Straw Purchases

Common Types & How to Detect and Prevent Them

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People buy things for friends and family members all the time, and mostly for innocent reasons. However, there are cases in which someone will buy for someone else an item that person isn't legally allowed to have (like cigarettes or a gun). Or they may cheat a financial institution by borrowing money as themselves, but secretly acting on behalf of someone else. This is known as straw buying, and it’s a crime in most instances.

This article will explain more about what straw buying is, including when it’s illegal and why. We’ll also identify some industries that commonly encounter illegal straw buying, as well as share some techniques for identifying and stopping illicit straw purchasers.

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What is a Straw Purchase?

A straw purchase is when a person buys something on behalf of someone else when the other party can’t make the purchase themselves. The other party may lack the necessary resources to make the purchase, or may be legally prohibited from doing so and want to hide their identity as the true buyer.

Why is it Called a Straw Purchase?

So where did the term “straw purchase” come from? It’s related to the legal term “straw man,” which describes a person who possesses property to facilitate a transaction but has no real interest in owning it. This latter term draws its meaning from a scarecrow or other effigy made of straw, which is meant as a dummy or as a placeholder for a specific person.

Are Straw Purchases Illegal?

Straw purchases can be legal if they aren’t used to circumvent a law or otherwise commit a crime. An example is an elderly person asking a friend or family member to buy groceries for them, and perhaps also paying that person back. This is legitimate because there isn’t any kind of law that restricts how an elderly person can buy groceries; they may simply have poor mobility or health that makes it difficult for them to leave their home.

In cases where the sale, ownership, or use of products or services is heavily regulated, though, straw buying is often against the law. One type of illegal straw purchase is where the end recipient of the item isn’t lawfully allowed to possess it, and the buyer knows this (or at least could reasonably assume it). A prime example is buying alcoholic drinks and tobacco/nicotine products for underage people. The straw purchase of a gun or car is also a crime if the end recipient is underage or doesn't have the certification required to handle these items.

Another prohibited use of a straw purchase is for the sake of committing a crime. To illustrate, a form of straw purchase fraud is when someone with good credit takes out a loan for someone with bad or no credit, often falsifying the paperwork in the process. Then the person with poorer credit spends the money on whatever they want. In this case, the lender may lose the money, but they may also have never approved the loan in the first place if they knew the person actually receiving it had a high risk of defaulting.

This increases the risk the lender exposes themselves to and increases the likelihood that the loan is not actually paid back. The fact is, even if the loan is paid back in full, this is still an illegal practice that exposes the lender to higher risk—risk they may not have taken on had they known who the funds were actually going to.

What is a Straw Buyer or Purchaser?

A straw buyer is a person who buys something on behalf of another person who has a reason (legitimate or not) why they can’t make the purchase themselves. A straw buyer may be a willing participant in the arrangement, or they may be tricked into a fraudulent straw purchasing scheme.

In some cases, a straw buyer will also receive some form of compensation from the person they are buying for. This can be as simple as a youth offering an adult $5 to purchase alcohol or tobacco products for them, or as complex as an individual offering someone $1,000 to secure a $20,000 loan on their behalf.

What is Straw Buyer Fraud?

Straw buyer fraud is basically any instance of a straw purchase that is intentionally deceptive in nature or used towards illegal ends. For example, an underage person convincing an older person to buy them alcohol or cigarettes. Or a person without a driving or firearms permit getting a person with proper licensing to buy them a car or a gun, respectively.

Other types of straw buyer fraud involve fraudulently borrowing money rather than purchasing a physical product for someone who isn’t allowed to have it. For instance, a person with a poor credit score may ask a lower-risk person to take out a loan and give them the money. They may even have the straw buyer(s) falsify financial documents to make it look like they qualify for borrowing more money than they actually do.

How to Detect a Straw Buyer

In general, straw buyers will know that they’re doing something potentially illegal, so they can have nervous body language or tone of voice. Or, if two people are making a purchase and only one of them is doing the talking and answering the questions, that person could be a straw buyer.

