City probes ‘major property scam’ as AIB loses £56m

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Allied Irish Banks admitted it lost £56 million in the alleged scam and prosecutors believe other banks could also have been deceived, sending the bill into hundreds of millions.

The Serious Fraud Office and City of London Police raided an office and two homes in central London but no arrests were made. AIB said it was considering legal action to recoup the lost money.

It is the latest in a string of frauds to come to light since the start of the financial crisis, with Bernard Madoff and Allen Stanford grabbing the headlines.

This latest scam centres on a series of loans made by AIB between 2003 and the peak of the property boom in 2007 to the alleged fraudster to buy buildings in the UK.

The suspect allegedly supported the loan applications with bogus documents from a blue-chip property company which guaranteed higher levels of rents and longer leases than those currently being paid.

The fake details ramped up the value of the properties and enabled the fraudster to borrow far more than was necessary to buy the buildings and pocket the difference.

AIB's corporate banking department only discovered the scam last year and took control of the properties. It has since sold them but the properties fetched less than the loans were worth, leaving the bank nursing the loss of £56 million. "The suspect created a bogus situation, where the blue-chip property company's name was used fraudulently in order to attract investment loans from the banks," said SFO spokesman David Jones.

"The property company, when it discovered this, brought the matter to the SFO. We have information that suggests there could be other financial institutions who have been subject to a similar fraud." Under the alleged fraud, the suspect created "overriding leases" guaranteed by the blue-chip property company should the current tenants fail to pay.

"These leases were generally for longer periods and at higher rents than the existing occupational tenants' leases," said the SFO. "The apparent existence of these additional leases increased the value of the properties."