As the Public Authorities (Fraud, Error and Recovery) Bill makes its way through Parliament, financial crime professionals - and in particular MLROs - should be paying close attention. While the Bill’s stated aim is to improve the efficiency and effectiveness of fraud and error recovery in the public sector, the bill introduces specific new obligations on financial firms, and also potentially signals a broader shift in expectations for how firms engage with government agencies on benefit-related fraud.
Quick take: Why things are changing
Benefit fraud is simply defined as persons providing false information (or not reporting changes to their existing circumstances) which would therefore falsely entitle them to receive government benefits.
It is important to note that benefit fraud is not the same as benefit error, where people receive overpayments and underpayments with no intention of fraud.
Reports state there has been a gradual increase in fraudulent benefit claims, in particular between 2020 and 2023 as a result of the coronavirus pandemic, with the government estimating 2.2% of all benefit claims are now fraudulent, totalling around £6.5 billion per year in 2024. Check out FINTRAILs series on Financial Crime Threats in a Recession for further reading.
Historically, the Department of Work and Pension’s (DWP) ability to investigate and crack down on benefit fraud has been hampered by only being able to request information from a limited number of organisations through out-dated means (often in writing or through physical visits) and voluntary cooperation with third party firms.
There are a number of different scenarios in which benefit fraud can be committed. The most common of which include:
- Working and claiming: receiving housing or council tax benefits on account of entitlement to job seekers allowance or income support when you are in fact, earning through employment.
- Non disclosure of partner: claiming housing and council tax benefits that you are not entitled to as you are in fact living with a partner.
It isn’t just individuals taking advantage, with organised gangs carrying out controlled operations to infiltrate the system using phishing, identity theft, shell companies and falsified documents to fraudulently claim for universal credit, child benefits and VAT refunds. For example, in April 2024 the Department for Work and Pensions (DWP) reported the prosecution of five individuals involved in a sophisticated operation that led to over £53 million in fabricated benefit claims.
These figures highlight how the UK’s benefit system is a direct target for both organised crime groups and opportunistic individuals that can have detrimental effects across the general population, the welfare system and the country. This can include funds being diverted from other social services such as healthcare and education.
These effects create a hostile environment for genuine claimants who may face longer waiting times or not receive the benefits they are entitled to due to lack of resources. This in turn can create a lack of trust in social services and reputational damage to the government which could continue to affect economic growth.
A new approach to information gathering and recovery
One of the most significant changes under the Bill is the proposed expansion of the Department for Work and Pensions’ powers, particularly in relation to access to bank and payment account data.
Information gathering powers
DWP is currently only able to request information - either in writing or through a physical visit - but has limited power to enforce a response from firms. As it relates to financial services firms, the government has relied on the ability of firms to spot benefits fraud and report this voluntarily. There is a need to modernise and expand DWP’s information-gathering powers, in line with the ever-more sophisticated nature of benefit frauds.
Regulation 19 of the proposed Bill contains the requirement for banks to provide information through a so-called “account information notice”. This requires banks to provide statements covering the three months before the notice is given, or a longer period if specific in the notice.
Recovery of funds
DWP will be able to issue deduction orders to firms, requiring them to remit funds back to DWP which have been fraudulently claimed. Where accounts have insufficient funds to make such payments, firms must notify the DWP of this as well.
Crucially, firms must ensure that where a notice is in place on an account, that the account is not closed by the account holder and that sufficient funds are maintained in the account to be able to pay DWP.
Detecting Benefit Fraud
Financial services firms already have an obligation to file a Suspicious Activity Report (SAR) when they suspect that a customer is misclaiming benefits, and should also report these directly to the DWP. The new Bill does not change that obligation, and firms should ensure they have controls in place to detect behaviour that might be indicative of benefit fraud.
Customer risk assessments - MLROs should be actively considering how benefit fraud fits into their broader financial crime frameworks, and revisiting customer risk assessments. While customers receiving benefits should not necessarily be thought of as higher risk by default, additional scrutiny may need to be applied to those customer’s source of funds to ensure they align with the stated benefit.
