Mortgage Loan Fraud and Money Laundering

With Comments on FinCEN and South Dakota Trusts

by David J. Willis J.D., LL.M.


Mortgage loan fraud, on the decline after the Great Recession due to more intense monitoring by lenders and regulators, is again on the rise, this time with an electronic emphasis. Great American Title warns its Texas customers:


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. More on federal law and enforcement below.

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 HSBC in 2020 issued in response to an investigation by BuzzFeed and the International Consortium of Investigative Journalists: “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.” In other words, algorithms now screen 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.

Federal Law Applicable to Mortgage Crimes

Numerous federal criminal statutes apply in this area:

Federal CrimeLawPenalty
False statement on a HUD loan18 U.S.C. § 10121 year, fine, or both
False statement to obtain credit18 U.S.C. § 10142 years, $5,000, or both
Mail/wire fraud18 U.S.C. §§ 1341, 13435 years, $1,000, or both
Concealment18 U.S.C. § 10015 years, $10,000, or both
Conspiracy18 U.S.C. § 3715 years, $10,000, or both
Racketeering18 U.S.C. §196120 years, $25,000, or both
Money laundering18 U.S.C. § 195620 years, $25,000, or both
Aggravated identity theft18 U.S.C. § 1028 20 years, $25,000, or both

In addition to these crime-specific statutes, the government has a plethora of 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.

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 general civil statutes can be brought to bear, notably statutory fraud and deceptive trade practices. More specifically, the Texas Residential Mortgage Fraud states: “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 the case with the median-priced family home, then the offense is a first-degree felony punishable by 5 to 99 years in prison and a fine of $10,000.

Also, 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:




The borrower must sign this notice. However, “failure 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.” Tex. Fin. Code Sec. 343.105(d). So the loan is valid without the notice, even though fraud may be present.

The Residential Mortgage Fraud Act combines sections of the Finance Code, the Government Code, and the Penal Code to address loan fraud. The Act also created a Residential Mortgage Fraud Task Force under the direction of the attorney general, which includes 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 abolished as a formal entity in 2017, these agencies continue to share information and resources.

Examples of Loan Fraud

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. 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 this duty. Compliance results in immunity for the reporting individual. Failure to comply or failure to act could be a violation with criminal consequences.

Examples of fraudulent schemes include flipping based on false loan applications and inflated appraisals (this category does not include buying property at a bargain price and then selling it for fair market value for a profit, which is entirely legal); 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; concealing other indebtedness of the borrower; the 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), 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. Putting it another way: 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 openly disdainful. 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. Say nothing and immediately contact a white-collar crime 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.

Temptations of the Investment Business

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 overnight millionaires. Intense competition in the real estate investment business can lead impatient and unethical investors to look for profits in ways that cross the line.

Investors should avoid schemes that sound too good to be true, either to the investor or homeowner. Programs that ask a homeowner to sign incomprehensible documents with weird names often involve fraud. 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.

Giving documents creative names does not help 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 tip-offs that one is 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 was more common before the Great Recession, but it is becoming fashionable again. Here’s how it works:

1. A crooked investor generally looks for two categories of homes, those owned by distressed sellers who are behind on payments and new-home builders who have unsold inventory that is draining them because of the interest carry.

2. The perpetrator recruits straw purchasers/borrowers who are willing to allow their names and credit to be used in exchange for an up-front, off-the-closing statement kickback (often $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, never obtained a buyer’s representation agreement from, and never gave an IABS to.

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 inflates the value of the property, often by $100,000 or more.

6. The amount of the loan applied for exceeds 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 grossly 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 have left with profits in hand.

Looking closely, it is clear that the whole transaction has been concocted so that the co-conspirators can generate large up-front fees for themselves, something that 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.

Email and Wire Fraud

This is a growing area of potential risk and liability for title companies, escrow agents, lawyers, and even real estate investors who do business by email and wire transfer. The FBI reports that about one billion dollars of closing funds are the object of criminal intent annually, meaning that criminals attempted to divert or actually succeeded in diverting this amount from pending closings. Consider the magnitude and audacity of this.

Wire fraud may have unobtrusive beginnings; often there is an apparently harmless email (ostensibly from the seller) to the escrow agent, giving notice of a last-minute change in wire instructions and providing new bank account information. The closing is then funded and money wired to the new bank is immediately moved elsewhere, which means the money is likely gone forever. Any emailed instructions concerning the electronic transmission of funds, particularly changes in those instructions, should be viewed skeptically.

Knowledgeable escrow agents (or anyone handling and wiring funds, including law offices and their staff) are now refusing to accept such email changes in funding instructions, requiring either a telephone confirmation or even demanding that the seller come in person to the office and confirm the change.

It all begins with hacking into a victim’s email, called an “email account compromise” (EAC) by the FBI. Title companies, banks, and even real estate lawyers are under continual attack. Many real estate law firms receive attempted EACs each day. Some of them are laughably foreign in origin and syntax; but others appear legitimate, at least on the surface. They provide names of seller and buyer, a property address, and a file number. The email asks that you review attached closing documents. Sometimes the email comes from a sort-of familiar address with just one or two letters slightly altered. And, of course, it’s always urgent. Once you click on a malign attachment like this the trouble begins.

