As if finance directors haven’t had enough to contend with during the pandemic, the spectre of fraud allegations is now an additional risk to be managed by companies that applied for the government’s furlough schemes and/or various loan schemes.
A report published by the National Audit Office on October 23 estimated that five to 10 percent of the £39bn paid under the government’s job retention schemes (CJRS) to date has been claimed fraudulently or improperly. Around half is the result of organised crime but the other half relates to improper claims. Behaviour of this nature often operates on a spectrum of culpability. At the lower end, there is the genuine mistake or the erroneous decision made in good faith. At the higher end, there is sharp practice and a desire to use the scheme to gain as much money as possible.
The government’s business loan schemes (such as the Coronavirus Business Interruption Loan Scheme, Coronavirus Future Fund and Bounce Back Loan Scheme) too have been a target for fraudulent applications, again both by genuine businesses but also organised criminal enterprises. According to Treasury figures over £61.9bn of loans have thus far been made under the various schemes and the NAO estimates that up to 60 percent of the loans made under the BBLS alone may never be repaid due to fraud, organised crime or default.
HMRC’s amnesty period under the CJRS has already passed whereby businesses could come clean about mistakes and make repayments accordingly. The focus for HMRC is now investigations and they are diverting significant resources to this to protect the public purse even hiring private contractors as part of the effort. Thus far there have been three arrests for furlough fraud but there are likely to be more to come given HMRC has stated it will investigate some 27,000 high risk claims.
In relation to business loan schemes, the NCA too has made clear that it is committed to providing intelligence to partner investigating authorities and will investigate cases itself where there is a serious and organised crime element.
The criminal offences for which companies and individuals within affected businesses could be investigated and prosecuted, include:
- Fraud by false representation (section 2 of the Fraud Act 2006):A person is guilty of fraud by false representation if they dishonestly make a false representation, knowing that it is or might be untrue or misleading, intending to make a gain for themselves or another or to cause a loss (or expose a risk of loss) to another. This offence could arise if, for example in the course of applying for a loan an applicant knowingly provided false information, relating to the business’ turnover or claims made for employees who continued to work in breach of the rules
- False accounting (section 17 of the Theft Act 1968):A person is guilty of false accounting if they dishonestly falsify any account or any record or document made or required for any accounting purpose, with a view to gain for himself or another or with intent to cause loss to another. This offence could arise if, for example, in the course of applying for a loan, an applicant knowingly provided falsified accounting records (eg cash flow forecasts or management accounts) in order to obtain a loan which they would otherwise have not qualified for or providing false payroll records.
- Conspiracy to defraud: This common law offence has two variants: (a) a dishonest agreement by two or more persons to deprive another person of something which is his or to which he is entitled; and (b) a dishonest agreement by two or persons to deceive another person into acting contrary to his duty.
- Money laundering offences under the Proceeds of Crime Act 2002:There are a number of potentially applicable offences, relating to the use of criminal property (the misappropriated funds). Such offences will often be investigated and charged alongside a substantive fraud or false accounting offence.
- Cheating the public revenue: This is another common law offence.
So, the receipt of misappropriated funds under whichever scheme brings with it a number of different issues for companies to manage. One area of concern may be with the taxman and the reputational damage that may follow. However, the knottiest problem may well be how to manage potentially criminal funds which have entered, and possibly exited, a company’s accounts.
All of these issues are better managed proactively than companies finding themselves on the backfoot if subject to an investigation. The coronavirus crisis continues to put a significant strain on public resources and there is likely to be little, and reducing, sympathy for companies that have incorrectly claimed funds and have not put in place steps to undo that error.