Posted by Bronwyn Townsend, senior marketing manager at Legal Futures Associate InfoTrack
Townsend: Have an accurate picture of who your client is
Changes are coming for businesses that deal with services that are a high fraud risk, meaning law firms are one of the most affected industries. Following the government’s announcements of the impending ‘failure to prevent fraud’ offence amendment to the Economic Crime and Corporate Transparency Bill, the time to prepare is now.
Recent data suggests fraud is the cause of 41% of recorded crime in the UK. It’s insights like this that are driving the need to implement further management strategies to safeguard services against fraud.
The new offence will outline a set of core fraud offences, such as fraud by false representation, fraud by failing to disclose information, and false accounting, mirroring existing failure to prevent fraud offences.
And the penalty? An unlimited fine, meaning the stakes for businesses found liable of an offence are high.
While an implementation date has not yet been set, preparation is key to ensuring you are ready once the changes are passed. The government has not yet published guidance on the ‘reasonable fraud prevention procedures’.
But savvy firms will be getting ahead of the curve and ensuring their risk management procedures are updated and employing tools to ensure they can maintain continuity when the time comes.
So, how can you prepare for the impending enforcement of the ‘failure to prevent fraud’ offence?
Review and update your procedures
Best practice for law firms should include a firm-wide risk management assessment and procedures for how to manage your customer due diligence to ensure you really know who you’re acting for.
For firms who are already operating under the Conveyancing Quality Scheme, this aligns with the core practice management standards, and you should review your procedures and policies every time there is an update to guidance around anti-money laundering (AML) and verifying funds.
Make sure you have your procedures and policies documented and that all your team are aware and familiar with them too. This is the first step to ensuring you have a solid plan for managing fraud risk.
Maintain training and development
Having policies and procedures are a great start, but you need to ensure your team’s expertise is maintained. Engage in regular training and development programs internally to manage any knowledge gaps.
This should also take place any time there are changes to regulations or legislation and consider whether consultant or subject-matter expert-led training would be beneficial for your team.
Use the right tools for the job
Ensure you execute your due diligence and ‘know your client’ processes in the most effective way possible – with the right technology. Having an accurate picture of who your client is, is instrumental in effectively executing the transaction.
Completing digital ID verification, AML checks, and source of funds checks is essential to taking all reasonable steps to prevent fraud. It helps you know your client and ensure consistency between what you know about them and what the due diligence checks confirm.
It’s not enough to simply have ticked the boxes – ensure you treat each matter individually and that your procedures are being followed. You must complete every step diligently to ensure there are no gaps leaving you exposed to risk.
Start by gathering the information you need to begin building a profile of who you are acting on behalf of – use client questionnaires, property information forms and send out your client-care letters. From there, verify your client’s identity digitally.
HM Land Registry’s gold standards are a good measure for ensuring you are taking all the right steps to validating their identity – biometric data makes technology far better at detecting fraudulent documents than humans.
While AML does not fall within the scope of the ‘failure to prevent fraud’ offence, it is a crucial part of your firm-wide risk management process. Risk assessments should be carried out on each case and using systems that can help flag inconsistencies or discrepancies can make managing fraud risk easier.
Use your discretion – if something feels like it needs further investigation, then gather more information.
Automated politically exposed persons and sanctions checks can also help you stay on top of the situation in case of changes. With an increased crackdown on AML in 2023 due to ever-increasing pressures, such as the Russia Ukraine conflict, ongoing monitoring can help you respond quickly should you need to.
When it comes to assessing funds, having a 360 view of your client’s financial situation is key. There should be a three-point check when it comes to funds – source of funds, proof of funds, and source of wealth. Open banking technology can provide secure, real-time financial information and removes the manual collation of bank statements and PDFs.
Getting all these steps set up is essential. From there, you and your team need to know what risks to be aware of. Training is essential to ensure you are on top of the latest regulations and it must be monitored on an ongoing basis to keep up to date with the changing fraud landscape.
Make the most of digital audit trails to provide proof
We can expect some of the ‘reasonable fraud prevention procedures’ to require evidence that businesses have taken all possible avenues to mitigate fraud risk.
Digital audit trails are especially handy when providing proof of the actions you’ve taken to safeguard a transaction. Having them accessible within a single platform attached to a matter makes management of your customer due diligence more convenient should the Solicitors Regulation Authority request information for any potential investigations.
The best time to manage fraud risk is now
With the government’s intention to increase the scope of criminal liability for businesses in the UK when it comes to preventing fraud, law firms need to be on top of the impending changes. You need to be acting now to avoid pain when the new offence is implemented.
Just because the offence is not yet in force and the government still needs to publish guidance around reasonable fraud prevention procedures does not mean you should wait.
The reality is that you should already be taking these steps to ensure you are meeting your compliance obligations now. Getting ahead now by aligning with best practice around fraud risk management will make any further actions quicker and easier to implement when the time comes.
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