Title companies and law firms are occasionally berated by outraged parties who claim that the process of double-confirmation and verification is holding up a closing or even killing the deal. This is unfortunate but inevitable. Sensible lawyers and title companies will not allow themselves to be liable for lost closing proceeds because a party resists precautionary instructions or foolishly disregards risk. The best practice for title companies and closing attorneys is to have a written and posted policy that wire instructions are to be provided at the inception of the transaction, preferably from the client in person and in his or her own handwriting. Such instructions should not be subject to any change whatsoever without a personal visit by that party (with sufficient ID) to the office. Wire instructions should be verified by phone before funding. Staff should be thoroughly trained in these and other authentication procedures.

Broad Potential Liability for Fraud

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 to both criminal prosecutors and civil plaintiffs. 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—which in terms of the legal consequences 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.

Prosecutions are not limited to fraud and conspiracy charges. There are related prosecutions for mail and wire fraud, identity theft, and money laundering. An example of the latter is the 2019 mortgage fraud conviction of Paul Manafort, who formed a shell company to buy an expensive Manhattan condominium for the purpose of evading taxes on foreign-sourced money. 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 false, since the truth was that he was renting the property on Airbnb. Manafort’s classic error? Greed. Not satisfied with merely transforming 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.”

Fraud Prevention for the Average Real Estate Investor

State and federal conspiracy laws cast a wide net. Accordingly, the most prudent approach is to keep one’s distance (and plenty of it) from suspicious parties or 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. 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.


What is FinCEN?

The Financial Crimes Enforcement Network (“FinCEN”) resides within the U.S. Treasury Department and is responsible for enforcement and rule-making in the area of money laundering. This has direct links to the real estate business since buying and selling property is probably the best single means of legitimizing ill-gotten gains other than using the services of a casino to transform questionable cash into clean cash—and it’s a lot less risky.

Bank Reporting

FinCEN imposes due diligence obligations on financial institutions, sometimes referred to as the “know your customer” or KYC rules. These have expanded over the years, both in response to the Great Recession and as part of the worldwide effort to clamp down on international tax evasion. The “beneficial ownership rule,” effective in 2018, obligates banks to inquire into and report on who actually owns or controls the entities they deal with, specifically persons who (a) own 25% or more of the equity of any entity that is borrowing money, and/or (b) have significant control or management responsibility with respect to the entity.

Bank disclosure requirements can impact any asset protection strategy that seeks to achieve anonymity (or even a low profile) for investors acquiring investment properties. This is true even though the borrower may not be intending to conceal anything from the bank, but only from the public at large. And, of course, any attempt to avoid or evade these disclosures rules is a federal crime.

A prime example of this is the requirement by most banks that investment properties be taken into their personal name of the investor, not into the investor’s LLC. This is an over-reaction to the disclosure rules but still occurs about 90% of the time. Real estate investors must then transfer the new property after closing into their LLC in order to achieve a minimum level of asset protection.

FinCEN and Geographic Targeting Orders (GTOs)

FinCEN is granted authority under the Bank Secrecy Act to issue geographic targeting orders as to specific areas of the country where money laundering is common in the luxury residential real estate market. Past GTOs have applied to the Miami area, Manhattan, Los Angeles, and even San Antonio. They are supposed to be short-term in duration (up to 180 days) but can be easily extended.

The focus of GTOs is on transactions involving a registered entity such as a corporation or LLC (the target here is shell companies formed offshore) that purchase properties for over $3 million without a bank loan using cash or check (GTOs do not currently include transactions accomplished solely by wire transfer, even if the wire transfer originates from a bank in The Cayman Islands or some other tax haven). A title company involved in such a transaction must complete and submit FinCEN form 8300 which requires disclosure of the identity of the purchaser and any beneficial owner controlling 25% or more of the equity involved. The title company must also obtain valid government-issued identification from the parties. Not surprisingly, about a third of transactions targeted by GTOs involve persons or entities that were previously the subject of suspicious activity reports.

The reality is that FinCEN’s efforts have fallen significantly short of capturing all cash purchases of U.S. luxury properties by shell companies, particularly as offshore purchasers have begun to shift into commercial properties in smaller cities and towns to escape the geographical limits of GTOs. The local car wash or strip center could be owned (indirectly) by an African dictator, and the locals would never know.
The are other loopholes. As mentioned, wire transfer transactions are not subject to GTOs. Also, what if a title company is not utilized as an escrow agent to close the transaction? There is no FinCEN form 8300 generated. FinCEN regulation or not, the United States is still considered to be the land of opportunity when it comes to laundering cash using real estate.

