In ASIC’s recent announcement relating to its imposition of conditions on the Australian credit licence of broker United Financial Services Pty Ltd (UFS), it discussed the obligation of credit licensees to have risk management systems to detect fraud in loan applications.

ASIC said it was concerned that UFS’s failure to have adequate risk management systems in place to detect fraud in a timely and effective manner resulted in the submission of loans with false documents going undetected by UFS for over 18 months.

The suspected fraud involved a used car dealership in the Sydney area using false payslips that overstated the consumer’s income when providing documents to UFS when it was arranging credit for the consumer.

The false payslips were then submitted by UFS with applications for car finance to the Australia and New Zealand Banking Group Limited (ANZ).

While ASIC’s views are always worth noting (and the only information we have is that disclosed in ASIC’s announcement), failure to detect a fraud does not of itself necessarily mean that the fraud was facilitated by the victim’s non-compliance.

Just as it is simplistic to say that default by a borrower is evidence of poor loans assessment by a lender, it is not always the case that fraud on a lender is evidence of a broker’s failure to have adequate risk management systems to prevent fraud.

Of course lenders and their representatives need a system to monitor fraud and prevent it but the occurrence of fraud does not mean there has been a breach by a broker or lender. Each party in the loan assessment process has different risks and different obligations. There are always arguments between lenders and brokers as to apportionment of the loss for fraud.

By definition, fraud involves intentional deception. No program can prevent and detect all fraud.

ASIC’s Deputy Chair is quoted as saying “Brokers and lenders will not meet their responsible lending obligations by using unreliable verification processes.”

What can lenders and brokers do to minimise fraud in loan applications? Methods include:

• train staff in loan application and assessment including identifying inconsistencies
• sight original documentation and verify that the information provided in the employment information exactly matches the information provided in the loan application. Legible copies of all the employment documentation should be retained with the loan application file
• confirm the employer exists: check the employer’s website
• call the employer to confirm employment
• check the employer name against the name of the payer on the pay deposit description of the bank statement.

According to the latest Veda Cyber Fraud Report credit application fraud in Australia rose almost 13% in 2014-15, across the four main types of fraud – falsifying personal details (accounting for 58% share), identity takeover (22% share), undisclosed debt (9%) and fabricated identity (8%).

Fraudulent credit applications involving identity takeovers rose 59% in the past two years – and 17% in the past 12 months.

Recent verification of identity of mortgagor changes will make it harder for mortgage fraud to be committed.

The Australian Federal Police Fraud and Anti-Corruption Centre deals with complex and large frauds.