SFO investigates massive property fraud against banks

By Sean Farrell,Financial Editor
Friday 27 March 2009 01:00

The Serious Fraud Office (SFO) is investigating a massive alleged property investment fraud against several banks that has already cost Allied Irish Banks £56m.

The banks lent money to companies controlled by the main suspect in the investigation. In Allied Irish’s case, it made loans from 2003 to 2007 against UK properties based on lease guarantees by a “blue-chip property company” whose name was used fraudulently. The borrower companies created leases for longer periods and at higher rents than the existing tenants’ real leases, increasing the value of the property.

Allied Irish found problems with its security interests over the properties in 2008 and discovered the fraud, which it reported to the authorities late last year. It also took control of the properties and sold them, resulting in a £56m write-down in its annual accounts.

The SFO said it believed other banks had been deceived by the main suspect and their associates. A spokesman for the SFO said he did not know which other institutions were affected or where they were based.

The SFO and City of London Police raided three central London properties on Wednesday to seize evidence about the alleged scam. None of the premises, which included one business address, was occupied and no arrests were made.

Allied Irish is considering legal action against several parties to try to get its money back. Ireland’s biggest bank declined to comment because the case was a continuing legal matter.

The financial and economic crisis is exposing a growing number of frauds, from the overstatement of residential property values for mortgages to Bernard Madoff’s $50bn (£34.5bn) Ponzi scheme. The alleged fraud against Allied Irish is one of a raft of big financial scams the SFO told The Independent it was investigating earlier this month, including a “mini-Madoff” scheme.

Allied Irish shares fell by up to 12 per cent yesterday but closed down 1.5 per cent at 64 euro cents (60p).

Allied Irish was the victim of one of the most notorious frauds of recent years in 2003. The bank lost nearly $700m at its US Allfirst business after John Rusnak, a trader, lost money by betting on the yen and then covered up the losses for five years with false trades.

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