The Corporate Transparency Act and New FinCEN Rules

The Corporate Transparency Act of 2019 is a federal anti-money laundering/tax evasion law that is being implemented by FinCEN, the agency charged with rule-making in this area. FinCEN has realized that geographical targeting orders are simply not doing the job, so it is becoming more aggressive. Beginning in 2022, and without any geographical limits except the borders of the United States, FinCEN will require all new registered entities (LLCs and corporations, both domestic and foreign) to disclose personal information on the “beneficial owners” of the entity, defined as any individual who directly or indirectly exercises substantial control over an entity or owns at least a 25% interest. Previously this was only a third-party reporting requirement for banks. The new rule requires self-reporting by everyone who forms a corporation or LLC in any U.S. state, which is a huge change.

FinCEN will maintain an in-house database for this information which supposedly will not be public but will still be available to law enforcement agencies including federal and state prosecutors.

In its Notice of Proposed Rulemaking issued in December of 2021, FinCEN states:

Money laundering vulnerabilities exist throughout the United States real estate market. These vulnerabilities are not limited to any particular sector. Although in recent years FinCEN has focused its information collection efforts on non-financed purchases of residential real estate by shell companies, FinCEN believes that other areas of the real estate market, such as commercial real estate and certain real estate purchases by natural persons, may merit regulatory coverage. For this rulemaking process, FinCEN is considering how best to focus its regulatory attention on [both] residential and commercial real estate transactions.

The stated intent is to crack down on anonymous shell companies used by money launderers, terrorists, and criminals to invest in real estate. In spite of this alleged narrow focus, these FinCEN rules will have a broad impact on both real estate investment and entity formation, especially attempts be real estate investors to create anonymity. The new reporting and enforcement regime significantly expands federal power into the area of state-chartered entities, giving the entity-formation process a distinct federal component. This is unprecedented.

Additionally, the trend is clearly in the direction of expanding reporting requirements beyond banks and title companies which are already have compliance staff dedicated to meeting regulatory requirements. It is probable going forward that FinCEN will attempt to require lawyers, real estate agents, and even small businesses to file reports of “suspicious” activity. What will now be suspicious? Cash, primarily, as well as any entity that does not publicly list all of its true stakeholders.

Part of the NPRM process is to invite public comment. FinCEN “seeks comment on the approach that would most effectively address money laundering concerns and minimize burdens for persons involved in non-financed [cash] real estate transactions. FinCEN also solicits comments on whether and how to assign a reporting requirement to any or all of the following entities: title insurance companies, title or escrow companies, real estate agents or brokers, real estate attorneys or law firms, settlement or closing agents, as well as other entities . . . required to collect information, maintain records, and report information regarding non-financed purchases of real estate. . . . .” Expanding the list of persons required to report is not a good trend, if for no other reason than “failure to act” can be a federal crime. Any criminal attorney will tell you that charges of being a co-conspirator come next. Another likely effect of this trend will be the near criminalization of cash transactions in real estate, particularly if the cash originates abroad.

The Pandora Papers and South Dakota Trusts

Release of the Pandora Papers in 2021 reveals that politicians, celebrities, and billionaires are as determined as ever to move cash to places where it is not taxed and where their identities can be concealed. Aggressive as the new FinCEN rules are, individual states (in particular, Delaware, South Dakota, Wyoming, and Nevada) are determined to push back. South Dakota is now probably the leader, having brought billions in cash deposits into the state in recent years. There are several reasons: first, there are no income or death taxes in South Dakota, a prerequisite for a state to become an asset protection haven; second, there is only a two-year “lookback” (statute of limitations) for fraudulent conveyances rather than the usual four or more; third, the rule against perpetuities has been abolished and trusts established in South Dakota can be perpetual; fourth, trusts in South Dakota can be self-settled, which means that someone can be both a trustor (the same as a grantor) and a beneficiary. In South Dakota you can put your money into a trust and direct its management for your own benefit. In Texas, which adheres to the common law doctrine of merger when it comes to trusts, this arrangement would not be considered a trust at all. It would be viewed as the equivalent of fee-simple ownership.

Last and most revolutionary of all, South Dakota declares that a trust beneficial interest is not personal property. Why is this important? It means that a judgment creditor cannot seize or garnish a South Dakota trust beneficial interest to satisfy a judgment. This is a revolutionary departure from common law.

In Texas a trust beneficial interest is no different from any other item of non-exempt personal property, so it can easily be taken by a creditor to satisfy a judgment. Texas may be the best state for asset protection overall, considering the favorable LLC laws and the long list of items exempt from execution on a judgment, but this favorability does not extend to trust law. Compared to states like South Dakota and Nevada, Texas is in the dark ages when it comes to trusts.

The bottom line in all this stepped-up federal regulation is the desire to collect more tax revenue for the U.S. treasury. This is opposed by certain states that see themselves as home to a billion-dollar international industry. This money is going to flow somewhere, no doubt about it. The trust industry in Bismark ask “Why not here?”


Information in this article is provided for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. 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 as we do not give tax advice. Reading this article does not make you our client. This firm does not represent you unless and until it is retained and expressly agrees in writing to do so.

Copyright © 2022 by David J. Willis.  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,