Terrorists and criminals are conning British banks out of £700 million a year to help to finance their illegal activities, a police report has revealed.

An intelligence report by the Association of Chief Police Officers said that organised crime groups used mortgage fraud to generate income and launder money from the proceeds of their operations, such as drugs, human trafficking and prostitution.

“While there is no evidence to suggest mortgage fraud directly funds terrorist acts, this area of criminality has been encountered during investigations into UK-based terrorist groups,” it said. “Mortgage fraud can be used to finance infrastructure including safe houses.”

The report, which was sent to financial institutions and police forces across the country yesterday, said that it was difficult to assess the scale of the problem, but estimated that fraudsters conned lenders out of about £700 million a year. The average cost of each such fraud to the lender is about £45,000, the City watchdog has said.

Fraudsters can con lenders out of money by using corrupt surveyors to issue false valuations. This allows them to apply for a loan that is larger than the value of the property. In addition, they will usually apply under a false name, supported by false docu-mentation, and later fail to make any repayments.

On a larger scale, solicitors can assist criminals to secure mortgages illegally. The buy-to-let market is particularly vulnerable to mortgage fraud, whether through new-build apartment complexes or large-scale renovation projects. In January, a High Court judge ruled that a former head of valuations at a subsidiary company of the troubled property services company Erinaceous was liable for an £11.5 million mortgage fraud after he overvalued a property.

This month the City watchdog said that it was considering levying fines and penalties on more than 70 mortgage brokers as part of a plan to tackle organised home-loan fraud.

More than 200 brokers have been referred to the Financial Services Authority over the past 18 months by lenders suspicious that they might be involved in fraudulent activity.

The FSA recently highlighted the threat of organised crime rings using mortgage and property fraud to make profits. Last month, Philip Robinson, financial crime and intelligence division director at the FSA, said: “There seem to be a lot of criminals who have realised that mortgage fraud allows them not only to wash their ill-gotten gains, but make a profit in the process.”

Mike Bowron, Commissioner of the City of London Police, who is leading the Acpo investigation into economic crime, said: “Organised mortgage fraud can take many forms and, while difficult to measure accurately, remains a significant element of the UK’s annual fraud losses . . . Long gone is the notion that fraud is a vic-timless crime.”

The Times revealed last year how borrowers can inflate their earnings when applying for a loans using fake documents bought online. Websites offer “duplicate” bank statements, pay-slips, utility bills and P60s for as little as £20 and make no attempt to verify any information provided.

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