Shona Campbell, Head of our Business Recovery and Insolvency team has identified fraud as a key issue in the world of insolvency and business distress for 2021. In this article, she discusses the types of fraud we expect to see in the next 12 months.
Fraud has been around for a long time. The earliest recorded fraud was in 300BC where a Greek merchant received payment in advance for a ship of corn. He planned to sink an empty ship, keep the money he had already been paid and then sell the corn again. Classic frauds like this happen over and over again.
The type of frauds that are prevalent at any particular time depends on the economic and legislative backdrop. The COVID pandemic required the government to get money into the economy quickly. In the last months of 2020, there was a wide range of grants, loans and funding made available:
- Bounce Back Loans
- Coronavirus Job Retention Scheme
- Small Business Grant Fund
- Retail, Hospitality and Leisure Grant Fund
- Local Authority Discretionary Grants Fund
A strategic decision was made by the government to put ease of accessibility and speed of getting money into the economy as the priority. Accordingly, many of the loans and funding relied on self-certification by applicants with minimal checks by the funding entity. This meant a high risk of schemes taken advantage of by organised crime, opportunistic individuals and business owners under severe pressure.
As Insolvency Practitioners, we regularly deal with fraud as we often discover it whilst carrying out our investigations once appointed or we are appointed because there has been a fraud.
We expect that the most common fraud scenarios that we will come across in the next 12 months will involve Coronavirus Job Retention Scheme (CJRS) and Bounce Back Loans. We will look at each of these in turn.
Coronavirus Job Retention Scheme
CJRS is funding for employees on furlough and is currently running until April 2021. It is a self-certification scheme whereby a business makes the claim and the money will then be paid. There are reported instances of abuse of the scheme such as employers claiming for employees that were working rather than on furlough, employees no longer in employment, or even fictitious employees. In August, HMRC advised that they had received 8,000 calls to their anonymous fraud tip-off line.
HMRC understand that the scheme was rolled out quickly and that mistakes could have inadvertently be made. There was an amnesty period to 20 October 2020. More recently HMRC have been sending out letters in respect of specific claims requesting that they be checked and confirmed.
If an inadvertent error has been made HMRC should be notified as soon as possible and certainly within 90 days of the receipt of funds. If a known incorrect claim is not brought the attention of HMRC then this is fraud which could result in hefty financial penalties and ultimately a criminal conviction. Under the Finance Act 2020, directors can be held personally liable by HMRC for fraudulent CJRS claims.
Bounce Back Loans
Bounce Back Loans are loans of up to £50,000 for small businesses that are struggling due to the COVID pandemic. The amount is capped at 25% of annual turnover and is 100% guaranteed by the government.
Typically the terms will be as follows:
- no interest charged or repayments in the first 12 months.
- after 12 months 2.5% annual interest.
- the loan can be repaid at any time without penalties.
- up to 10-year repayment term.
As the speed of rollout was important, there were minimal checks carried out which meant a greater risk of abuse. There are reported instances of eligibility misrepresentation, use of dormant companies and duplicate applications. In October, the National Audit Office estimated that over 50% of the Bounce Back Loans would not be repaid, a significant portion of this relating to fraudulent applications. The remainder of bad debt will be credit-related where the business is unable to repay the amount. Although the loan is 100% guaranteed by the government, the government has advised that it expects the lender to pursue the debt fully before recourse to the guarantee will be given. The first repayments will be due in May 2021 and given that some are for 10 years, it will be some time before the actual position is known.
If the loan is not be repaid, it is likely that a business will end up in formal insolvency.
In a formal insolvency, the insolvency practitioner is required to submit a report on the conduct of the directors to the government. The government has written to all Insolvency Practitioners asking them to be mindful of Bounce Back Loan fraud, specifically highlighting where a Bounce Back Loan was obtained, and the proceeds removed by the directors for their personal benefit in close proximity to the company entering into formal insolvency proceedings. The consequences of this are director being disqualified from acting, convicted for fraud and having to repay the full amount. Inability to repay could mean personal bankruptcy.
Providing false information in connection with any application for a COVID-19 support scheme will also have consequences. This could be overstating the turnover of a business in the application or stating that the business was viable “but for” the pandemic.
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