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The APP Fraud Epidemic: A Growing Threat to UK Law Firms and How to Combat It

Updated: May 29


In the ever-evolving landscape of financial crime, Authorised Push Payment (APP) fraud has emerged as a significant threat, not just to individuals and businesses, but increasingly to law firms. This type of fraud, where victims are tricked into authorising payments to fraudsters, has seen a dramatic rise, with losses in the UK reaching £420 million in 2023. As decision-makers in law firms, understanding the implications of APP fraud and taking proactive measures to mitigate risks is crucial. This blog post delves into the background, current trends, and the most impacted practice areas, providing actionable insights to safeguard your firm.


What is APP Fraud?

 

APP fraud occurs when a fraudster deceives someone into authorising a payment to an account controlled by the fraudster.


  • Unlike other types of fraud, the victim willingly initiates the transaction, making it particularly challenging to detect and prevent.

  • Common tactics include impersonating trusted entities such as banks, solicitors, or even family members, often through sophisticated social engineering techniques.


Background and Current Position


The rise of APP fraud has prompted significant regulatory responses. The Payment Systems Regulator (PSR) has introduced mandatory reimbursement requirements for victims, effective from October 2024.


Yes, but:


  • These requirements primarily apply to payment service providers (PSPs) and not directly to law firms.

  • In fact, given size, most law firms will not be eligible for mandatory reimbursement.

  • Regardless, the legal sector has always been far from immune to the repercussions of APP fraud, especially given the high-value transactions often handled by law firms.


Recent publications from the Solicitors Regulation Authority (SRA) highlight the increasing prevalence of scams involving law firms. The SRA's guidance emphasizes the need for robust anti-fraud controls and proactive measures to protect client funds and sensitive information.


Trends in APP Fraud


  1. Increased Sophistication: Fraudsters are leveraging advanced technologies such as artificial intelligence (AI) and machine learning (ML) to scale their operations. These technologies enable them to create convincing fake identities and manipulate victims more effectively. Just take a look at the recent case out of Hong Kong where £20 million was stolen using deepfake technology.

  2. Regulatory Changes: The PSR's new reimbursement scheme mandates that PSPs reimburse victims within five working days, with costs split between sending and receiving banks. This scheme aims to incentivize better fraud detection and prevention measures across the financial sector.

  3. Sector-Specific Risks: Law firms, with their frequent high-value transactions, are particularly vulnerable due to the high-value transactions they handle. Fraudsters often target conveyancing transactions, probate matters, and client account transfers, where large sums of money are moved, making them attractive targets.


Implications for Law Firms


Law firms face major risks from APP fraud, including financial losses, reputational damage, and potential legal liabilities.


The SRA's focus on anti-fraud controls means that firms must demonstrate robust measures to protect client funds and comply with regulatory expectations. Failure to do so can result in disciplinary actions and loss of client trust. Just imagine the fallout if a multi-million pound property deal went awry due to an APP fraud.


Key Decisions and Actions

 

  1. Enhance Fraud Detection Systems: Implement advanced fraud detection technologies such as AI and ML to screen payments and and identify suspicious accounts in real-time. Lucra is one such provider.

  2. Client Education: Educate clients about the risks of APP fraud and provide clear guidelines on verifying payment requests. Encourage clients to use secure communication channels and confirm payment details through multiple methods.

  3. Internal Controls: Strengthen internal controls by implementing multi-factor authentication, regular staff training on fraud awareness, and stringent verification processes for high-value transactions. Most firms already do this very well.

  4. Collaboration with Financial Institutions: Work closely with banks and PSPs to ensure seamless communication and quick response to suspected fraud cases. Do not rely solely on Confirmation of Payee (CoP) to verify account details before authorizing payments. This only ensures you don't make a mistake with the payment details; it is not (contrary to popular belief) a fraud prevention tool.

  5. Legal and Compliance Review: Regularly review and update your firm's anti-fraud policies and procedures to ensure compliance with the latest regulatory requirements and best practices. Obvious but crucial.


Summary


  • APP fraud poses a significant threat to UK law firms, with increasing sophistication and regulatory scrutiny.

  • By understanding the risks and implementing robust anti-fraud measures, law firms can protect themselves and their clients from financial and reputational damage.


Checklist of Urgent Actions

  • Implement advanced fraud detection technologies.

  • Educate clients on APP fraud risks and verification processes.

  • Strengthen internal controls and staff training.

  • Collaborate with banks and PSPs for better fraud prevention.

  • Regularly review and update anti-fraud policies and procedures.

 

By taking these steps, law firms can mitigate the risks associated with APP fraud and ensure they are well-prepared to handle any potential threats.


 

Alan is the founder and CEO of Lucra. Previously he was a lawyer at Kirkland & Ellis LLP.

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