Counsel Kate Gee examines the investigations looking into the misuses of Covid-19 support schemes, before analysing the steps taken by the HMRC and other Government authorities, in Accountancy Daily.
Kate’s article was published in Accountancy Daily, 18 October 2021, and can be found here.
An inescapable outcome of the Covid-19 pandemic is the marked increase in fraudulent activity. Individual or corporate economic difficulties, the increased opportunity for fraud arising from changing and remote working practices and the increase of online banking, retail and other business activity are all among the reasons cited. It is also an uncomfortable truth for the UK government that its Covid response schemes have inadvertently created unprecedented opportunities for fraud – and only now is the potential scale of it beginning to come to light. The UK Treasury has launched a remarkable 23,000 inquiries into potentially fraudulent payments made during the pandemic. Last year, HMRC announced that it was investigating 27,000 cases of possible fraud relating to the furlough scheme alone. In February 2021, the government announced the creation of a £100 million Taxpayer Protection Taskforce, with 1,265 dedicated staff working within HMRC to detect fraud. This year, HMRC has confirmed that it opened more than 12,000 investigations into fraud and error relating to the Coronavirus Job Retention Scheme (CJRS), Self-Employment Income Support Scheme and Eat Out to Help Out Scheme before the end of March 2021.
These developments illustrate the start of a crackdown on fraud in the UK that is mirrored by companies that have uncovered frauds carried out against them by external or internal fraudsters are starting to take action to recover misappropriated funds.
Reports of the alleged frauds are now a regular feature in the mainstream news:
- The Financial Times recently revealed concerns about how a mystery “group of companies set up by an obscure entrepreneur received as much as £40m in furlough cash in a single month this year, despite little public evidence that the businesses have any staff.” The four companies in question are understood to have received between £20 million and £40 million in May 2021 from the UK government’s Coronavirus Job Retention Scheme – despite having only been registered to a virtual mailbox service in London.
- There have been a series of arrests in relation to bounce back loans taken under false pretences: it is anticipated that between 35% and 60% of these will remain unpaid due to fraud and credit issues. The NCA recently arrested three men who worked for a financial institution in London under suspicion of using their “specialist knowledge” to fraudulently misappropriate around £6m from the scheme.
- In May this year, two people were arrested for a suspected furlough scheme fraud which involved cheating the public revenue, VAT evasion and money laundering to the value of £3.4 million. More than £6m in bank accounts held by the two individuals has been frozen.
In October 2020, the House of Commons’ Public Accounts Committee (PAC) raised concerns about the risk of fraud: MPs warned that “hastily drawn up economic support schemes” allowed “unacceptable room for fraud against taxpayers“. The government responded by saying that, “we make no apology for the speed at which [the schemes] were delivered,” while claiming that the government had rejected “thousands of fraudulent claims“. However, the statistics suggest that the government’s anti-fraud measures were inadequate.
While misuse of the fiscal support measures is in itself not unexpected, the figures indicate that it has been significantly more widespread than anticipated. The Counter Fraud Function undertook a Global Fraud Risk Assessment across 206 COVID-19 response schemes, with an estimated total value of £387 billion. A total of 16 schemes were risk-assessed as having a high or very high fraud risk, represents 57% of the total value. More than £70 billion has now been distributed through the furlough scheme. HMRC has estimated that 5-10 % (or up to £7 billion) of furlough payments were claimed fraudulently. Towards the end of 2020, National Audit Office (NAO) reports suggested that criminal organisations had siphoned off more than £3 billion from the government’s Covid support measures. The last 18 months has also seen an increase in fraud within the UK’s existing welfare programmes. The PAC’s 30 June 2021 report notes that fraud and error within Universal Credit rose by £3.8 billion to an all-time high of £5.5 billion between April 2020 and March 2021.
The increased risk of fraud is thought to be in part due to the government relaxing or modifying controls in place to prevent or detect fraud and error and prioritising its COVID-19 response over business-as-usual compliance activity. Proper and complete adherence to companies’ KYC and AML requirements may never have been more important. In circumstances where, for example, fake shell companies and unviable or barely solvent companies have been used to make fraudulent claims for furlough payments or to take out bounce back loans which will never be repaid, accountants, auditors and financial advisors are among those who must remain vigilant.
Contrary to what one might expect, the number of companies that actually registered for insolvency in the UK fell by 27% compared to 2019, suggesting that unviable businesses were artificially kept solvent by pandemic support measures. The Insolvency Service has recently been given new powers to investigate the conduct of directors of companies which are suspected to have taken out bounce back loans shortly before dissolution of the company – which loans have not been, and are unlikely to ever be, repaid.
These trends are consistent with the rise in civil fraud claims during 2021, and which I expect to continue. Common examples are authorised push payment frauds by way of vishing, phishing or smishing, whereby (typically) either a fraudster tricks a person into divulging information enabling the fraudster to make a payment from the victim’s account, or a fraudster inserts themself between the victim and the intended recipient of a payment. Between April 2020 and March 2021, there was an 83% rise in phone and text scams of this nature: fraudsters have taken advantage of people’s habits caused by the pandemic, remote working and an increased online and virtual presence. Using online search engines and social media adverts, fraudsters have misappropriated approximately £535 million in investment frauds, where a victim is tricked into wrongly thinking he or she is making a genuine investment with anticipated high returns. These scams often include bitcoin or other cryptocurrencies, leading to a misapprehension about the risks of investing in and dealing with digital assets.
The courts are increasingly seeing examples of payment scams and being asked to consider the scope of the duty of the paying bank (see for example the recent cases concerning the Quincecare duty) and role or position of the recipient bank. Issues for the paying bank may include negligence, the Payment Services Regulations and their actions considered in the context of relevant codes of conduct. For the recipient bank, courts may need to consider unjust enrichment, knowing receipt, dishonest assistance or even negligence (though it has to date been more difficult to establish any duty of case on the recipient bank). A number of the cases that addressed the Quincecare duty are due for appeal next year, and the results of those will influence the nature and volume of similar cases in the future.
A significant percentage of fraudulently misappropriated funds is thought to have been converted into crypto assets. While the anonymous and decentralised nature of crypto can make it difficult to identify, trace and – importantly – link an asset back to a fraudster, there is nothing necessarily fraudulent or risky about the digital asset itself. Importantly, in recent years, legal, investigatory and technology specialists are working together creatively to track these assets down and freeze or seize them. Crucially, the English courts are at the same time continuing to adapt their tools to crack down on frauds involving crypto assets, and we expect to see this trend continue in the coming months. Useful interim tools in this context include orders for disclosure (Norwich Pharmacal / Bankers Trust orders against the relevant exchange or the recipient bank), and proprietary and freezing orders against individuals, banks or persons unknown.
The true scale of fraud committed during the pandemic, including against the UK government, is yet to be known. It is likely to take years for the enforcement agencies to catch up with fraudsters and those who wrongly claimed or overclaimed, and for individuals and companies to uncover frauds carried out against them and take the necessary legal action to recover misappropriated funds. We anticipate an increase of complex civil and criminal fraud in the years ahead as a direct result of the Covid-19 pandemic.
Sylvie Gallage-Alwis and Nikita Yahouedeou discuss the DGCCRF’s recent practical guide to online shopping and consumer rights in Le Monde du Droit
28 November 2023
28 November 2023