Serious Fraud Office says it may lay criminal charges after discovering 'inflated' valuations on properties and businesses

By Gareth Vaughan

Fresh from firing a warning shot to property investors over "rogue valuers" providing "inflated" valuations in an industry lacking independent oversight, the Serious Fraud Office (SFO) has noted a trend away from industries regulating themselves.

Asked by interest.co.nz in a Double Shot interview whether the regulation of property valuers should be overhauled along similar lines to changes made to the oversight of auditors with the Financial Markets Authority brought in, Simon McArley, the SFO's general manager of financial markets and corporate fraud, wasn't dismissive of the idea.

"Well there has certainly been a move away from self regulation," McArley said. "But that’s probably a matter for the valuation industry and for the Minister involved. That’s more a policy question. Mostly we focus on law enforcement and pointing out some dangers where we see them coming up."

Under the Valuers Act 1948, the industry is overseen by the Valuers Registration Board which is chaired by Valuer General Neil Sullivan. The Board, or someone appointed by the New Zealand Institute of Valuers, investigates complaints with the Board being a statutory body with the power to discipline registered valuers for improper, unethical or incompetent conduct. No other body has authority over the Valuers Registration Board, with its members appointed by Minister for Land Information Maurice Williamson.

The Institute of Valuers, meanwhile, merged with "voice of the property profession" the Property Institute of New Zealand in 2000. As well as statutory roles, it's also tasked with advocating the interests of property valuers as a professional community within the Property Institute.

Under the Valuers Act, the Valuers Registration Board has the power to impose penalties against rogue valuers ranging from a reprimand and/or fine, through to suspension or removal from the Register of Valuers.

Similarities with how auditors were regulated

On the face of it, the regulation of property valuers appears similar to the auditor oversight regime in place until recently, which was self regulation through the Institute of Chartered Accountants of New Zealand. After Registrar of Companies Neville Harris fingered audit failure as a contributing factor in finance company collapses, and following pressure from the European Commission, the auditing industry has this year had a new licencing regime imposed on it for major audits with ultimate oversight from the Financial Markets Authority.

The shake up to auditor regulation, confirmed through May's passing of the Auditor Regulation and External Reporting Bill, was hailed by Commerce Minister Simon Power as "an important piece of the regulatory jigsaw to restore investor confidence in our financial markets."

Interest.co.nz asked a spokeswoman for Power about whether it was also time to bring in full independent oversight of the property valuation industry, perhaps also under the Financial Markets Authority. She referred the question to a spokeswoman for Williamson who said he had no comment "at the moment."

Meanwhile, McArley said the SFO's concerns stemmed from what it had discovered about property valuations through a series of its investigations. A "continuing trend" was observed, through mortgage fraud, or mortgage hydraulicing, where a false valuation is used to get a mortgage that’s excessive.

"We’d also noted the same individuals and the same valuation methods being used in relation to some of the finance companies in their related party transactions," McArley said. "So a finance company would have a valuation on a property and lend against it where the value was significantly more and it may be a related party transaction."

Commercial and residential property, plus business valuations involved

The SFO had seen inflated business valuations, and pumped up residential property valuations, as well as over valued commercial properties.

"We’ve seen businesses valued in related party transactions for significantly more than we can ascertain that they may have really been worth," McArley said. "It (inflated valuing) spans right from simple mortgage frauds involving residential properties across to complex business valuations."

The SFO had been talking to the Institute of Valuers for between three and six months about some of the issues. It hadn't yet formally laid a complaint, but was in the process of doing so in relation to "a number of individuals" who the Valuers Registration Board also has "ongoing complaints" about, McArley said.

"I have no doubt that they’ll do a complete investigation and seek a resolution on their professional standards, but that’s a matter for the Registration Board and the Institute," McArley said.

He said the SFO was considering laying criminal charges.

"At this stage we haven’t got to the point where we can prove beyond reasonable doubt that criminal offending has occurred," McArley added.

"There is a big gap between something looking suspicious and proving beyond reasonable doubt for a court to a level where we could get a conviction. Before we can take a prosecution we have to be at the point where we believe it’s reasonably likely to succeed."

Nonetheless, the SFO felt it had a duty or obligation to alert investors to issues of concern that were continuing themes.

McArley said the most extreme case it had encountered in relation to a property was a property valued 500% over market value. This case, which made SFO "eyebrows shoot up," was still being investigated.

In general terms McArley said the warning  to investors was: "When you are considering an investment that is heavily reliant upon a valuation, consider whether the valuation can be considered independent, consider whether or not the person who commissioned the valuation had an interest in the level of the valuation. And if in doubt go and seek independent advice commissioned by yourself." 

(Updated with comment from Maurice Williamson).

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