Real Estate Fraud: How to Spot the Red Flags on Integrity Issues

The recent verdicts in the €250 million ($330 million) Dutch real estate fraud case have thrown into sharp focus how tempting the large amounts of capital frequently changing hands in property transactions can be for tricksters in a market where valuations are often as much about “art as they are science.”

Alvarez & Marsal’s (A&M) Global Forensic and Dispute Services in Amsterdam has identified a number of “Red Flag Situations” in which investors and operators in the sector should be aware that their investments and reputations could be at risk.

Michel Grummel, Managing Director for A&M’s Global Forensic and Dispute Services in the Benelux, said: “While the vast majority of transactions and people in the real estate investment market are honest and above board, companies and institutions need to have processes in place to thwart the few fraudsters. A&M has long experience in investigating and managing complex property deals around the world to help firms and pension funds keep control and spot the Red Flags.”

The Red Flags for integrity issues:

• Exclusive "preferred suppliers" leading to a lack of transparency and favoritism.

• Business partners have received negative publicity in the past due to their involvement in questionable business practices.

• Investment decisions are taken by a single individual with little or no supervision.

• Business and private relationships are intertwined. Personal interests take priority over business interests.

• The property development company and the future lessees are intertwined.

• The agreed rent installments have been amended during the pre-negotiation period frequently and significantly.

• Multiple valuations of the same property are made within a short period of time.

• Contractual risks are not properly balanced between client and contractor.

• A property is sold multiple times within a short period, each time for a higher price.

• Extra costs in a project are far higher than planned.

• Internal procedures covering investment decisions are not respected, have never existed or have not kept up with the growth of the organization.

• A company has no written integrity policies or procedures. Integrity is a non-issue. Employees and management are expected to make their own rules in this area.

Julian Jones, Managing Director and European Head of A&M Global Forensic and Dispute Services, said: “The presence of some or all of these red flags can indicate a heightened risk of fraud. In such cases it’s important that an investor carefully examines his investment, gathers additional information and quickly takes appropriate measures to protect himself.”

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