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

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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Hmmmm...I think the banks will be having a word with the puppet in the Beehive...they depend too much on the valuers being blind and stupid.

Not the FMA...  maybe the REAA as that is more in line with the 'product' mix...  however, I would think the REAA would need some more skills and people to deal effectively with valuers...  

I have a few techniques that could be easily tweaked to deal with dishonest valuers....

I would happily take on the job for a modest sum:)

Of course they would have to agree to lease out Queens Wharf and install seating. Oh and purchase a whip or two also.....

 

 

Given they are meant to be independant and impartial you would expect a random occurance of purchaser engaged valuations being higher then sellers (and the other way around). While my experince is not extensive I have never seen a few valutaions from both sides in transactions and not once has the purchasers valuation come in higher than the sellers.

Whats the experience of those who see a lot of both sides valuations?

I once had a valuer I engaged ask whether I was the seller or purchaser and what I "expected".  Is this is a symtom of a problem if the profession is meant to be independant? Another time I asked for a valuation on a property to share some equity among partners from a sale/buyout and the valuer looked almost surprised that I just wanted a fair and straight up valuation. 

Couple of times I have thought about taking a compliant to their board when differences in the order of 100% came in between valutaions on either side of a transaction.  I understand that this should not happen.  They use the same or simliar methologies and that anything over a 10% variation for a fairly stock standard property should start raising questions. 

That all said I have dealings with some straight up honest valuers that have told me of clients they have lost because they refused to bend to their expectations. 

No sector is entirely pure and faultless.  Question is are the number of bad apples enough to look at the whole barrel? 

 

The differential is the greatest cause for concern and you have to wonder why the profession has allowed this sort of carry on to continue. 

Even one in the order of magnitude of 100% means a serious loss of credibility.

In one I had the misfortune to be involved in, the disparity was actually 250%.

I have inside knowledge of a valuer being told to go away and do it again at 20% less, which he did. It resulted in a sale.

YES

Practable application two check sytem:

1. Annual random checks of registered members - fee.

2. FilteRed complaint at no cost (Only relevant complaints).

 

Keeping the auditors fair and honest is the tricky bit?

About 20% of valuers are competent.  The others are order takers - sums up most industries really

Auditors, Trustees, and Valuers are a "protected species"

Haven't seen one instance where receivers / liquidators have had a go at any of them.

Where in any sphere of business has self-regualtion worked? Short answer not only has it failed but it has failed very badly....

regards

Where in any sphere of business has self-regualtion worked?

I think the MTA......and coming up 2nd.....hmmmmm, and hmmmm.....still thinking about that.

Pike creek, removed inspectors...in effect self regulation, . take a look at accient/deaths in work places since the Laour Dept and local Body inspectors where scrapped

Valuers ....well any organisation is ruled and LEAD by example from the top, and "Indiscrepencies" only occur when there is incompetence from the top....If they where doing their job, this issue would not be being discussed now.

How can an industry in most cases be self reguated?

There is the therory where IF responsabity is on the company and risk of prosecuion is high.....it works. But let look closer,the ruling body is democratically elected right....as 'corruption' sneeks in so does voting for incompentent officers of that organisation....incompentent, lazy, or even corupt themselves, doesnt matter still results in where we are at now.

And the tried and true therory of using trumped up little hitler civil servants.....yep that works ......bloody well , talk to anyone who has to work with SOME of the local body heath /food inspectors  or the MaF inspectors.

Self regulation is a failed experiment just like total free market....an enviroment where those who are corupt thrive to the piont that the world can be put into serious ressecion, the retired get life savings ripped of and  workers die ...sometmes dozens at a time.

As a valuer I agree with the coments by FYI.

A large amount of valuers are not totally competant. This ranges from lack of skill, dishonesty, but mostly not doing the background work.

In the case of a number valuers, I think that the sheer turnover of ork required means that it is not done particularly well. This can be the case in the instance of residential firms that expect valuers to pump out three residential valuations a day.

While many valuations can be complex, it is also not rocket science in many instances. The key is to know your market VERY WELL and make sure (in the case of hypo subs / DCF analysis), that the parameters and inputs are realistic. Applying the idiot test as a final measure is also a good place to start.

There is no substitute for doing the work well, being honest, and asking for advice from someone else if you are unsure of anything.

In terms of regulation, it is a joke. I dont know of anyone who has had more than a tut tut, and there are plenty of operators out there who are operating in a manner that is less than professional. Time to put the foot down a bit!

Also a valuer and also agree, and I like your comment on the amount of work some valuers are undertaking. There is just no way you can be accurate 100% of the time if you're pumping out huge volumes of work. Theres constant downward pressure on prices as well which makes the problem worse. 

Regulation is a total joke. And speaking of independence - why are there valuation firms that also lease, sell, and manage commercial property? How this could ever be considered independent is well beyond me and the very existence of these do it all businesses proves just how useless regulation has been.

 

Just to share what I know...

A friend of mine had a cross leased section but the section is in fact smaller than the neighbour.  He got the land and house revalued by the council after the 2008 CV and got the CV raised from 600k to 780k while the cross leased neighbour's CV remained at 580k.  My friend sold the house last year for 700k at the auction after marketing the house with a as "selling below CV".

Makes me think of the story in the book I read recently 'False Economy'.

Suharto put up with mild corruption, but when it got out of hand he acted decisively. His customs department was one such case, where has simply sacked the lot of them and got another country's department contracted in to do the job.

We won't get meaningful change in NZ until something of this nature happens. Trouble is I think it needs to start with Parliament.

No necessarily. But if you are going to have a democracy then you need a clean out to restore it every so often. 

Question is do you really think we have a democracy?

The Western Democracies are considered the best for of governance we have ever had, but we are watching it fail before our eyes.

There is something in the saying "that the best form of governance is a benevolent dictator".

I agree but it's up to the population to decide

But we don't really decide do we. We just get two slightly different variations of the same flavour. We also have thousands are unelected bureucrats that really run the country. 

I think there have been a few good Monarchs along the way. Soloman perhaps? Might have been a few Egyptian ones also.

Alexander the Great didn't do too bad in his short tenure. If he hadn't of died it might of all held together nicely for a while.

Interesting you bring up the US constitution. I think what we got is not quite what Jefferson intended, certainly not anymore.

A look at your local council might be a good start.

But I might leave that train of thought for someone else to dig into.

Talk about off topic.

 

The issue here is professional integrity, and who is best / most ineffective at maintaining acceptable levels of such.

Valuers need policing, as do any profession as the few will take advantage of thier position. There is no room for advocating in the valuation profession. Period. The asset is worth what the asset is worth.

Advocating is for lawyers, you have to let the client know the likely realisable value of thier asset, however unpalatable it may be.

Can drivers who are members of the AA be self-regulated too?  I'm sure we would all be well-behaved on the roads.