocol hack in 2021, hackers found a vulnerability in the sparta code (a flawed liquidity-share calculation in the smart contract code) and utilized it to steal $30 million in sparta tokens. These tokens were then moved into etherium and bitcoin and finally into Tornado Cash, a process known as chain hopping.
Money laundered in this manner is then ready to invest in real estate, where no rules regulate how consideration is tendered. If a seller of property is willing to accept it, then crypto is as good as cash.
In the world of “DeFi” (decentralized, blockchain-based finance) there is no central institution (a bank or regulatory authority) to monitor transactions for fraud; and once money is moved, whether for legitimate or illegitimate purposes, there is no reversing the process even if the funds can be traced through a multi-layered laundering process involving international shell companies. In most such cases, as a practical matter, the money is simply gone.
FinCEN
FinCEN, an agency within the Treasury Department, is the primary investigator and law enforcer in this area. FinCEN has declared that money-laundering is a matter of national security and seeks to build resilience against what it considers to be an evolving threat.
While money laundering is undoubtedly both socially expensive and morally reprehensible, FinCEN’s declaration that these practices are weapons that threaten our national security may be over the top. Some suspect that the extreme language used by FinCEN may be an attempt to advance an extreme transparency agenda that seeks federalization of real estate transactions and state-based entity formations.
Geographical Targeting Orders (GTOs)
It has been a matter of great frustration to FinCEN that the United States is considered the land of opportunity when it comes to laundering cash using real estate. For several years, FinCEN has issued geographic targeting orders applying elevated scrutiny and reporting requirement in specific major urban areas of the country where money laundering is common in luxury real estate (New York and Miami for instance).
Overall, the results of GTOs have been disappointing. Wire transfer transactions are not subject to GTOs, and there are other loopholes. For instance, what if a title company is not utilized as an escrow agent to close the transaction? No FinCEN form 8300 is generated or filed. The result is that GTOs have not have the hoped-for effect mostly because cash-laundering transactions migrated to commercial deals and venues outside of the stated geographical parameters.
Suspicious Activity Reports (SARs)
Algorithms now screen all bank transactions, large and small, for suspicious activity. The FBI receives required suspicious activity reports (SARs) by the tens of thousands from U.S. banks. In 2020, HSBC Bank stated: “The goal of any financial crime compliance programme is to detect and prevent financial crime. One way we do that is through transaction monitoring and sanctions screening. Each month, we screen over 689 million transactions across 236 million accounts for signs of money laundering and financial crime. . . . During 2019, we filed almost 50,000 suspicious activity reports to law enforcement and regulatory authorities where we identified potential financial crime. . . . In August 2019, we became the first bank to introduce a system that will automatically screen all our trade finance transactions for potential signs of financial crime.”
BSA/AML Reporting
FinCEN requires banks and title companies to file currency transaction reports (CTRs) as well as suspicious activity reports in any transaction that lacks economic sense or has no apparent lawful business purpose; where a purchase or sale generates little to no revenue or is conducted without regard to high fees or penalties; involves the purchase of real estate without regard for the property’s condition, location, assessed value, or sale price; involves funding that far exceeds the purchaser’s wealth, comes from an unknown origin, or is derived from unconnected individuals or companies; is conducted in an irregular manner; or includes a request by the participants to alter records (pertaining to assessed value, for instance). Banks and title companies have staff dedicated to compliance and reporting, often referred to as BSA/AML (Bank Secrecy Act/Anti-Money Laundering) compliance officers.
Customer Due Diligence Rule
The long-standing Customer Due Diligence Rule (CDD rule, 81 FR 29398) states that covered financial institutions (such as banks and title companies) must have customer identification programs (CIPs) to verify the identity of customers; identify the beneficial owners of companies opening accounts; understand the nature and purpose of customer relationships to develop customer risk profiles; conduct ongoing monitoring to identify and report suspicious transactions; and, on a risk basis, maintain and update customer information.
Corporate Transparency Act (CTA)
The Corporate Transparency Act (31 U.S.C. Sec. 5336) was passed in 2021 as Congress’ response to worldwide financial corruption. It required that FinCEN, a division of the Treasury Department, write and implement rules and regulations to enforce the CTA. The declared goal was “to combat, to the broadest extent possible, the proliferation of anonymous shell companies that facilitate the flow and sheltering of illicit money in the United States.” The CTA required that FinCEN, a division of the Treasury Department, write and implement appropriate rules and regulations to enforce the legislation.
DISCLAIMER
Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. No attorney-client relationship is created by the offering of this article. This firm does not represent you unless and until it is expressly retained in writing to do so. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well.
Copyright © 2025 by David J. Willis. All rights reserved worldwide. Reproduction or re-use of any of this material for any purpose without prior written permission and full attribution is strictly prohibited. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, www.LoneStarLandLaw.com.