Here are some other signs of straw buyers to look for:

  • Documentation that appears altered or filled in by different people
  • Information that doesn’t match up with what the customer has on file
  • Behavior or info that doesn’t make sense, given what else is known about the customer

Straw Buyer Red Flags to Watch For

Some specific signs of straw buyers for regulated items or financial services include:

  • Purchase doesn’t match consumer profile: Based on a customer’s transaction history, there are some purchases that will seem very out of the ordinary for them. This could mean they’re being used as a straw buyer.

  • Inflated income statement: Straw buyers will often falsify the amount of money they make in order to qualify for bigger loans than they normally would. Check this value against their age, profession, and other known information to see if it makes sense.

  • Unrealistic employment record: Similar to inflating their income, a straw buyer can easily fake their career path to look like they’ll be able to afford larger loans than they actually are. Again, check this against their other information for inconsistencies.

  • Unusually high collateral value: An unscrupulous seller may have a straw buyer take out a loan while vastly overvaluing the collateral held for that loan. This could be a sign that they’re trying to get the straw buyer more money than they qualify for (and maybe even that the loan won’t be paid back at all), or get them to illegally resell the property in order to profit at the lender’s expense.

  • Buyer won’t (or can’t reasonably) use the purchase: Particularly with houses, a sign of a straw buyer is that they declare they won’t be living in the property after buying it. Another is that the property is an unreasonably long distance away from where they actually live or work.

  • Suspicious source of funds: Another indicator of a straw buyer is that their funding for a purchase or loan repayment is coming from a business or other organization, instead of an individual person. A clue to this might be if the funder’s address is a post office box instead of a street address.

  • Lack of interaction with the buyer: An illegal straw buyer typically tries to avoid directly communicating with a seller or lender as much as possible (via in-person meetings, phone calls, and so on). This is meant to minimize opportunities for figuring out the straw buyer isn’t the real buyer.

  • Serial non-arm’s length transactions: Straw purchases tend to happen when buyers and sellers share close relationships and don’t deal through professionals (such as real estate agents). This allows them to rapidly pull off straw buyer scams (such as illegal house flips) while not involving someone who’s legally obligated to blow the whistle on suspicious activity.

These are all red flags that someone might be attempting a straw purchase that’s against the law. But how can it be proven that a straw purchaser is doing something illegal? That’s a more difficult problem.

How to Prove a Straw Purchase

Like many other compliance tasks, checking each individual regulated purchase or loan for an illegal straw buyer is virtually impossible to do completely manually. Fortunately, automated processes and analytics can spot signs that a buyer or loan applicant is being used illegally for a straw purchase. Examples include:

  • Know Your Customer (KYC) – Tools for verifying a customer’s identity against official sources can help identify and block illegal straw buyers. Discrepancies in ID credentials, especially risk-related information (such as income, employment history, and asset valuation), can point to a person being a straw buyer.
  • Link Analysis – Visualizing transaction and other financial activity histories can help stop illicit straw buying in at least two ways. One is through looking at customer profiles for inaccurate information, or transactions or activities that don’t make sense given the customer’s other information. The other is by looking at the wider financial and retail landscape to identify locations and businesses where straw buying scams are common.

Common Types of Illegal Straw Purchases

While not all straw purchases are illicit, there are several industries with heavily-regulated products or services that are common targets for straw buying scams. Here are five major ones.

Guns & Firearms

Handguns and other firearms are lethal and efficient weapons, so many places have age limits and licensing requirements for owning one. That’s why underage people, convicted criminals, and others restricted from owning firearms will often turn to straw buyers to acquire them.

The straw purchase of guns puts dangerous instruments in the hands of people who aren’t qualified to use them, and thus could potentially hurt themselves or innocent people. It also leads to guns being taken out of legitimate regulated commerce and put into underground markets, where virtually anyone can buy one without any restrictions.

Tobacco & Alcohol Products

Tobacco-based, nicotine-based, and alcohol-based consumables are addictive and can cause serious health problems if overused. Not only that, but their use can also result in dangerous situations for other people (e.g. second-hand smoke and impaired driving).

That’s why most countries have laws limiting the sale and/or consumption of alcohol, tobacco, and nicotine. However, these products still find their way through straw buyers into the hands of underage people who aren’t legally allowed to possess them.

