Focus Could banks survive with land fraud?

Land fraud and mortgage fraud over the past years have grown significantly in Sri Lanka threatening the stability of local banks. Thus it’s time to take immediate action as the money lent by banks on negative equity or forged deeds belong to the depositors.

I refer to the informative article written by senior journalist Anthony David on ' Real estate changes hands via unreal deeds' which appeared in the Sunday Times on February 26. The article stated that 1000 complaints have been lodged by land owners to the CID during a very short period. How many of those lands are mortgaged to banks? How many will be mortgaged pending the inquiries? Can the banks recover loans with negative equity?

Discussing this issue with legal officers of several banks, I found that the default rate is increasing due to land fraud. The fraudsters who mortgage land with forged illegal documents disappear with their ill-gotten money.

When a borrower is delinquent in making timely mortgage payments to the bank or other financial institution banks / financial institutions take legal action to sell the property; only at this stage would the true owner know of the plight of his land title and the existing mortgage.

Mortgage fraud flourished in the United States in an environment of delinquent lending standards and lax regulations for documents. One study placed the losses resulting from fraud on mortgage loans made between 2005 and 2007 at $ 750 billion. There is a high default rate due to the high risk involved in mortgaging lands with the present pervasiveness of land fraud in Sri Lanka. Are we heading towards a similar situation?

Lenders today are faced with high risks; they are exposed to massive losses through the mortgage industry. The traditional mortgage model involved a bank originating a loan to the borrower/ homeowner by obtaining a title report from a lawyer relating to the land. The land registry search and a title report from a lawyer was a promising path at one time to determine the validity of the security offered by mortgagors or land owners.

Today the secure path has got alarmingly awry. The banks cannot rely on a title report, they need to be extremely vigilant to identify and verify those who claim that they are the sellers, mortgagors, Power of Attorney holders and buyers before dispersing money on mortgages.

Recently Hatton National Bank had a conference to discuss the issue of credit default and the risk involved due to fraudulent transactions. The issues were raised regarding the detection of fraud. Land fraud is difficult to detect as the deeds and mortgage bonds are executed and registered with a complex process known to Notaries and Registering Officials. The process is operated with a set of ethical rules under the Notaries Ordinance of 1907 and the Registration of Documents Ordinance of 1927 which is outdated.

The land registry today is reduced to a ' recording station' of legal and illegal documents attested by white collar criminals. The report from a lawyer there- fore may indicate a perfect chain of title to a land whose recording may have been manipulated by a fraudster, while the real owner's title remains defaced or hidden The legal officers of the banks are helpless; they have expressed their concern.

The Notaries Ordinance of 1907 which provided the rules for notaries served a different era and is unsuitable to meet the challenges of the 21st century. The provisions provide ample room for fraudulent transactions such as notaries needing to identify their clients, cash [ purchase price] being payable before transactions are signed notwithstanding the provisions of the Money Laundering Act. Ironically provision is also available under Section 33 of the Notaries Ordinance for all deeds executed to be valid even if all the rules prescribed in the ordinance are not followed. Amidst the lax regulations there are only two strict legal requirements to process a deed: They are (1) a valid description of the land and situation and ( 2) the signature and seal of a notary on the paper on which the land is described. Provisions of this nature needless to say alienate the professional rights to fraudsters as anyone could execute deeds with such flimsy provisions. Recently the land registry had introduced guiding rules to identify notaries; however this would not be sufficient to prevent fraud.

Recent methods used by fraudsters

1) Land owner's rights are subject to claims from all predecessors in the title. There is no prescriptive period for such claims. The CID will entertain complaints even after 10 years from any of the previous owners. Police enquiries for complaints for frivolous forgery will encourage borrowers dishonouring their loan installments. The banks will be helpless as they cannot sell such land to recover the amounts lent since the properties will not be marketable.

2) Deeds of Declaration written illegally to create new chains of title. In spite of the fact that the Prescription Ordinance does not permit parties to stake title to land by executing deeds to stabilize ownership, fraudsters register title to the land of others, with deeds of Declaration with the connivance of the professionals. The deeds which are illegal are registered and chains of title are prepared with the execution of further fraudulent deeds in favour of ' straw' buyers ( making a purchase on behalf of another person).

This method gives a great advantage to fraudsters to create new chains of title to lands while the land owners remain ignorant. Once the money is received from the bank they disappear with the money leaving the owner and the bank in a predicament.

3) Last wills need to be proved in court by way of Testamentary cases. Fraudsters register a false deed forging the deceased owner's signature conveying the land to another fraudster and the land is mortgaged to a bank. When the Testamentary case is completed which takes a considerable period of time the heirs find that the land is sold and mortgaged to a bank. The banks cannot recover their money and the legal battle begins.

4) Lands are transferred with the use of forged Powers of Attorney often when owners are residing overseas. The banks accept Powers of Attorney to transact mortgage bonds which is a high risk. Some nations have introduced laws where the owners need to be present to execute documents relating to bank loans.

5) Fraudsters institute partition actions and obtain valid and indefeasible title to lands owned by others. Banks are unable to recover the money when owners file action in court.

6) Notaries number two deeds with the same number conniving with the land owners selling the land twice to two parties. One deed is registered and a bank loan is obtained. Thereafter the second deed gets registered making it possible to obtain a loan from another bank with a new chain of title made in theland registry.

Protecting land owners and banks

The unexpected decline in the Notarial documents needs to be addressed to prevent the collapse of the banks and to obtain the best results from the Bim Saviya program. Policy makers and regulators in advanced countries including India have adequately adressed the issues and have introduced international rules for conveyancing.

The laws require identification and verification of sellers and buyers with ID supported with birth certificates, bio metric methods such as finger impressions on documents and photo ID'S at the time of signing documents for every transaction relating to land and the retention of documents of identification and verification with notaries for at least 10 years for ' consumer protection'. The land registries are empowered with quasi- judicial authority ( trained legal officers) to verify the identification with bio metric methods and to reject invalid documents which are forwarded for registration.

Tackling potential Bim Saviya frauds

Bim Saviya has introduced great solutions for potential frauds. Modern technology, advanced surveying systems, Cadastral plans and usage of Global Position System [ GPS] and Global Information System [ GIS] systems have been introduced to Sri Lanka through the Bim Saviya programme. The Government is investing a considerable amount of funds to secure and guarantee the land rights of private owners. The transacting documents for land transaction are prescribed under the statute of Bim Saviya.

The process needs to be streamlined with the necessary legal component and amendments to statutes as in other nations, as the process cannot operate with the weak laws for documentation under the Notaries Ordinance and the Registration of Documents Ordinance of 1907 and 1927 which provide ample opportunity to create negative equity for banks.

( The writer is actively engaged in research for preventing land fraud nationally and internationally, and has written many articles which were published in Sri Lanka and abroad on land fraud and other related matters).