Establishing source of funds - One of the fundamental difficulties for firms is that it remains extremely challenging to determine whether a customer is actually eligible for a specific benefit. Firms may ask customers to confirm benefit entitlement by producing letters from DWP, and confirming this by identifying relevant payments from DWP-linked bank accounts. When completing source of funds checks, a red flag to look out for is the customer stating they are receiving benefits into their account on behalf of a family member/ friend who has lost access to their own bank account.
Transaction monitoring
Firms should ensure they have transaction monitoring rules to detect and investigate possible indicators of benefit fraud, for example:
- A customer receives benefits into their account which are rapidly remitted overseas or followed by large cash withdrawals.
- A customer receives benefit payments but also appears to have significant employment income from other sources.
- A customer receives benefits into their account but the payment reference does not match the customers details.
Firms should report suspected or known benefit fraud in a SAR, and should also have processes in place to separately report this to DWP via their reporting page.
Awareness and training - Firms should ensure their financial crime training for staff - from financial crime investigators who review transaction monitoring alerts to front-line staff who interact directly with customers - includes typologies and red flags on benefits fraud.
What the Bill means for MLROs
Financial firms should be ready to receive and respond to information requests from DWP. All firms who receive an account information notice from DWP must respond or otherwise face a penalty for failing to respond. Firms may also need to execute account deduction orders if necessary.
Practically speaking, firms should ensure they have the following controls in place:
Ability to receive and respond to account information notices issued by DWP, or otherwise face a penalty for failing to respond.
Ability to suspend certain transactions on the account, if those transactions would result in the remaining amount being insufficient to repay DWP.
Ability to transfer a specified amount to DWP if requested.
Ability to ensure the account is not closed by the customer, if the account is subject to a deduction order.
Note: the Bill is not yet passed by Parliament, and the above provisions may therefore not form part of the final Bill.
At the same time, firms should ensure they take a balanced approach. There is a key difference between detecting potential benefits fraud and making judgments around how customers spend the funds they receive from the government. Acknowledging different consumer habits and ensuring fair treatment of customers is important. Firms, as part of their Consumer Duty obligations, should balance the need to ensure that customers who receive benefit-related payments legitimately are able to receive and spend these without restrictions or added hurdles with the need to detect benefit fraud.
Next steps for financial crime teams
The Public Authorities (Fraud, Error and Recovery) Bill is more than a technical update to fraud recovery powers - it marks a shift in how the government expects to work with the private sector in fighting benefit fraud. For financial crime professionals, that means new expectations from the government in the sector’s ability to detect benefits fraud and enter a more active information-sharing partnership with DWP.
In preparation for these new powers, firms should take steps to stay ahead of the Bill. This includes:
Bolstering internal systems and knowledge to better detect benefit fraud, including revisiting customer risk assessments and applying additional scrutiny to the source of funds for customers receiving benefits, while at the same time keeping consumer duty and the fair treatment of customers at the centre.
Refining transaction monitoring rules to identify indicators of benefit fraud, such as rapid remittance of benefit payments overseas or significant employment income alongside benefit claims.
Preparing to comply with DWP's new powers, including responding to account information notices, and executing deduction orders to remit fraudulently claimed funds back to the DWP.
Implementing these changes won’t be without challenges. Many firms may find it difficult to adapt their systems to handle account information notices or deduction orders, particularly where legacy infrastructure or siloed operations limit responsiveness. Embedding new typologies into transaction monitoring, updating customer risk assessments, and training staff on benefit fraud indicators also require cross-functional coordination, which can stretch already resource-constrained compliance teams.
If you’re unsure where to start, or don’t have the internal capacity to make these changes quickly, FINTRAIL can help. Our team has deep experience designing and enhancing financial crime controls for regulated firms — from gap analysis and system design to training and implementation support — ensuring your framework is proportionate, effective, and aligned with emerging expectations.