Loan fraud is on the increase with various charges of this kind beginning to come to court.

The extent of the problem can be seen from the fact that one case currently before a Crown Court involves hundreds of thousands of pounds allegedly paid in up-front fees against loans which have not materialised.There are a number of prosecutions in the pipeline but, as is always the way in such cases, investigating is a long and painstaking process and, in the meantime, the number of such frauds multiplies.

Successful prosecutions may put a damper on others who are actively involved, but that is in the distant future.My company, Bank Management Services, has an ongoing investigation into this apparently growing market.

It has established that such practice s are proliferating at an alarming rate.We have already found, through our own research, together with that of other colleagues in the National Association of Commercial Finance Brokers (a recently formed professional body of brokers who only deal in the corporate finance market), that there are some 60 'scam funds' operating and we are uncovering instances where both corporate entities and private individuals have parted with substantial sums of money.

In the main this has been paid in up-front fees to brokers, who have been collecting it either for their own pockets or on behalf of prospective lenders, or both.Insurance companies are also suffering and some of them have engaged the services of my firm to assist them in spotting suspect funds.

The insurance market over the past 12 months or so has seen a substantial increase in the number of applications for life assurance that have been issued in connection with loans where funding has come from previously unknown sources.

Many of these cases have similar characteristics with the so-called 'lenders', for example, usually being based off-shore; calling for very substantial up-front arrangement fees, which are not refunded if the loan does not proceed; and offering low rates of interest.In addition, these loan offers do not show the registered company's name or number P even though they may be UK-based.Some of those involved have pocketed sums in excess of £3 million in up-front fees and commitment fees together with various other charges, but there are problems in bringing individuals to book.

The Bank of England has no mandate to regulate the finance broking industry and can only act if an organisation sets itself up as a bank without the appropriate licence.

As to the police, a senior officer in the company fraud department of New Scotland Yard said: 'While most crime is committed against an unwilling victims, this type of offence is usually perpetrated against unwittingly willing victims.

Greed is the real perpetrator P why people are so gullible in believing they can obtain funds at substantially lower rates of interest than the market norm is an example of stupidity and gullibility.'Until recently it was very easy to spot suspect funds.

However, it has become much more difficult.

Many small brokers, especially those who are not au fait with the commercial loan market, are targeted by the fraudulent loan organisations.

The brokers in these cases are in many instances 'unwittingly willing victims'.It used to be that if a broker or alleged lender required 'up-front' fees, one would suspect a scam fund and advise one's client not to proceed further.

However, the fraudsters are becoming more sophisticated.

In some instances, the potential funder has paid £15,000 or even £20,000 for extensive professional valuations to be undertaken, where they have got the potential borrower on the hook.

The letter of offer is then produced, by which time the client and his or her advisers are substantially more relaxed.

The offer looks and appears to be genuine, and will call for very substantial funds to be paid into an escrow account at the same time as the broker normally collects his or her fee P ahead of completion.Where money has been paid up-front, or fees to a broker or lender have been paid prior to completion of the loan, it is virtually impossible to obtain recovery in a case of fraud.

In most instances the money has gone to an off-shore fund and the chances of seeing it again are extremely limited.The perpetrators and purveyors of fraud loan schemes are fully aware that the Fraud Squad will not investigate unless there is a letter of complaint issued against them and, given the increasing level of this type of fraud, it appears that commercial loan broking business should be brought under some form of legislation.Currently, a commercial finance broker dealing in loans in excess of £10,000 does not even need a consumer credit licence and, until the recent formation of the National Association of Commercial Finance Brokers, there was no collective organisation.

As yet the NACFB has no teeth, but it is making a very valiant effort to control the industry.

It has obtained sponsorship from a number of banks and is at least moving in the right direction.Experience shows solicitors to be, in broad terms, lacking basic knowledge of the commercial funding market.

As a result, they are not necessarily best placed to advise a client whether or not to proceed in regard to any offer of finance.

Given the proliferation of fraud loan schemes and the number of people now directly and prolifically involved, there is an ever-growing likelihood that such schemes will impinge upon many, if not most, solicitors in due course.The average solicitor's lack of knowledge in the area of commercial loans is not really surprising.

Most only see the usual residential mortgage lender's standard letter of offer/mortgage offer.

Even the larger commercial practices (with obvious notable exceptions) are now experiencing problems.When presented with a letter of offer by a client, many solicitors are concerned as to whether the lending source is genuine.

It must also be remembered that a client has probably been working through a broker or directly with the prospective lender (whether genuine or fraudulent) for some considerable weeks.The culmination is the letter of offer and that is normally the first indication that the solicitor has had of a client seeking funding.

Very often the time given to accept the offer can be very short P some have to be accepted within 48 hours and others call for acceptance within seven days.

This leaves little time for investigation by the solicitor.A number of solicitors have contacted my company, very concerned for their clients and, in the main, their fears have been prompted by the fact that the offer has been issued by a source they have not heard of, the rate of interest seems extremely competitive and, of course, the main fear is the substantial money the client may have to part with when accepting the offer.The solicitor is also conscious that the client is desperate to obtain the funds and is fearful that any delay may prejudice the completion.There are ways of establishing whether one is dealing with a potential scam fund.

Unfortunately to anyone outside the immediate industry, they are time-consuming and expensive.

The result is that the client pays in the end, whether in up-front money which disappears, or in engaging a solicitor to make enquiries.A few simple guidelines which all solicitors should follow will, in most cases, reveal the truth.

While some costs and disbursements to a broker acting on behalf of a genuine fraud are quite permissible, say £250, no money should be paid to the funder until such time as the offer has been produced and checked to be authentic.

No fee for services should be provided to the broker until such time as the loan has completed.When the letter of offer, or any communication, is available from the supposed funder, one should endeavour to speak to the lending officer of that funding source.

If the name of the lender is unfamiliar or unknown, full references should be taken on the lender, together with the firm of solicitors acting for them.It is also very costly to investigate P we know of one particular life assurance company which is spending in excess of £150,000 a year in investigating dubious letters of offer prior to satisfying itself as to the validity of the policy being issued.Solicitors acting for clients borrowing substantial funds, which is the area in which the scam funds proliferate, should not be fooled by documentation of the highest possible quality or by authentic sounding foreign-based lenders.

Millions of pounds have been paid to so-called lenders during the past year alone.

Presumably in most instances these clients have sought the advice of their solicitor.

Most solicitors are not working on a daily basis in the commercial funding market and cannot expect to have an in-depth knowledge of what is a very complex industry.

Following the above guidelines will eliminate most of their fears and, if still in doubt, contact should be made with one of the members of the National Association of Commercial Finance Brokers.2, 1994