Fraud in the pandemic
The sheer scale of fraud committed during the pandemic was exacerbated by the limited level of checks when claims were made for covid grants. Kate Gee, counsel at specialist disputes firm Signature Litigation, examines the scale of the issue
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 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 £100m 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. One of those concerned four companies in question understood to have received between £20m and £40m 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 National Crime Agency (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 £3.4m. 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.
Fraud more widespread than expected
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 £387bn. A total of 16 schemes were risk-assessed as having a high or very high fraud risk, representing 57% of the total value. More than £70bn has now been distributed through the furlough scheme.
HMRC has estimated that 5-10 % (or up to £7bn) 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 £3bn 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 £3.8bn to an all-time high of £5.5bn 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’ know your customer (KYC) and anti money laundering (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.
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.