Cars & Other Vehicles

A vehicle is a complex machine that can be dangerous if the operator doesn’t know how to handle it properly. This can result in serious and costly damage to the vehicle itself, as well as other property. Beyond that, it can potentially cause the driver, their passengers, or other nearby people severe injuries or even death. So when the end recipient is underage or doesn’t have the required permits to drive the car, a straw purchase of a car is illegal.

Also, because vehicles are usually very expensive, people with poor or no credit will sometimes get straw buyers with better credit to finance cars for them. This is illegal if the straw buyer doesn’t reveal they’re buying the car or taking out a loan on behalf of the other person.

Some unscrupulous auto dealers will also try to scam poor-credit buyers by convincing them to have another buyer with bad credit straw purchase the car. Then they can use that person’s credit history as justification to charge a higher interest rate on the loan repayment, or put other restrictions on the contract. This, too, is illegal.

Is Buying a Car for Your Spouse, Child, or Other Family Member a Straw Purchase?

Yes, but if the end user is of the proper age and has the proper licensing to operate the car, it’s not illegal in some cases. For instance, the straw buyer could pay for the car and then transfer legal ownership of it to their family member as a gift. Or they could co-sign or co-borrow on a car loan with the family member. These are legally-allowed examples of a car straw purchase.

What isn’t legal is if the straw buyer takes out a loan for a car, but fails to name the family member as the one who will be using the car and repaying the loan. This amounts to deceiving the lender as to the true risk associated with giving out the loan. This is especially the case if the family member isn’t old enough or doesn’t have the required permits to use the car. So this is considered fraud.

Real Estate & Mortgages

Houses are typically very expensive assets as well. So it should come as little surprise that some people with poor or no credit may try to get someone with better credit to straw purchase a home for them. Like with cars, the straw purchase of real estate—or the straw borrowing of mortgage loans—is illegal if the straw buyer doesn’t disclose that they are doing so on behalf of another person.

Real estate industry insiders also sometimes make use of straw buyers to commit mortgage fraud. For example, they may have a straw buyer purchase a house, then get them to quickly (and illegally) resell it after the insider falsely appraises the property as being worth much more than it actually is.

Another straw buyer mortgage scheme is when an insider gets a straw buyer to take out a mortgage on a made-up property, so the lender is unable to possess the non-existent house as collateral when nobody pays the loan back. As a variation, an insider may have a straw buyer take out mortgages from multiple lenders, but deliberately fail to mention they’re using the same property as collateral for each loan.

Bank Loans & Other Financial Services

As pointed out in the above discussions on financing vehicles and real estate, straw buyers can defraud financial institutions in several ways. They can use their good credit to apply for a loan that’s secretly meant for someone with bad or no credit. Or they can manipulate risk-related information about themselves to try to borrow more money than they’d normally be given.

In fact, in most of the cases of straw buying above—especially automobile loans and mortgages—the real issue is that the straw buyer is deceiving the lender to illegally obtain a loan.

Financial institutions themselves may sometimes use straw buyers in predatory lending practices. For example, they could convince a borrower to get someone else to co-sign or co-borrow on the loan, then base the terms and interest rates on whoever has worse credit.

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Unmask Illicit Straw Buyers with Unit21’s Anti-Fraud Solutions

Illegal straw buying is both a fraud issue and a Trust & Safety issue. It’s a fraud issue because it can be used to steal money from financial institutions and other money services businesses. At the very least, it disrupts their risk management processes.

It’s also a Trust & Safety issue, as it puts heavily-regulated products into the hands of people who legally aren’t allowed to have them. This often goes against a marketplace’s rules, and can also cause reputational risk for the marketplace if it’s seen to be allowing illegal activities.

That’s why FIs and marketplaces need systems in place to detect and take action on illegal straw buying activity. Tools like Unit21’s Transaction Monitoring and Case Management solutions allow for aggregating and visually analyzing financial activity data from multiple sources. This lets risk teams spot patterns that could be indicative of fraudulent straw buying.

If you’d like to see what else our anti-fraud infrastructure can do to protect your FI or marketplace, contact us for a demo.